Comments on the Iranian Budget - 20th March 2014 to 19th March 2015

By Dr. M. Javad Ardalan (ardalan@oxpe.co.uk)

Director of Oxford Persian Institute (www.oxpe.co.uk)

The Iranian Budget for the current year (20 March 2014 to 19 March 2015) was approved by the parliament on March 1st 2014. This was the first time that the budget was approved on time, after several years of delayed budgets during the presidency of Mahmud Ahmadinejad. The total budget for the current Iranian year amounts to US$300 Billion. As the first budget planed by the Rouhani government, this budget is particularly important. On the one hand this could show the government's financial approach. On the other hand, it shows how Rouhani's officials understand the financial restrictions and difficulties that Iran has faced during recent years, mainly as a result of the US, EU and international sanctions.

Commentators in general are highly sympathetic to the difficult task faced by the present Administration and have commented on the superiority of it's 2014 budget to Ahmadinejad's budget. The budget lists the problems faced when preparing the budget: inflation at 40%, economic growth rate of minus 5.8%, and unemployment of 12.6%. It reveals the total budget as an absolute increase from last year but a significant decrease when inflation is taken into account.

The government will spend $16.4 billion for cash and non-cash subsidies and $775 million for unemployment benefit. As the government is keen to reduce the inflation rate, it is likely that most of the subsidies will be in the form of basic goods and not cash. However, the unemployment benefit will have to be in cash.

The government has made the strategic choice to focus on inflation, which is, in view of the president's advisers, due to domestic fiscal and monetary policies, rather than external sanctions. Rouhani's economic team have been successful in reducing the inflation rate as promised. The inflation rate for the current months has been 26.2%. However, the government's policy has been challenged by the conservatives, such as Ahmad Tavalloki, who is a member of Budget Commission of the Parliament and a UK trained economist. In his letter to the parliament, Tavalloki criticised the government for reducing the inflation rate and risking recession.

Although such pressure may force the government to revise its economic policy, it is highly unlikely that this will lead to a significant change in the budget at this point. What may potentially impact the budget are international sanctions. The Administration was optimistic that they could reach an agreement with the P5+1 over the Iranian nuclear programme. Intensive negotiations took place in Vienna, in which period William Hague carried out one of his final duties as British Foreign Secretary immediately before his resignation on Tuesday. While both the Iranians and their Western counterparts were determined to reach an agreement, negotiations terminated without any significant (or even insignificant) progress. Both John Kerry and Javad Zarif returned to their respective homes from Vienna for further consultation. Ayatollah Khamenei's public speech last week about the necessity of maintaining a large number of centrifuges is to be understood as a clear manifestation of the Iranian position, which is beyond the scope of acceptability for Western powers. If the situation continues the same way, the Iranian treasury will not be able to meet its obligation regarding the budget, making a supplementary budget deficit bill unavoidable.

Potentially, the budget could easily be faced with a deficit, as it is too optimistic. The Rouhani administration has relied too much on resolving the nuclear issue and obtaining sanctions relief, on income tax and high oil prices, at $100 per barrel, which accounts for the highest in the Iranian budget history. It has predicted a 22% increase in its oil income and a 20% increase in public investments through the sale of public bonds (particularly to fund transportation and energy projects) and hopes to raise $2.2 billion this way. So, regardless of the feasibility of the budget, I shall look into the budget's approach.

Defence

The budget allocates a considerable amount of money, US$3 trillion for improving the defence structures and military equipment for the country. The CBI (Central Bank of Iran) is obliged to sell the currency surplus resulting from an increase in the oil price or quantity exported and pays that into an exclusive account in the treasury, which is in turn used for defence. Since the beginning, President Rouhani has maintained a good relationship with the military forces. He has maintained a long friendship with top military officials such as General Firuz Abadi, who is the highest military official in the country and the closest military adviser to Ayatollah Khamenei, the Supreme Leader. In fact, one of the reasons for Rouhani's election victory was Firuzabadi's support. Military officials, including General Jafari, the commander of Revolutionary Guard met with Rouhani for a Ramadan evening meal, which shows their strong ties. As Rouhani requested the help of military organisations in building national infrastructure, it is expected that most of this money will be spent on infrastructure projects contracted to the Revolutionary Guard, including in oil and gas sector.

Savings on hydrocarbons

Another feature of the budget is an emphasis on reducing the usage of hydrocarbon-based energy. The budget allocated for this purpose totals $8.5 billion. This will cover US$120 million for improvement of the heating systems of the schools, with the priority for schools in villages, $4.6 billion for replacing oil and gas products with electricity through buy-back contracts and $3.8 billion for improving transport and energy efficiency. Although this budget will be allocated to different organisations, the fact that so much is to be spent for this purpose, shows how the country's policy makers are determined to make progress in developing electrical power. Ideally, they want to be able to generate electricity through nuclear power. This also shows that the nuclear industry in Iran for policy makers and other industries is now far beyond research or just minor usage in nuclear medicine. This is in fact one of the reason which makes it more difficult for Iranians to reduce the number of their centrifuges, as outlined in Khamenei's speech last week.

Improving investment in oil and gas sector

Commentators argued that during Ahmadinejad's Administration, the oil and gas industry suffered greatly. In his parliament speech, Bizhan Zangeneh, the Iranian Oil Minister, raised the same concern with the MPs that the Oil Ministry is not in a good state. In terms of oil and gas, the budget allocates a total of about US$1.2 trillion for investing in oil and gas development plans.

The gas companies will be offered US$1.1 trillion for developing gas supply to villages and towns which are currently without a supply. The general approach of the Oil Ministry is that development of domestic gas supply will reduce the usage of other oil derivatives making more resources available for export.

The treasury is permitted to lend US$10 billion to the Oil Ministry for investment in its development plans. The Oil Ministry shall also be permitted to spend US$100 billion on oil and gas plans, using Iranian foreign reserves. This clearly shows that Iran is determined to rebuild its oil and gas industry to be able to play an active role in the international market. In addition to that, the Oil Ministry shall pay 5% of the sales of oil derivatives (up to US$600 million) for the improvement of the oil and gas pipelines, instead of paying it to the treasury.

Rural development

The budget allocated about US$15 billion to be spent directly or indirectly on rural development plans. This includes US$500 million for developing rural roads, US$548 million for improving rural irrigation and electricity, $235 million for buying service vehicles in smaller towns, $4.2 billion for buying domestic wheat and its storage, $135 million for research and exploration of the mines, which are usually in rural areas. Another point in the budget which will directly benefit the rural areas, is allocating considerable amounts of money (US$10.5 billion) for using water reserves which are held in common with neighbouring countries. This includes $465 million for control of border waters and $10 billion for using border waters for farm irrigation through the buy-back contracts. Also, US$21 million is allocated for preservation of the lakes and fighting drought, which will be mostly beneficial for the rural areas

Improving technologies and services

US$35 billion is allocated for the government to borrow from international finance providers for technical, financial and environmental plans. In addition to this, $200 million will be invested to help innovative technologies, $150 million for ICT and fibre optics projects, and $55 million for creating a digital archive of land registry, bringing the overall budget for developing the technologies, especially the ICT sector, to US$35.4 billion. The treasury is also obliged to allocate $58 million for buying ambulances (sourcing from 5 percent increase on car import tax) and $387 million for helicopters and air first aid equipment. In addition to its usual expenses, the government shall pay $3.5 billion for non-governmental public companies.

Foreign trade and international business

The budget's approach to foreign trade and international business is optimistic, as it allocated about US$12 billion for investing in development of such plans. This shall include issuing $8 billion worth of bonds or Islamic Sukuk for power, oil, roads, defence, and IT with priority for joint oil and gas fields and joint water resources, $2.7 billion Sukuk for city councils (guaranteed by the central bank) and $2 billion for Iranian contractors who win foreign tenders. This part of budget shall face practical problems, if sanctions and financial restrictions on Iranian foreign trade continues.

This content does not necessarily express the views of The British Iranian Chamber of Commerce. The views and opinions expressed are those of the author.