Economy, Domestic Economy

Ways to Cushion Oil Revenue Losses

Ways to Cushion Oil Revenue LossesWays to Cushion Oil Revenue Losses

Iran has been bearing losses of about $2.5 billion per month ever since the international oil price plummeted by more than 56 percent  from its peak of $114 per barrel in June last year to less than $50 in recent days. The outcome is expected to be at least $30 billion reduction in Iran’s national income in 2015, forcing the government to postpone some of its key projects which would by extension lead to higher unemployment than the current 30 percent rate – a heavy price for a country that has been relying on oil for more than 30 percent of its state revenues.

If the oil price slumps to half of what the government had initially considered in its next year budget bill ($72 per barrel), the government would lose 300 to 350 trillion rials ($11.1 -$12.9 billion at official exchange rate) of its revenues and compelled to compensate the deficit either through cutting expenditures or offering the government-owned assets in the market.

To avoid this, economists suggest the government needs to create sustainable sources of income to replace its income from oil, which has proven time and again to be a shaky source of income, and heavily dependent on international forces.

“The budget bill submitted to the parliament by the administration for the next fiscal year is the least reliant upon oil revenues (in the history of the Islamic Republic of Iran),” President Hassan Rouhani said in a public address in the southern city of Bushehr on Tuesday.

“Only a third of the next year’s budget is based on oil revenues. Moreover, we know how to compensate the lost revenues,” IRNA quoted the president as saying.

“Oil revenues in next year’s budget have been designed to account for only 60% of the country’s total export earnings, while the remaining is to be generated through non-oil exports. We are planning to boost non-oil exports in the coming year,” President Rouhani remarked; describing the falling oil prices in the international market as a “conspiracy orchestrated by a few countries in the region.”   

Meanwhile, the Persian daily Iran asked four economic experts to point out the possible measures which could be adopted by the government to help reduce the dominance of oil over the budget.

 Tax Revenues

Mehdi Taghavi, a leading economist, is of the opinion that the government must switch to tax revenues as the main source of income in light of the drop in oil revenues.

“The government has three alternatives to finance its spending, namely: tax revenues, non-tax revenues and printing money which means borrowing from the Central Bank of Iran (CBI),” he said, noting that the tax revenues have proven to be the most sustainable source of income compared with the other two alternatives.

“Borrowing from the CBI will increase liquidity in the market, leading to higher inflation,” he warned.

 Sustainable Sources

Professor of economics at the University of Tehran, Meisam Mousaiee believes the government needs to generate income from “sustainable and viable” sources.

“Tourism and non-oil exports have proven to be the most sustainable sources of revenues that can help the government protect the economy against external pressures,” he said, adding that the government should limit cash payments to the people – paid to nearly 74 million Iranians as part of the so-called Subsidy Reform Plan – in order to cut its spending.

 Domestic Capacities

Economic expert, Ebrahim Razaghi believes the government should turn its focus on the capacities at home; a move which he says can come true through the implementation of a number of combined policies.  

“The government should stop the export of commodities that entails importing expensive raw materials for their production; also it should stop the import of unnecessary commodities,” he said.  

 Contractionary Monetary Policies

Professor of economics, Kamran Nadri suggests adoption of contractionary monetary policies by the government and cutting the government expenses to compensate for the lost oil revenues.

Cutting the government’s running expenses, reforming the current taxation system, and prioritizing the non-oil exports were among the solutions suggested by the expert to tackle the budget deficit.