An Outlook on 2019-2020 Budget Bill

ByHashem Barooti

Most economists consider the next Iranian year (starting in March) to be the toughest for Iran’s economic management, with conditions that will be harsher and more critical than what engulfed Iran during the period of its war with Iraq.
After the beginning of the new phase of US oil and banking sanctions, this year’s budget has two main features: first, the price of the dollar is fixed at 8000 tomans, and second, salaries and wages are to increase by 20%.
With the beginning of the second round of US oil and banking sanctions and the Europeans’ implicit cooperation, any economic activities on a large scale will be very tough and risky for the Iranian government. That is why the next year’s budget has been drafted while taking the sensitive conditions of the country into account, as it can significantly impact people’s livelihood and lives; particularly for workers, who hope to solve a part of their problems by an increase in their wages and salaries. Currently, the representatives of the government, employers, and employees are negotiating, and it seems that it will soon be decided how much the workers’ salaries and wages will increase – a minimum 20% and a maximum 30%.
In addition to resolving the issue of workers’ and employees’ wages, there is another issue that will result in the government facing more of a crisis; chaos in pension funds. According to statistics published, the Social Security Organization and pension funds are actually bankrupt and their demands from the government are being postponed. This issue can impact the livelihood of retirees in the country.
The official statistics show that the share of oil in the current expenses— which has recently decreased — has grown since 2017, and once again, reliance on revenue from the sale of oil and fossil fuel has increased.
The government’s economic policies for the next year that are generally reiterated by Rouhani’s government each year are:
To mobilize the country’s capacity in providing goods and public services; attention to financial discipline and amending the bureaucratic system to increase efficiency and make the size of the government logical; empowering and increasing the productivity of government companies, banks, and other profitable institutes affiliated with the government; equipping the non-oil public resources; organizing plans for asset procurement; and planning the national budget based on performance.
But, what ties on the government’s hands is the negative economic growth for the next year. In reality, the government, even in the best-case scenario after the JCPOA, could not place civil projects in the development agenda while announcing a 4% growth. It did not direct the revenues accrued by selling crude oil towards the real estate and financial market. And, to escape inflation and postpone it to the future, it could not revive the production sector. In Rouhani’s government, small and medium shops, as well as, factories experienced inflationary stagnation and unemployment, just as they did in Ahmadinejad’s government.
On the other hand, inflation because of fluctuations in the currency created problems such as a shortage of resources and capital required to provide raw materials for production. According to predictions by international and domestic institutes such as the International Monetary Fund and the Iranian Parliament’s Research Center, we will see stagnation and negative growth in different economic sectors this year and in the next. The government hoped that it could increase tax revenues to some extent and in the next year’s budget; the focus is on revenues accrued by taxes. But, unfortunately, this government’s policy will put additional tax pressure on those businesses which form the real and transparent part of the economy. This can put an end to these businesses. The government intends to increase tax revenues by 20% next year.
Some experts believe that in the budget bill, there can be an approximate 20% tax growth given the inflation rate. An increase in inflation can result in receiving good incomes by putting taxes on added values. However, the ratio of such taxes to GDP is low.

The rate of currency exchange in the 2019-2020 budget bill
Iranian officials previously announced some variables in the next year’s budget. Earlier, President Hassan Rouhani in his trip to the West Azerbaijan Province announced that the rate for providing essential goods for the next year would be fixed at 4200 tomans per dollar. The rate of exchange for other uses is being investigated from different perspectives. One of the suggestions is to define the average rate of exchange between 4200 tomans and the NIMA system average [Forex Management Integrated System]. According to the latest news, the rate of exchange is decided at 8000 tomans, which means that the inflation rate in 2019-2020 is to be predicted at about 60% compared to the previous year. Accordingly, the evidence shows that the amount of oil exports, the price, rate of exchange for other uses, the share to the National Development Fund, and the amount of resulting revenues for the government as stated in paragraph 14 in the budget bill have not been defined.

Level of oil exports under sanctions
Some predictions show that the maximum level of oil to be exported by Iran is approximately between 1 to 1.5 million bpd at $60 to $65 per barrel. The strongest speculation is that Iran will export 1 million bpd at $60 per barrel. Of course, these are just predictions, and the oil and banking sanctions in 2019 will be in such a way that we will see tougher situations facing Iran’s oil sector. Even though the government has repeatedly said that it doesn’t have any problems with regard to selling oil, it seems that it is just a political bluff. One of the government’s policies reiterated by Rouhani is increasing the price of gas and other fuels. This can decrease the government’s revenue concerns.

What is the prediction for the price of currency next year?
In my opinion, the government has decreased the rate of the dollar, because it wants to wrap up the next year’s budget with the rate it has in mind (8000 tomans per dollar). After offering the budget bill to the parliament, the rate of foreign currencies – in both official and unofficial markets – will start fluctuating again.
But, the impact of an increase in the currency rate and growth in liquidity in the next year means announcing economic bankruptcy. Liquidity growth with 22.1% in 2017 reached 1530 billion tomans; it reached 214 thousand billion tomans last year with 19.1% growth.
Given the fact that liquidity is basically a nominal variable, it must be compared with other variables such as GDP to have a more accurate assessment. According to the Central Bank, at the beginning of 2017, GDP was over 1,480 billion tomans. Therefore, a simple calculation shows that the liquidity in 2017-2018, when the currency crisis was not that severe, had gone above the GDP, reaching 103.3%.
One of the significant factors in liquidity exceeding GDP is that the inflationary impacts of liquidity have not been discharged in recent years. Given the high rate of banking interest, a large part of liquidity did not transform into demand, as a result of which the created liquidity did not lead to a change in the level of general prices and nominal growth of GDP. Looking at the ratio of liquidity to GDP shows that it has gone from 63.2% in 2012 to 103.3% with a 40.1% increase. This is happening in Iran’s economy for the first time when compared to past decades.
The amount of liquidity, according to the latest statistics of the Central Bank in December, has been about 1463 billion tomans, showing an average growth of 1.6% each month. Therefore, the amount of liquidity reached more than 1500 billion tomans by the beginning of 2017. If we take the rate of annual growth of liquidity at 20% on average, the amount of liquidity in the economy will reach 1800 billion tomans this year.
In other words, if this process continues in 2019-2020, roughly 400,000 billion tomans will enter the market. This amount of liquidity is worrying even on paper, and some proper policies must be considered for controlling it. Otherwise, it will enter the country’s economy like a devastating flood and will create instability. Currently, 88% of this liquidity is in the banks in the form of long-term deposits, and only 12% of the liquidity is used in the economy in form of banknotes, coins, and current accounts.
One of the reasons for controlling the inflation rate is a low number of banknotes and assets in the economy. But if any factor disrupts this balance next year, it cannot be controlled easily with the tools usually used for controlling the inflation rate.
The other point is that the next year’s budget has had 41% of growth compared to the last year, which does not mean growth in income, but a reduction in the value of money. Given the price of the dollar at 8000 tomans, it means that it has not been able to add to the budget’s assets, given the increase in the price of the dollar.
Finally, if economic pressures lead to selling properties, it might decrease prices in the short-term in fields like currency, real estate, gold, and funds, but it will increase the pressure on the government with regard to essential goods. I think the Vice President Jahangiri’s dollar price suggestion for providing essential goods will soon expire. And if the government intends to provide the essential goods at 8000 tomans per dollar, my prediction of 60% inflation will be absurd and we should expect three-digit inflation. The other point is that the capacity of the establishment and the government in selling smuggled fuel, oil, and gold cannot be high enough to save the government from collapse; perhaps, it can alleviate the pressure by approximately 20 to 30 percent. At best, Iran might be able to sell about three to four hundred thousand barrels of oil per day, in addition to the European Union’s commitment to buy 1 million barrels of oil. As such, it can be predicted that the government will adopt more contracted policies in the field of health, education, and production. This will add to public dissatisfaction. In my opinion, the Islamic Republic under these conditions —considered as normal and natural by some— has economically collapsed on paper, unless some divine force favors it.

Source: Zeitoons 

Opinions in this article reflect the writer’s point of view, not necessarily the view of Rasanah

Hashem Barooti
Hashem Barooti
Economic researcher