Middle East Bank Monitors Iran’s Economic Performance

Government tax revenues in the first half of the current Iranian year of 1395 (started March 20, 2016) amounted to 433.1 trillion rials, which is below the legislated amount of 529.1 trillion rials but 29.6% higher than the corresponding figure of last year.

Each dollar was exchanged for 39,550 rials in Tehran’s bureaux de change on Sunday.

Compared with the same period of last year, the share of direct tax revenues decreased from 57.6-56.4% and the share of indirect taxes increased in the Middle East Bank’s latest quarterly report on Iran’s economy. Excerpts follow:

An examination of direct tax revenues reveals that the tax share of legal entities has been continuously decreasing in recent years.

The steep fall in the tax share of non-governmental legal entities from 28.3% in the first half of last year to 23.6% in the first half of this year was the main reason for this decline.

In contrast, the tax share of governmental legal entities increased in terms of both provisional and delayed taxes.

It is noteworthy that despite the government’s declared policy regarding the taxation of institutions and foundations affiliated with the Islamic Republic, tax revenues from them amounted to 100 billion rials in the first half the year, which is half of that in the same period of last year.

The share of private sector employees in income tax revenues decreased and that of public sector employees increased. Wealth tax revenues did not experience much change.

In indirect tax revenues, the share of imports tax that had fallen from 10.8% in the first half of 1393 to 9.5% in the same period of 1394, fell further to 9.3% in the first half of the current year.

Revenues from tariffs on imported vehicles more than doubled from 2.1 trillion rials in the first half of last year to reach 4.6 trillion rials in the first half of the current year.

The tax on vehicle licensing increased in the same period, while the tax share of vehicle transactions decreased. In other words, the market for new and imported vehicles experienced a boost.

During the first half of the year, the share of tax revenues accruing from goods and services in tax revenues continued to increase, while in a change from the past, value added taxes did not increase much. In a reversal of recent years’ upward trend in value added taxes, in the first half of this year, the share of VAT in tax revenues fell by 5.2 percentage points from the first half of last year to reach 22.2%.

The 12.3% fall in oil revenues in the first half of this year compared with the same period in 1394 resulted in worsening the budget deficit, despite the significant increase in tax revenues.

The budget deficit during these two periods more than doubled. The government’s oil revenues in 1395 are partly buffeted by the Central Bank of Iran’s transfer in late 1394 part of its expected 1395 oil revenues. And the settlement of that advance payment this year has led to the severe decline in the government’s disposable oil revenues.

The 53.5% rise in development expenditures in the first half of the year compared to the same period of 1394, although it was still less than half the legislated amount, exerted additional pressure on the budget deficit.

In the same period, the disposal of financial assets increased to even surpass oil revenues. As such, the strengthening of the debt market has had a significant role in financing development expenditures in the face of declining oil revenues.

Table 1 shows the fiscal performance of the government in the first two quarters of this year.

  Next Budget Bill

In the budget bill for 1396, the 10.9% rise in the government’s general budget and the 10.6% rise in the general budget are in line with the expected inflation rate for 1396.

Government employees’ incomes are to increase by 10% and general resources by only 8.7%.

The increase in budget items by rates around the expected inflation rate indicates the intention to control further expansion of the government.

Table 2 presents the main subdivisions of the 1396 budget bill.

Among the components of general resources in the 1396 budget bill, compared to the 1395 budget law, current revenues show very small growth compared to the considerable 49.1% rise in oil revenues.

The rise in forecasted oil revenues emanates from oil prices averaging $55 per barrel, oil exports rising to 2.4 million bpd and the conversion of US dollar at 33,000 rials.

Tax revenues are expected to increase by 8.6% while other current revenues are to decrease by 12.5% and thus current revenues are to rise slightly.

The 23.8% increase in income tax revenues in 1396 budget bill indicates that the government intends to rely more on this type of tax revenues.

With regard to disposal of financial assets, despite the government’s declared intention to rely more on Islamic securities and foreign debts, the net disposal of financial assets is to decline by 32.9% as a result of a considerable drop in the disposal of state-owned companies.

The slowing trend of privatization in this bill marks a noticeable departure from the recent past. Keeping the share of the National Development Fund in oil revenues at its previous level of 20% may be a weakness of this bill, as it may not enable the fund to play its role in mobilizing the required private capital necessary for achieving a desirable economic growth.

Expecting 35 trillion rials from the disposal of development projects to the private sector in this bill is questionable, given the government’s failure to take such actions in recent past.

Table 3 exhibits the resources and expenditures in the 1396 budget bill.

   Capital Market

The overall index of Tehran Stock Exchange showed an upward trend in the early days of the second half of the year and after some fluctuations reached 81,342 before closing at 80,122 on the last day of the Q3 of 1395, showing a 3,672-point increase from the same day in 1394.

The value of transaction in “Shares and Preemptive Rights” fell to 33.7 trillion rials in the last month of Q3 of 1395 to register the lowest monthly value so far in 1395.

The third, fourth and fifth series of Islamic Treasury Bills matured in Q3 of 1395 and the funds were fully paid by the treasury on time.

The ninth and 10th series of these bills totaling 30 trillion rials have also been issued with maturities in 6/1396 and 7/1396 in the OTC market.

Additionally, 45 trillion rials of short-term Islamic Treasury Bills with 4- and 5-month maturities were issued and as of Q3 of 1395 are being traded in the OTC market.

  Other Economic Developments

The 10-year extension of Iran Sanctions Act by the US Senate on December 1, 2016, is a noteworthy development in the aftermath of the Joint Comprehensive Plan of Action, the formal name of the nuclear deal Iran reached with world powers for curbing its nuclear program in lieu of the abolition of sanctions.

According to the initial version of ISA, investment exceeding $20 million by an American or non-American firm for the development of Iranian oil resources would trigger sanctions by the US against that firm.

The senate voted 99-0 in favor of the resolution and the president did not veto it, although he did not sign it either, letting it become law.

In accordance with JCPOA, since the signing of that agreement, the US government has abstained from implementing ISA sanctions. But the outcome of the November presidential election in the US has given rise to concerns about the future of JCPOA.

Regardless of the upcoming US administration’s behavior, since JCPOA was signed by six countries and Iran, the incoming US administration cannot unilaterally scuttle it.

In early fall, the Central Bank of Iran proposed changing the national currency from rial to the more commonly used unit toman that equals 10 rials.

Considering the circulation of 8 billion notes and 5.3 million coins, such a change is estimated to cost 52 trillion rials. However, this figure is not included in 1396 budget bill.

According to CBI authorities, the substitution of old notes and coins with new ones would be carried out gradually.

The census of population and housing, which is to be conducted once every 5 years, was carried out in Q3 of 1395 and for the first time online as well.

Also, a $16.6 billion deal between Iran Air and Boeing was signed in the last days of fall, based on which 80 aircrafts would be delivered to Iran by 2028. This deal was made possible by JCPOA and is a first in Iran’s international trade in over 30 years.