Iran’s Budget Close Up!
By Mahdi Goodarzi & Mojde Rezaee
President Rouhani submitted the draft of Iran’s Budget Bill for the new Persian calendar year, starting 21 March 2017, to the Majlis on Sunday December 4th. During his speech, two missions were stated as the underlying basis of preparing this draft; the first is to offer services funded by the general budget considering the limitations of resources and the second is to leverage the governmental budget resources to activate the non-governmental sector in order to fuel and boost economic growth and prosperity in Iran’s economy.
Taking a look at the budget bill structure, one finds out that the total budget divides into two parts of the government general budget and the budget for the state-owned companies as well as banks. The government general budget part itself is also made up of Resources and Expenditure. The resources largely come from oil revenues, tax revenues and those made from divesting assets while the expenditure mostly refers to current expenditure, civil project(s) investment and the acquisition of financial assets, i.e. paying back the principal and yield of Musharaka Sukuk securities.
In this proposal, the total proposed budget hovers around IRR 10,840,000 bn, which registers an 11% increase compared to that of the current year, paying special attention to:
- The Environment,
- Water Resources,
- Railway Infrastructures; and
Of the proposed total budget, IRR 7,560,000 bn will be the resources for state-owned companies belonging to the government along with banks and the remained IRR 3,710,000 bn will fund the government’s general budget. Out of the said IRR 3,710,000 bn, IRR 510,000 bn belongs to the government’s dedicated revenues and IRR 3,200,000 bn will fund the government’s general budget.
Taking a look at the draft bill, it is realized that the funding for running the government has set to be IRR 3,200,000 bn, relying on revenues, proceedings from divesting capital assets as well as those from financial assets. Of this amount, the civil projects budget has been predicted to be IRR 620,000 bn, posting a 26% growth and the current budget has increased up to IRR 23,600,000 bn contrary to the previous year; the current budget is mostly made up of the administration’s personnel salary whose 10% rise has increased the general budget up to 13%.
The current article offers a brief insight into the proposed draft budget bill in comparison with the budget bill for 2016/17 in the first part, explaining its major items, while keeping an eye on Iran’s capital market comparing the draft budget bill with the budget law for 2016/17 in the second part.
As was said, resources mainly come from oil revenues and tax revenues along with those coming from divesting assets, both capital and financial ones. The table below pictures the items making up the total budget resources for 2017/18 along with those approved as the budget law for 2016/17.
With a 10.9% rise in resources, it is realized that the item of “capital assets divesture” has gone through the highest growth rate of 46.9%, the most important reason for which is the 48.5% increase in the “resources made from oil revenues”. In the following, the three items, which consist the resources will be briefly stated.
Taking into account the 1.4% rise in the Revenues item, it is seen that tax revenue accounts for its major part. Based on investigations, the realization of almost 90% of tax revenues in the current year has been estimated mostly relying on the statistics released by the National Iranian Tax Administration in the first 4 months of 2016/17. It proves the government’s determination on realizing this revenue item.
Capital Assets Divesture
With the oil price per barrel set at $50 with the official FX rate to be 33,000 and selling 2.42 mn barrels per day, revenues from selling oil and its derivatives with IRR 1,100,000 bn consist the major part of this item, posting a 62% increase. It is so while the oil revenues as well as the total revenue made from capital assets divestures for the current year (2015-16) has been IRR 745,000,000 bn and IRR 790,000 bn, respectively. It is worth mentioning that the balance in the budget for 2017/18 depends to a great extent on oil prices in global markets.
Financial Assets Divesture
The 18% rise comes from the increase in issuing types of Islamic securities and the resources from other items under this heading have not gone through a considerable increase in comparison with that of the current year.
Government General Budget
Having been all said, the government general budget includes:
- IRR 1,590,000 bn from the Revenues; of this amount, tax revenues of IRR 1,127,325,001 mn accounts for 70%, showing an 11% growth contrary to that of the draft budget bill for 2016/17;
- IRR 1,160,000 bn from capital assets divesture;
- IRR 440,000 bn from financial assets divesture; this amount registers a 24% drop; however, the major part of this figure, which comes from revenues from selling Islamic Treasury Bills and Musharaka and Ijarah Sukuk has gone up by 18%,
As the draft budget shows, 5.14% of the oil revenues will be spent by the National Oil Company to implement development plans and projects. Besides, 20% of the revenues made from exporting crude oil and gas will be deposited to the Tose-e-Melli Fund. The Oil and Gas Ministry is also obliged to modernize and renew the pipeline transport, which will be funded by the 5% increase in the oil products’ price.
In his speech when submitting the draft budget bill to the parliament referring to the fact that the oil revenues will not reach that of 2001-2009, the President announced that more than IRR 4,000,000 bn worth resources are required to complete the remained development and civil plans; as the result, divesting the said projects to the private sector will be a major strategy adopted by the administration. As the President continued, not only will this unfreeze resources locked in half-completed projects, it will also increase investment efficiency. Therefore, the current budget draft seems to be designed with the intention to attract the cooperation of the private sector, banks and Tose-e-Melli Fund; this will accelerate the completion of such projects and facilitate financing new ones. Consequently, the state will select those economically feasible development plans and direct them to the correspondent banks; based on projects’ type, at least 20% of resources will be brought by the private sector; 25% will be deposited by Tose-e-Melli Fund in those banks and the rest will be funded by the private sector in the form of financial facilities.
Expenditure also refers to items, including current expenditure, civil projects budget and acquisition of financial assets.
Figures show that the civil projects budget for 2017/18 registers a 9.1% increase; the most important reason is the 15.54% rise in government’s investment in “Buildings and Other Constructions”. On the other hand, the “Acquisition of Financial Assets” has shed 9.7%; a major part of this item refers to the “Repayment of the Principal of Musharaka Sukuk” and “Credits for Equity Divesture”.
The Capital Market Side of the Budget
The capital market is affected by the country’s budget both in terms of micro-economic and macro-economic factors. Talking from the macro-economic point of view, government policies for resources and expenditures will influence macro-economic variables, including the GDP, investment and inflation. In terms of micro-economic perspective, however, the government presence in the capital market through the available financial instruments as well as divesting state-owned companies can significantly affect the role played by the capital market in the real sector of the economy. Below, the items of the draft budget bill which are directly linked to the capital market will be briefly explained against those in the budget law for 2016/17.
Divesting Financial Assets
Financial assets divesture exerts a significant impact on the capital market. In fact, including an item named as “Resources from Selling and Divesting Types of Islamic Securities” shows the government intention to create the required platform for introducing new financing instruments, which itself will deepen the Debt Market.
In this draft, issuing IRR 325,000 bn worth new securities has been proposed, of which IRR 50,000 bn will be Sukuk and Islamic T-Bill issues (with up to a 5-year maturity) to cover the principal and interest on the overdue securities, allowing the government to postpone its debts to next years.
Of the total set amount, up to IRR 200,000 bn, both in Rial and foreign currency, will be allocated to own to-be-completed capital assets. The government will be allowed to issue Islamic T-Bills worth IRR 75,000 bn to be matured in 1-3 years. Besides, the government will be permitted to settle its debt to individuals and private sector and corporate entities using its certain claims from these persons worth up to IRR 50,000 bn.
Subsidiaries of the Ministries such as Energy, Oil and Gas, Road and Urbanization, and IT and Communication will be permitted to issue Musharaka Sukuk in Rial up to IRR 100,000 bn to implement plans with technical, economic and financial feasibility, especially in housing and urban development, power plants and electricity distribution grids, transportation and water and sewage treatment plans.
The municipalities and their subsidiaries will also have the right to release Sukuk worth up to IRR 50,000 bn whose payment of principal and interest are guaranteed by themselves. The Ministry of Oil and Gas will also be allowed to issue Musharaka Sukuk, both in Rial and foreign exchange, up to IRR 50,000 bn to invest in oil and gas plans, with priority being given to Joint-Field plans; this, however, must be approved by the National Economy Council and the payments will be guaranteed by the Oil and Gas Ministry relying on the increase in production of the said fields.
The National Iranian Oil Company will also be granted the permission to use the issued Sukuk up to IRR 116,760 bn in order to pay back the principal and interest on the overdue securities, banking facilities as well as the debts to contractors for upstream oil and gas projects. The company will be obliged to settle the issued securities within 5 years at most.
Acquisition of Capital Assets
Taking a close look at this item, it is found out that the acquisition of “Buildings and Other Constructions” has increased by 15.54%, demonstrating the government’s intention to allocate its civil project budget to the housing and construction sector. Taking the relative boom in this field in the current year into account, in case continued in the next year, the increase in the government’s investment in the housing sector can gradually bring prosperity back to this field.
In this part, the acquisition of “Machinery and Equipment” has dropped 35.75%, which proves the decline in government demand for machinery and industrial equipment. As the largest clients for domestically produced machinery, this will result in the decline in supply and performance of their manufacturers; in case not compensated by the private sector, the companies’ financial performance will suffer.
The price of crude oil to be exported has been estimated to hover around $50, contrary to the $40 in the budget bill for 2016-17. Considering the increase in crude oil export volume within the current year and its increase up to the pre-sanctions levels intensified with the predicted increase in the oil price in the coming year, the resultant rise in the country’s oil revenue not only will improve business, both of state-owned and the private sector, in terms of macro-economic factors, but also will increase revenue and profit of companies listed on the Oil Products and Chemicals spaces.
Foreign Exchange Rate
The official FX rate has set to be 33,000, registering a 10.1% increase. The inflation rate is interpreted as a decisive parameter in foreign exchange rate fluctuations; in case the current year’s 10% inflation rate remains in this area in the next year, the predicted rate seems logical. Besides, the hike of the FX rate can increase the revenue of exporting companies while reducing those of which that are mostly import-oriented. Furthermore, experts believe that the jump in the foreign exchange rate will eventually result in higher inflation rate that can also influence those which are not active in the international commerce field.
Investigating the structure of the draft budget bill for 2017/18 and comparing it with the budget law for 2016/17, it is seen that the estimated resources and expenditure for the government will rise by 10.9%; taking the 16.8% increase in the current year’s budget and the 10% inflation ratio into account, the proposed budget cannot be regarded as expansionary. In fact, it seems that the government has adopted a conservative financial budgeting with the goal of controlling expenses and adjusting it with the inflation rate. Besides, the combination of the state budget resources shows that the administration is more leaned towards oil revenues and less inclined towards financial assets divesture. Just like other economic sectors, the capital market is significantly influenced by the government’s financial policies as well as the close link with items of financial assets divesture, acquiring capital assets plus macroeconomic policy making.
All in all, the principals, revenues and the required resources are now to be discussed and voted in open sessions and after being approved by the Parliament members and then by the Guardian Council, will be implemented from the next Persian calendar year.
DISCLAIMER: This report has been prepared and issued by Agah Brokerage Firm on the basis of publicly available information, internally developed data and other sources believed to be reliable. The information contained herein is not guaranteed, does not purport to be comprehensive and is strictly for information purposes only. Agah does not assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions. Any expressions of opinions are subject to change without notice.
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