EghtesadOnline: The Iranian Parliament rejected the outlines of the upcoming fiscal year’s (starting March 21) budget bill on Tuesday.
The legislators cast 99 votes for and 148 votes against, while 12 abstained, IRNA reported.
“If the bill wins enough votes, we will start working on its details. If not, it will return it to the government [for revision],” Parliament Speaker Mohammad Baqer Qalibaf said before the voting process began.
The parliamentarians’ negative vote for the budget comes as the government’s economic team and President Hassan Rouhani have time and again spoken of changes made by the Majlis Joint Commission in their proposed bill, “which changes would make economic conditions even more difficult for people and hinder the country’s path toward development”.
Majlis Joint Commission, comprising representatives of all parliamentary commissions, is responsible for reviewing budget bills as well as five-year development plans proposed by the government before they are put to a vote by MPs.
Joint Commission’s Proposals
With a new president in the White House and emergence of optimistic expectations about the future of oil exports, the government had projected to gain 1,992 trillion rials ($8.26 billion) from the sale of 2.2 million barrels of oil per day in the budget bill.
But the Joint Commission reduced the figure to 1.5 million barrels a day and instead raised the budgetary foreign exchange rate to 175,000 rials per US dollar, the Persian-language daily Etemad reported.
As per development plans, 38% of oil revenues must be transferred to the National Development Fund of Iran, the country’s sovereign wealth fund. Leader of the Islamic Revolution Ayatollah Seyyed Ali Khamenei rejected President’s Rouhani’s request for reducing this share from 38% to 18% in next year’s budget.
Furthermore, the government had called for the withdrawal of €3 million from NDFI, but the parliamentary commission removed the aforementioned budgetary section altogether.
The section on domestic sales of oil bonds proposed by the government was also removed from the budget by the commission. The government had predicted to earn 700 trillion rials ($2.9 billion) from this source.
A balanced operating budget is a situation in budgeting process where total expected non-oil revenues are equal to planned current spending. A budget surplus occurs when sustainable revenues exceed expenses, and the surplus amount represents the difference between the two.
A budget deficit, by contrast, is the result of expenses eclipsing revenues. Budget deficits necessarily result in rising debt, as funds must be borrowed to meet expenses.
The government had predicted to earn 3,175 trillion rials ($13.17 billion) in sustainable revenues and spend 6,370 trillion rials ($26.43 billion) next year, which would lead to a budget deficit amounting to 3,195 trillion rials ($13.25 billion).
According to changes incorporated by the parliamentary commission in the draft, projected revenues would increase to 4,550 trillion rials ($18.87 billion) and expenditure would rise to 9,205 trillion rials ($38.19 billion).
“The operating budget [including revenues derived mainly from taxation and exports at the disposal of the government] has been projected to stand at 8,413 trillion rials ($34.9 billion) by the government. The Joint Commission has increased the figure to 11,940 trillion rials ($49.54 billion),” Rahim Zare’, the commission’s spokesman, said.
He added that revenues earmarked for ministries and governmental institutions increased from the government-proposed figure of 884 trillion rials ($3.66 billion) to 950 trillion rials ($3.94 billion), which improve the total sum of the general budget from 9,298 trillion rials ($38.58 billion) to 12,890 trillion rials ($53.48 billion).
Noting that the budget of state companies, banks and for-profit organizations had been put at 15,619 trillion rials ($64.8 billion) by the government, the lawmaker said the ceiling set for the government’s total budget had been put at 24,910 trillion rials ($103.36 billion), but the commission increased it to 28,510 trillion rials ($118.29 billion).
The government had predicted to earn 2,480 trillion rials ($10.29 billion) in the general budget from taxation, which indicate a 17% growth compared with the current year’s budget. However, members of the parliament have increased tax income, very optimistically, by 940 trillion rials ($3.9 billion) to 3,420 trillion rials ($14.19 billion) despite the coronavirus crisis and its economic impacts, which are unlikely to disappear next year.
All in all, the parliamentary commission has increased government revenues by 44%, revenues from the transfer of capital assets, including exports of oil products by 64% and earnings from the transfer of financial assets, including the sale of treasury bonds by 25%.
The commission has also increased expenditure by nearly 50%. Capital expenditure budget (development projects budget) increased by 20% and spending on financial assets, including bonds interest expenses, by 48% to reach 1500 trillion rials.
Essential Goods Forex Rate Controversy
The Joint Commission earlier decided to change the exchange rate for importing essential goods from 42,000 rials to 175,000 rials per dollar, suggesting that the prices of essential imports would be set in accordance with the exchange rates of the secondary FX market, known by its Persian name Nima.
The real market price of the dollar is around 60% higher.
Also known as necessity goods, essential goods are products consumers will buy, regardless of changes in income levels.
According to the spokesperson of the commission, the move is aimed at unifying the exchange rates and preventing the supply of imports at free market rate by importers as well as fighting corrupt and rent-seeking practices.
“Importers used to sell their products at prices determined by the free market despite the government’s allocation of subsidized forex at the rate of 42,000 rials per US dollar,” he said.
The government’s revenues are projected to increase by 400 trillion rials ($1.6 billion) provided that the commission’s proposal is approved by the parliament during its open sessions.
“The abolition of 42,000 rials per dollar exchange rate for importing essential goods recently approved by the Joint Commission is bound to increase inflation,” says the head of Plan and Budget Organization, Hamid Reza Haji-Babaie.
“The public cannot afford higher inflation rates and further economic pressure under the current circumstances,” he was quoted as saying by IRNA.
Those who have proposed this bill say they have an aid package to cushion the inflationary effect of the move, but the details of any such package has yet to be explained, he added.
Echoing the same viewpoint, Ali Shariati, a member of Iran Chamber of Commerce, Industries, Mines and Agriculture, says reforms have given rise to the golden signature (a metaphor used in Farsi to suggest influence peddling), duality of foreign exchange rate and arbitrage pave the way for new corrupt activities; the adoption of fixed foreign currency exchange rate, all over again, won’t improve the situation.
“ICCIMA, as the advisor to the three branches of the government, has time and again warned against the consequences of cheap forex policy but to no avail. The so-called economic mafia, given its influence in government or connections with persons in authority, has managed to keep this policy over years; it’s three years now that Iran’s economy is suffering from this policy lines,” he was quoted as saying by the news website of Tehran Chamber of Commerce, Industries, Mines and Agriculture.
“Following the delicate conditions facing the country in the fiscal 2018-19 [the dramatic depreciation of the national currency], the government set the foreign exchange rate of 42,000 rials per US dollar for imports to soften the blow of inflation. But in actuality, the price gap, which was caused by the difference between subsidized and free market forex rates, set the stage for rent-seeking and corrupt practices to become even more widespread.”
Take the example of livestock feed imports: cheap dollars earlier distributed among 20 companies are now being given to more than 150 companies belonging to government retirees, white collar employees and selected persons.
Smuggling of chicken and red meat became so prevalent that the government was forced to import meat by airplane. That is just a small example of the consequences of subsidized currency. Despite problems like this, the government kept on giving out cheap dollars with the aim of financially supporting the people of modest means.
Today, the pressure of sanctions and decline in foreign currency reserves have left the government thinking whether it should eliminate the forex subsidy.
“Experience shows reforms that give rise to golden signature, duality of foreign exchange rate and arbitrage pave the way for new corrupt activities. Repeating the adoption of fixed foreign currency exchange rate [45,000 rials or 175,000 rials per dollar] won’t improve the situation; structural change must be introduced. To give the poor or the producers a leg up, the government needs to allocate its direct support to the end consumer product or hand out subsidies to low-income deciles, the bottom links of the chain; opening up opportunities for those links in the middle of the chain won’t produce the desired results,” he said.
“Staying away from emotions on economic front is no less important than avoiding impulse decision-making when dealing with national security issues. Fixing the exchange rate on 175,000 rials per US dollar is as indefensible as setting it at 420,000 rials; it will create rent just like before.”
Houman Hajipour of Business Department of TCCIM said, “We are constantly facing a command economy.”
“It is not clear on what basis the parliamentarians have arrived at this figure. The least we expected from the members of the Joint Commission was to lower the tariffs on one row as they increase them on another column appropriately,” he said.
Noting that five essential items receiving subsidized forex account for a significant portion of imports, he said that from the operational point of view, trade expenses are bound to increase and the ensuing inflation next year would reflect this policy.
“There are three scenarios on the table for members of the Joint Commission whose common issue is the rise in the US dollar’s exchange rate to 175,000, the elimination of subsidized forex and increase in oil revenues from the government-proposed 2,000 trillion rials [$8.3 billion] to 2,800 trillion rials [$11.6 billion]. Those scenarios are setting two ceilings for the government’s budget in H1 and H2 of the next fiscal year, increasing the projected tax revenues from 600 trillion rials [$2.5 billion] to 2,500 trillion rials [$10.4 billion], and lifting the ceiling of the government’s operating budget to above 10,000 trillion rials [$41.6 billion]. The customs tariff on essential goods will also decrease from 5% to 3%,” he was quoted as saying by Eximnews.ir.
“Say, an item worth $100 is imported using the exchange rate of 42,000 rials and the customs tariff of 5%. As a result, the customs tax of the item would be 210,000 rials. The customs tax of the same item being imported using the exchange rate of 175,000 rials and the customs tariff of 3% would be 525,000 rials, i.e., a 2.2-fold increase. The formula of customs tax is foreign exchange rate multiplied by the price of imported item multiplied by customs tariff.
“Has the Joint Commission worked out this simple formula or have the officials with the Islamic Republic of Iran Customs Administration or the Ministry of Industries, Mining and Trade explained the formula and its impacts on prices for the parliamentarians?” he said.
“The psychological effects of the rise in the budget’s foreign exchange rate would impact production and will have unpredictable negative ramifications. The final consumer would perceive that the official exchange rate has increased by more than 400%. Lack of collaboration between the government and the parliament, as well as the failure to consider the economic ramifications, would challenge Iran’s economy. Ultimately, it’s the people who will pay the price of these miscalculations,” he concluded.