Budget Deficit Likely

Budget Deficit Likely
Budget Deficit Likely

A sharp drop in global oil prices which was intensified last week with the decision by the Organization of Petroleum Exporting Countries (OPEC) to maintain its 30-million-barrel-a-day production quota, has raised the twin specters of a potential currency devaluation and budget shortfall in the next Iranian year (March 21, 2015).

Brent has fallen by nearly 30 percent since late June due to rising production and slowing global demand. It hit a five-year low of $63.72 a barrel on Monday after averaging around $110 a barrel from 2011 to 2013. It fell close to $69 a barrel on Friday, putting it on track for a second weekly decline.

More than 30 economists and analysts polled by Reuters after OPEC's Nov. 27 meeting forecast an average Brent price of $82.50 a barrel in 2015, down $11.20 from the previous poll. This was the biggest downgrade in average forecasts since the global economic crisis in 2008.

Oil income accounts for about 80% of Iran's foreign currency revenues and 60% of the nation's overall budget. OPEC's announcement that it would hold off on cutting oil production has led to the price of Brent crude to nose-dive to five-year lows from the average $70- $90 per barrel just a few months earlier.

Iran needs oil at $130.50 a barrel to balance its budget, according to IMF estimates. If the Iranian government is pushed to draft next year's fiscal budget assuming crude prices at $60 a barrel, government spending on infrastructure development projects would have to be cut down drastically. The reduced oil revenues would also mean less government investments in petrochemical industries which would in turn affect other industrial sectors.

Economic expert, Yashar Paknejad in an article in the Persian daily Forsat-e-Emruz points out that if oil prices continue to plummet, the government is likely to face budget deficits even before the end of current Iranian calendar year (ending March 20, 2015), provoking fluctuations in foreign exchange rates, currency devaluation, higher inflation and depletion of foreign exchange reserves.

Paknejad makes some suggestions which he believes could help "dampen the impact of declining oil prices on Iran's economy." Among them: "a realistic forecast of oil prices in next year's budget, monetary discipline by cutting government spending, curbing energy consumption and reducing import of fuels such as petrol, and finally reforming Iran's current expansionary monetary policy to contractionary policy through sale of bonds."

He says that Iran needs to boost its agricultural production to reduce spending on food imports, noting that the amount spent by the government to import agricultural products nearly doubled in the current Iranian calendar year from almost 6.2 billion dollars in the previous year due mostly to water shortages. But with reduced oil revenues, Paknejad argues, the government will be forced to cut expenditure on import of food, hence the need for strategic planning to boost agricultural output and productivity.