More of the same (austerity) in Iran’s new budget for 2016/17
For the third year in a row the government has proposed a tight budget, keeping spending constant in real terms. I am not sure the macroeconomics I studied decades ago has much relevance to Iran’s current economy, but the Keynesian in me says, given the economy’s dire conditions, a bit of fiscal stimulation could not hurt. The government still believes that inflation rather than bankruptcies and unemployment as the enemy number one. But perhaps Rouhani’s economic team is banking on the lifting of sanctions to pull Iran out of recession and generate a modest 5% growth. This seems to be also what the IMF expects.
Below are two summary tables showing the basic budgets numbers for the last three years, in rials and US dollars. Proposed expenditures for 2016/17 compared to the current year’s budget as approved by the parliament (budget law) are not expected to increase in real terms (assuming 12% inflation). There is a small redistribution of expenditures in favor of investment: development expenditures, at $19.9 billion (roughly 5% of GDP), show an increase of 5.3% in real terms. The share of development expenditures in total spending is up from 18.5% in the 2015/16 budget law to 19.4%, which is higher than the 14.6% in 2012/13, the last Ahmadinejad budget, but a far cry from the average of one-third in the mid-1990s, the period of post-war reconstruction.
Budget numbers in trillion rials.
Note: The budget numbers are as they appeared in bills presented to the parliament; they are not actual expenditures or revenues. The last two columns show increases over the budget law for 2015/16; real increases assume a rate of inflation of 12 percent.
Budget numbers in billions of USD.
No doubt, with the prevailing low price of oil, public revenues are as tight as they have been in a long time. In the proposed budget they account for 23.8% of all revenues. During the last Ahmadinejad years they accounted for twice as much — 53% in 2010/11. The current oil slump is reminiscent of Khatami’s first year in office, 1998, when oil prices were also at rock bottom and Iran’s oil revenues plunged to $16 billion — about the same in real per capita terms as the $24 billion anticipated for next year. But, in 1998, oil income accounted for 42% of government revenues. For the first time in a long time, taxes account for a larger share of total government budget than oil, one-third compared to one quarter.
Could the government have stimulated the economy by spending beyond its means? The answer is: with difficulty. The item listed in the table above under “sale of assets” includes the sale of public companies (under the privatization law) as well as bonds, i.e. borrowing from banks and the public. The government is unwilling to do much of the latter because it would have to compete with unregulated financial institutions, which are paying very high rates of interest. In addition, in recent years the government has been quite spoiled by being able to borrow at zero interest (actually at negative 20-30% real rates because of inflation!). According to news sites, at present the government owes private contractors as much as $100 billion on which it pays no interest. These arrears are one of the main reasons for bad loans held by banks and the current banking crisis.
Can the nuclear deal help jumpstart the economy in this situation? Foreign inflow of direct investment (FDI), the kind that builds industrial capacity and increases production, can obviously help inject cash into the system and enable some private debtors to settle their debts with the banks, but it would not help reduce government arrears, which require new government revenue. What about the $30 billion (or more) that the Central Bank expects to get as its account are unfrozen? Well, apparently that sum does not belong to the Rouhani government because its predecessor has already received the equivalent rials from the Central Bank and spent it. This was the reason why the monetary base expanded quickly in 2012-2013 and inflation skyrocketed to 35%. It is also the reason why the $30 billion is not listed as government revenue in the new budget.
What will the Central Bank do with that money? Most likely sell it to keep the exchange rate from rising, even lower it, in an attempt to unify the exchange rates. Which brings me to a final note and a warning about the role of foreign money. The government should be extremely wary of a large inflow of speculative foreign money attracted by interest rates of 20-30 percent while inflation is around 12% and the CBI promised to keep the exchange rate stable. Anyone with foreign currency can make a killing by converting it into rials and depositing it in an Iranian financial institution. Let’s hope that this is not the type of investment that is filling Tehran’s hotels, because if it is and Iran’s Ponzi scheme is not solved, its collapse would cause a much bigger bang: it would trigger a collapse of the rial as foreign investors tried to get their money out in a hurry.