Renewed Argument Against Oil-Based Economy

Renewed Argument Against Oil-Based Economy Renewed Argument Against Oil-Based Economy

Overreliance on oil revenues was described as "the biggest threat to the national economy" in remarks made by former minister of economic affairs and finance, Davoud Danesh-Jafari, Persian daily Taadol reported.  

Addressing an international conference on rural development in Mashhad, Danesh-Jafari said, "Oil revenues account for 65 percent of total government revenues." Overreliance on oil can be dangerous for the financial system, he noted, as imposing further sanctions on oil exports, and unexpected developments in the oil market like the December-January plunge in oil prices, can severally damage the economy.

"There is no predictable trend in the oil market, as Iranian crude sold at $8 a barrel back in 1998, while in 2011 it exceeded $100," the former minister said, adding that the constant changes in oil prices should always be taken into account while drafting the annual budget.

The government has based next year's budget on an anticipated oil price of $72 bbl. "The fact of the matter is when the parliament was examining the bill, the fall in global oil prices to $40 had already created 300 trillion rials ($8.5 billion) in budget gap," Danesh-Jafari added.

The Rouhani administration reportedly revised the budget last month to assume a base price for oil of $40 a barrel from $72 previously. Iran pumped 2.78 million barrels a day of oil in January, down from an average of 3.6 million in 2011, according to data compiled by Bloomberg.

   Wrong Approach

Former Iranian governments have mostly failed to balance their expenditures and revenues properly in case of oil price reduction, stated the expert. On the other hand, oil revenues are mainly used to cover the government's operational expenses, he said. "It's not possible for the government to cut salaries of state employees, which account for 85 percent of its total costs."  

With the intensification of sanctions over Iran's nuclear energy program in 2012, oil exports almost halved from 2 million barrels a day. Trying to fill the gap, the government of former president Mahmoud Ahmadinejad came up with two solutions, "both of which barely made any success," according to Danesh-Jafari.  The first was to increase foreign currency rates, and the second was to borrow from the Central Bank of Iran, he said, adding that the implementation of the two measures "came as a shock to economy, contributing only to a rise in inflation."

The former minister also pointed out that overreliance on oil revenues has given rise to severe fluctuations affecting almost every sector of the economy.

  Risk-Free Solution

To help solve the problem, Danesh-Jafari suggested that in line with the guidelines of the Resistance Economy, oil revenues must be used in a more efficient way than being spent on the government's current expenditures.

Resistance Economy is referred to a set of principles set out by Iran's Leader Ayatollah Khamenei, which mainly calls for measures to boost domestic production to reduce reliance on oil revenues and counter the West’s economic pressure.

"Rather, the government needs to seek safe and risk-free sources of revenue to cover costs," he suggested.  

Citing official statistics from 2011, Danesh-Jafari said the share of direct tax revenues in the budget was 23 percent then, while consumption tax and import tariffs accounted for 3.7 and 7.5 percent of the budget, respectively. "So, it's clear that oil can be a risk factor for the economy if you rely too much on it," the former economy minister said, adding that oil revenues must sooner or later be replaced with more sustainable sources of income such as tax.

  Best Alternative

Knowledge-based economy is "the best alternative" to falling oil revenues, Vice-President for Science and Technology, Sorena Sattari, said Monday. Speaking at the fifth edition of National Conference on Science in Tehran, Sattari said knowledge-based economy could generate revenues and create jobs for the country while giving a boost to economic activities.

Sattari said that Innovation and Development Fund has been able to provide funds for many companies to promote entrepreneurship in the form of knowledge-based companies.   “The government aims to move towards a knowledge-based economy so that it can cut its cumbersome costs and instead spend on areas that are capable of maximizing investment gains," he added.