The Majlis Research Center says overestimation of government revenues in the last fiscal budget (March 2019- 20) is the origin of galloping inflation.
In a report on the financial performance of the government, the MRC said the apparently high revenue projection is related to missed oil export revenue targets, the lifeline of the economy, which did not materialize due to the economic siege announced in 2018 by Donald Trump, the openly acrimonious US president.
The government had expected to overall earn 4,480 trillion rials ($17.9 billion), but the numbers suggest 70% or 3,170 trillion rials ($12.6b) came through.
Deficit in the last calendar year was 1,310 trillion rials, 440 trillion rials of which was compensated through bond sales and the balance was supposed to come from other means, namely cutting government spending, selling debt, divesting government assets and borrowing from the National Development Fund of Iran, the sovereign wealth fund.
In the review of the parliamentary think-tank, dependence on NDFI's resources was a leading factor in increasing the monetary base and pushing up inflation.
As per authorization given to the government by the High Council of Economic Coordination -- top economic decision making body comprising heads of three branches of power, the government could raise 765 trillion rials through the mentioned sources and cut spending by 620 trillion rials. However, the Rouhani administration was unable to trim more than 400 trillion rials.
It borrowed 650 trillion rials from the NDFI last year. Fifty trillion rials of this amount was used for relief programs to flood-stricken people in March 2019 and the large part (92%) was used to plug budget holes.
MRC says a big portion of the NDFI financial resources are deposited in accounts not accessible to the government and the Central Bank of Iran pays the rial equivalent of loan requests from the sovereign fund.
Fiat Money
What that translated into was fiat money and increase in the monetary base so conspicuous in the high and rising inflation rate last year and its inflationary impact carried forward into the current fiscal year.
The average goods and services Consumer Price Index in the 12-month period ending March 19, the last day of fiscal 2019-20, increased by 34.8% compared to the corresponding period the year before, according to data released by the Statistical Center of Iran.
"Therefore, overestimations, lack of sustainable revenue and mismanagement of government financial resources have largely contributed to the galloping inflation," the MRC said.
As per rules, the CBI receives the foreign currency from the NDFI and in lieu lends the rial equivalent. However, because Iran’s currency reserves remain locked in several countries, the CBI says it has no choice but to keep its printing machines running. This process has obviously expanded the monetary base.
Citing figures released by the Economy Ministry, MRC said the government and state-run companies' debt stood at 11,680 trillion rials, up 59% compared to the year before. Much of the debt is owed to the NDFI.
