Iran Budget Bill for 2018/19 Wrap Up!
President Rouhani submitted Iran’s Budget Bill for the new Persian calendar year, starting 21 March 2018, to the Parliament on Sunday, December 10th, which seeks to generate employment, rooting out poverty and promoting equality among many others, which altogether will bring about prosperity in Iran’s economy.
The budget bill for 2018/19 proposes IRR 11,950,000 bn as the total budget, while it had set IRR 10,850,000 bn in the budget act of 2017/18, registering a 10% rise.
The administration’s general budget has been set at IRR 3,680,000 bn, which posts 15% and 6.1% growth compared with the budget bill and the budget act for 2017/18, respectively.
The general budget resources are made up of revenue streams (tax income, fines, royalty fees), capital assets divestiture (oil revenues) and financial assets divestiture.
In more details, IRR 1,930,000 bn has been targeted as the government revenues, IRR 1,280,000 bn of which are expected to come from tax income; the tax income shows an IRR 160,000 bn rise compared to the target set in the act for 2017/18.
Taking a look at the government’s H1 performance, it is obvious that only IRR 430,000 bn of that target has been realized in the current year, which mostly points fingers to the lack of sufficient cooperation and harmony between the Government, Judicial System and Legislature of Iran, which has resulted in nearly a 40% tax evasion.
As was said earlier, capital assets divestiture or the revenues made from selling crude oil and its derivatives makes up another part of the government general budget. The budget bill for 2018/19 suggests IRR 1,060,000 bn as oil revenues, considering $55 crude oil per barrel and USD/IRR at 35,000; this figure proves 8% and 11% decrease in comparison with the budget bill and budget law for 2017/18, respectively.
The decline in the budget dependence on oil revenues is interpreted as a strength for the bill specifically with regards to the proposed $50 crude oil per barrel and USD/IRR at 33,500 in the previous bill.
On the other hand, despite being a hot issue since 2014, the matter of FX rate unification has not been addressed by the proposed budget bill; in fact, setting USD/IRR at 35,000 will create rent in the economy and slow boom and prosperity of Iran’s Economy down.
Financial assets divestiture is also set to provide IRR 680,000 bn revenue in the budget bill for 2018/19, which demonstrates a 54% and 26% increase compared with the budget bill and law for 2017/18. An improvement in the proposed budget bill is the usage of Islamic debt securities, which does not tie the government hands like in the past year’s budget bill where “Musharakah Bonds” and “Sukuks” had been explicitly mentioned.
The budget bill for 2018/19 has also estimated IRR 2,760,000 bn as the government expenditure, showing 17% and 9% rise in comparison with the Budget Bill and Budget Law for 2017/18; taking the targeted 10% inflation rate into account, this figure proves that the government expenses have grown at an acceptable pace.
A great part of the government current expenses deal with its employees’ wage and salary, which seems to grow by 11.6% with regards to the proposed IRR 1,060,000 bn in the bill.
Furthermore, the government has estimated IRR 600,000 bn to civil and development projects, which will be accompanied by IRR 500,000 bn from the National Development Fund of Iran, Iran’s Banking System and the Private Sector. Allocating the total IRR 1,100,000 bn to such projects will translate into many half-completed projects being diverted to the private sector; currently, there are IRR 5,000,000 bn worth of incomplete projects in the country. It is worth mentioning that the government had proposed IRR 600,000 bn for civil projects in the budget bill for 2017/18, which increased to IRR 710,000 bn by the Majlis approval.
Another part of the government expenditure deals with the acquisition of financial assets and settlement of the government debts, which have been set at IRR 310,000 bn; this figure demonstrates a 48% and 45% hike in comparison with the current year’s budget bill and law, which is interpreted as the government committed to delivering its promises.
Cash Subsidy
In the previous year, the Majlis tasked the government with removing up to 30 mn people from the list of cash subsidy recipients, an issue which has been addressed by the budget bill of 2018/19. While the government has continuously paid IRR 420,000 bn as cash handouts every year, the proposed bill reduces this amount to IRR 230,000 bn (-45%), which means the removal of half the names on the said list. The freed amount will compensate the government budget deficit and a higher share of oil revenues can be allocated to the Tose’e Meli Fund (National Development Fund of Iran).
Iran Debt Market Place in the Budget Bill
Deepening the debt market will bring about the development in the capital market and the capitalization system as well as acting as a strong monetary instrument for the government. Figures proposed in the next year budget bill underpin the important role of the debt market in financing through the capital market.
For instance, the issuance of bonds by municipalities has seen a 60% increase in the proposed budget; besides, the government has been granted the permission to issue IRR 735,000 bn worth of Islamic debt securities to settle its debts in addition to the release of $3 bn worth of said securities denominated in foreign currencies.
It is worth mentioning that a committee, made up of the Minister of Economic Affairs and Finance, the Governor of the Central Bank of Iran and the Head of the Plan and Budget Organization, will be in charge of creating the required supervisory measures in regard with issuing all the debt securities set in the bill as well as meeting the pre-requisites and conditions. This would lead to scheduled offerings of treasury bills and other debt instruments which was something missing in Iran’s debt market puzzle for a while.
Conclusion
The figures set in the budget bill for 2018/19 turn it into an expansionary budget in terms of its nominal figures (6.1% growth); taking into account the set 10% inflation rate, however, will convert it into a contractionary one.
Taking a glance at the budget figures, some experts are estimating a near IRR 1,000,000 bn deficit, which might be compensated using oil revenues as the easiest way possible. On the other hand, some believe that the government’s proposed roadmap for Iran Economy in the upcoming year has an eye on financing through other sources, which might bring about growth in private and foreign investments; if this is really the case and the government manages to get the Majlis in line, financing will see a new bright future ahead.
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