Iranian President Mahmoud Ahmadinejad on 24 January presented to the Majlis (parliament) the draft budget for the Iranian year 1389 (starting on 21 March 2010) which projects a 31.8% increase in expenditures to IR3,680 trillion ($368bn) from IR2,791 trillion ($279bn) in the previous year. Next year’s budget is expansionary with its significant increase in expenditure, compared with a small decrease in the 2009-10 budget, and lower increases of around 20% in the previous two years (MEES, 9 February 2009). The new budget will be the first in the president’s second administration, which began in June 2009, and also coincides with the first year of the fifth development plan (March 2010-March 2015).

In his address to parliament, Mr Ahmadinejad said that the new budget is intended to lessen dependence on oil revenues and help to make Iran less vulnerable to Western sanctions, which could be tightened further in the absence of a resolution of the nuclear dispute between Iran and the West. The president was upbeat about his country’s international standing, saying that “Iran is quickly turning into a center of inspiration and a role model of resistance and freedom,” and adding that “the strong participation of the Iranian nation in the regulation of global affairs is increasing and Iran’s regional and international position has reached its highest point in the past 250 years.” He predicted that “the economy of Iran would become a powerful [economic] pole in the region and the entire world during the fifth development plan,” and said that his country was ready for the “big leap.” The fifth plan (2010-15) projects an annual growth rate of 8% and an average inflation rate of 12% and is intended to redirect oil revenue to boost industry and overhaul the monetary and fiscal systems in Iran (MEES, 18 January).

The debate in parliament on the new budget, due to be approved by 20 March, is expected to be more lively this year than in previous years because of the president’s controversial economic reform bill, which over a five-year period phases out subsidies on certain food items, energy and utilities that are estimated to cost the government around $100bn/year. Under the bill, which was finally approved by the Guardian Council on 13 January (MEES, 18 January), the government intends to reduce subsidies gradually and pay out cash transfers to targeted sections of society according to income. But this shift to market pricing could be politically risky, since it may lead to high inflation and increased poverty and could therefore trigger further protests in the wake of those by reformists who contest the June 2009 presidential election results. Under the reform bill gasoline prices for instance are set to increase gradually in the next five years to reach market prices. Petroleum Minister Massoud Mirkazemi said last November that the price of gasoline will rise to IR5,500 ($0.55)/liter in the free market from the current IR4,000 ($0.40)/liter. He added that as of 21 March 2010, the allocated monthly gasoline ration will be reduced from the current 100 liters to 55-60 liters with the aim of eliminating this allocation completely within five years (MEES, 16 November 2009). The budget bill has not yet confirmed this reduction.

The budget gives no details about the source or destination of the cash handouts that will replace the subsidies. Some economists have predicted that inflation could rise to 40% when the reform plan is implemented, but the president claims that the inflation rate could actually fall if it is implemented according to plan. Some criticism of the budget has already surfaced, but not in parliament. Deputy Ali Asghar Yousef-Nejad, who is a member of the Majlis Industries Commission, has said that the draft budget bill needs extensive modifications and “another bill should be drafted which is capable of being implemented.” Another deputy, Hishmatollah Falahat-Pische, warned that “the budget will empty the country’s foreign exchange reserves.”

Budget Based On $60/B Oil Price

The 2010-11 budget is based on an oil price assumption of $60/B, according to the president’s deputy in charge of Iran’s budget affairs, Rahim Mombeini. This price, consistent with current market realizations, is significantly higher than the assumed prices in previous years – $37.50/B in 2009-10, $39.70/B in 2008-09, and $33.70/B in 2007-08 (MEES, 9 February 2009). To meet its rising financial obligations in 2010-11, Iran would need a price of over $60/B, given its expansionary budget, analysts predict. Mr Mombeini also revealed that 70% of the revenue from the sale of oil will go to the government and the remaining 30% to the oil sector itself (NIOC), with a tax to be levied on its 30% share. NIOC will also retain 11% of the revenue from gas sales through its wholly-owned affiliate NIGC, which will also keep 25% of revenues from domestic sales of natural gas. In the 2009-10 budget NIOC was allocated only 7% of its oil revenue.

Budget Projections 2010-11

As in previous years, the draft budget bill comprises the general budget, estimated at IR1,290 trillion ($129bn), up 32.9% from IR970 trillion ($97bn) in 2009-10, and the budget for state-owned banks and enterprises, estimated at IR2,690 trillion ($269bn, or double the general budget), up 35.2% from IR1,990 trillion ($199bn) in 2009-10. (The total of these two budget figures is usually higher than the aggregate as given in the budget bill because of double counting.) The general budget is subject to parliamentary supervision, while the budget for banks and enterprises is overseen by the Supreme Leader, Ayatollah Khamenei. Revenue in the general budget next year is projected at $59.6bn, with oil export revenue expected to generate about $39.6bn, according to Mr Mombeini. A deficit of IR60 trillion ($6bn) is projected in the 2010-11 budget, but Mr Mombeini expects the deficit to shrink to zero in the last year of the five-year plan. Analysts suggest that the government had to inflate its expenditure allocations to allow for the payment of cash transfers to eligible groups of society under the president’s economic reform bill. But increasing government expenditure on the one side requires revenue on the other, which is fiscally unavailable, when oil prices are at almost half their peak value in 2008, domestic economic activity is down and the world recession is taking its toll on trade.

Also projections for some sources of revenue, like privatization, are unattainable judging by recently realized figures, a newspaper has pointed out. An increase of 31.8% in projected expenditure – more than double the current inflation rate of 13.5% - would raise liquidity and reignite the flames of inflation, which has only recently begun to come down as a result of the general economic slowdown. According to statistics from the latest issue of Economic Trends published by the Central Bank of Iran (CBI), the value of oil and gas exports in the first half of the year 1388 (2009-10) fell by 45.5% to $31.333bn from $57.501bn in the corresponding period of 2008-09. The value of non-oil exports fell by a lesser 7.1% in the first half of 2009-10, but the aggregate for the value of oil/gas and non-oil exports was down by 40.0% to $40.494bn in the first half of 2009-10.

The general budget allocates IR340 trillion ($34bn) for development, up by more than 60% from IR210 trillion ($21bn) in 2009-10, but current expenditure will rise by only 6%, with no details available. The ratio of tax revenue/GDP will rise to 7% in next year’s budget from 6.5% in 2009-10. The budget allocates IR15,000bn ($1.5bn) for the development of cultural and religious issues; IR10,000bn ($1bn) for the development of small and large businesses and job creation projects; IR50,000bn ($5bn) for developments in the agricultural sphere; IR34,000bn ($3.4bn) for construction and development loans; IR10,000bn ($1bn) for subsidies and loans for job creation in deprived areas; and IR10,000bn ($1bn) for housing. The budget also allocates IR350bn ($35mn) for a contingency fund. The bill authorizes the president to reallocate some funds from certain activities and sectors to other needs if necessary without having to seek parliament’s approval – a sign perhaps of the consolidation of the president’s power within the machinery of government.

On the question of inflation, Mr Ahmadinejad said that he expected the rate to fall below 10% and possibly to around 5% half way through the development plan, if the implementation of the economic reform plan goes ahead smoothly.

Eurobonds Borrowing

Under the draft bill the government plans to issue €9.5bn in Eurobonds to finance its ongoing development projects. Of this total the oil ministry is authorized to issue up to €5bn in bonds in 2010-11 to help finance the development of the oil, gas and petrochemical sector. In addition Eurobonds worth €1.5bn and about €2bn will be issued to finance infrastructure projects and the mining and industry sector respectively. These bonds will not carry a sovereign guarantee, but only the corporate guarantee of the issuing entity. Iran has in the past few years been struggling to find the necessary cash and technology to develop its energy industry, as sanctions and political pressure have kept foreign firms away. Iranian officials have on various occasions announced plans to raise capital from foreign sources, but these have so far failed to materialize, given the financial sanctions imposed by the US Treasury Department on Iran in the past few years.

New Reserve Fund To Replace OSF

According to the draft budget bill and the fifth development plan, the government wants to set up a new National Development Fund (NDF) to which at least 20% of the country’s oil and gas revenue would be transferred. The NDF, which will mainly invest in Iran, will in due course replace the existing Oil Stabilization Fund (OSF) and take over its assets and legal commitments. The NDF will have a board of trustees, consisting of the president, the vice-president in charge of planning, the oil minister, the economy minister, the central bank governor and two other ministers selected by the president. At present the government needs parliamentary approval to draw on the OSF, and it is not clear so far if this would be the case for the NDF.

The Budget And Political Uncertainty

The unveiling of the budget comes at a time when the Iranian government is taking a hard line against the reform movement protesting last June’s presidential elections. The authorities want people to stop protesting and accept unchallenged rule by the Islamic establishment with no transparency and no accountability. Analysts point out that for the past 30 years the government has orchestrated its own rallies and silenced any opposing voices in order to claim that the majority of the people supported it without question. This may have succeeded until the elections in June, but the situation has changed dramatically since then. The government, or whoever is the driving force behind the government, is in denial. Against this backdrop of political uncertainty and economic difficulties, Mr Ahmadinejad’s budget projections verge on fiscal fantasy, and no amount of assertions by officials can dispel the impression that the Iranian economy is suffering from serious problems such as inflation, unemployment, economic sanctions, corruption, mismanagement, a lack of foreign investment, and domestic banking problems. The latter relates to some $48bn in bad debts and non-performing loans, which prompted the CBI Governor Mahmoud Bahman to question in the dailyEttelaat recently “how would it be possible for the banking system to show any profit with $48bn of loans in arrears?” Last month the CBI restricted individuals from withdrawing more than $15,000 in cash per day as part of its effort to battle money laundering. But some claim that the real reason is to check the outflow of foreign exchange from the country, amid anecdotal evidence so far of capital flight, which cannot be verified.

Is The Budget Transparent?

The president said in his address that the budget was transparent, flexible and integrated, and called on the deputies to refrain from undermining its integrity and purpose, but at the same time he invited them to amend and complement the budget. He also failed to reveal the sources of revenue to finance the large increase in spending next year. But transparency has not been a strong point in the government’s dealings with economic issues, as was recently revealed by the Majlis Research Center in its evaluation of the Fourth Development plan (2006-10). The center said that it was not in a position to evaluate the plan because of the lack of data on its progress and the failure of the government to submit the necessary reports on its implementation. It has also complained about the absence of any accurate figures on the reserve fund, the OSF. The center has managed to collate estimates of oil revenue in the first four years of the plan with a total of $283bn, of which $192bn were allocated to the budget, $31bn to various needs of companies in the hydrocarbon sector, and $12bn to finance private sector projects. According to the center, the budget’s dependence on oil revenue was around the 68-70% mark in three years and lower at 61% in one year only