Iran Gov’t Seeking New Revenues to Cover Budget Deficit

The government has a record of running budget deficits.

Latest statistics by the Central Bank of Iran show the budget deficit over the first seven months of the current fiscal year (March 21-Oct. 22) stood at 223.9 trillion rials ($5.3 billion).

This is while overall revenues during the period amounted to 330.6 trillion rials ($7.9 billion), posting a rise of 88.6% over last year's corresponding period. Spending hit 554.5 trillion rials ($13.25 billion), registering a 31.1% rise year-on-year.

To remedy the shortfall, the government is seeking new sources of revenue. A closer inspection of the budget bill submitted to parliament by President Hassan Rouhani on December 10 can shed light on how the chronic disarray in budgetary finances is to be dealt with in the coming fiscal year (March 2018-19).

Members of the special parliamentary commissions have 15 days as of December 10 to put forward proposals and amendments to the budget bill to the Majlis Joint Commission. The commission will then have one month to bring the budget bill to the open session of the parliament.

The parliament-approved budget needs the final endorsement of the Guardians Council—the body in charge of ascertaining the constitutional and Islamic nature of all laws.

> Drastic Cut in Cash Subsidy Receivers

Savings on narrowing the monthly cash subsidy receivers’ list by 34 million as stipulated in the budget bill will amount to 188 trillion rials ($4.47 billion), Bourse Press cited the government’s news website as saying.

Government Spokesman Mohammad Baqer Nobakht said on Wednesday all these resources will be directed to those who really need the aid.

“The government does not intend to deposit a rial of these [freed-up] resources to the treasury. I stress that all the money will be returned to the society,” he said.

As part of the Subsidy Reform Plan, the government of Rouhani's predecessor removed subsidies on food and energy in 2010 and instead paid 455,000 rials ($10.8) to each Iranian on a monthly basis.

Rouhani’s first administration retained the plan, albeit reluctantly. After all, an overnight cancellation of the scheme, as many experts argue, could translate into political suicide as the recipients, mostly ordinary citizens from low-income population, have grown accustomed to the monthly stipend over the years.

Nonetheless, the incumbent government has moved to restrict the number of cash subsidy recipients, slowly but steadily.

According to Nobakht, 4,853,386 people have been removed from the list of cash subsidy recipients as of January 20, 2017.

According to Chairman of Majlis Economic Commission Mohammad Reza Pour-Ebrahimi, the Iranian Parliament is determined to work in conjunction with the government to remove top three high-income deciles of Iranian households from the list of cash subsidy recipients in the new budget.

> Jacking Up Energy Prices

In a controversial move, the government is also looking to increase energy prices by a wide margin.

According to Chairman of Planning and Budget Commission Gholamreza Tajgardoun, the government is looking to earn 174 trillion rials ($4.14 billion) by increasing gasoline price from 10,000 rials (23 cents) to 15,000 rials (35 cents) and diesel prices from 3,000 rials (7 cents) to 4,000 rials (9.5 cents) per liter.

The move risks leading to a dramatic rise in inflation though. The Iranian economy has been beset by high inflation rates. A point-to-point inflation of 45% was handed to Rouhani in June 2013 by his predecessor.

However, the incumbent president managed to gradually rein in the runaway rate and bring it down to a single digit territory for the first time after about a quarter century in June 2016. The rate has been hovering around 10% ever since. It is widely expected that any such hike in energy process will make inflation bounce back above 10%.

Deputy Chairman of Majlis Energy Commission Hedayatollah Khademi said most lawmakers are against a sudden increase in gasoline prices and that a 50% rise in prices will most probably not be approved by the parliament.

> 3-Fold Rise in Departure Tax

And yet another controversial move stipulated in the budget bill is to raise the fee for outbound travelers from Iran, otherwise known as "departure tax".

As per the bill, the rate will see an almost threefold rise compared to the current year’s fee to reach 2.2 million rials ($52). The new fee is to rise 50% for the second trip and 100% for the third and subsequent visits.

Tourists heading toward religious destinations will be granted a departure tax exemption of 50%.

Revenues from the rise in departure tax are said to be spent on developing tourism infrastructures and improving cultural heritage and handicraft sectors.

The decision has met with widespread public opposition.

> Sale of Bonds and Other Sources

The government plans to issue 260 trillion rials (around $6 billion) worth of Islamic bonds in the next fiscal year (starting March 21, 2018).

According to Managing Director of Central Securities Depository of Iran Gholamreza Aboutorabi, the projected debt issuance is 30% higher compared to what was forecast for the current year.

The government says it will use the funds raised from issuing bonds to finance the completion of development projects.  

Apart from the above-mentioned forms of raising funds, the government has other major sources of income: oil revenues and tax. It is expecting about 959 trillion rials ($22.8 billion) from the sales of oil and oil products next year, assuming an average oil price of $55 a barrel, up from the current $50.

The latest CBI report shows revenues associated with the sales of oil and petroleum products reached 469.3 trillion rials during the seven months under review ($11.17 billion), indicating a 56.8% YOY rise, but less than the projected 674 trillion rials ($16.04 billion).

However, as oil revenues have proven to be an unreliable source of income over the years, experts have been calling on the government to direct its attention to taxation as a viable means to fund its affairs.

Economist Saeed Leylaz believes tax revenues could become a dependable source of income for the country, if they increase to 12% of gross domestic product in three to four years to reach 1,500 to 2,000 trillion rials ($35-47 billion) per annum.

According to Kamel Taqavinejad, the chairman of Iran National Tax Administration, the budget bill has predicted 1,050 trillion rials in tax.

The CBI report shows that although tax revenues were estimated to hover around 689.2 trillion rials ($16.4 billion) during the period under review, they only reached 526.4 trillion ($12.53 billion), registering a 2.7% increase YOY.

Taqavinejad said 20% of taxpayers in Iran pay 80% of all tax while about 65% of all taxpayers are either exempt or pay less than 10 million rials ($266) in tax.

INTA’s figures show tax evasion amounts to 140-300 trillion rials ($3.5-7.5 billion) in the country due to the gray economy, smuggling and lack of transparency.

Thanks to a relatively moderate 25% corporate income tax and no domestic withholding tax on dividends, Iran is one of the emerging markets where locally created value and cash repatriation to the investor’s home country attract the lowest taxes.