President Hassan Rouhani submitted his 2020-2021 budget to the Iranian parliament this week, in which he proposes irresponsible levels of spending based on optimistic projections of revenue from taxes and crude oil exports. The proposal shows that Rouhani is not prepared to admit, at least in public, that his government must dramatically curtail spending amidst the deep recession triggered by the return of U.S. sanctions.
Rouhani’s budget calls for spending 4,840 trillion rials, which is one-fourth more than parliament appropriated for the current fiscal year; yet given Iran’s double-digit inflation rate, the real value of the budget has still declined. Regardless, the government cannot afford what Rouhani proposes.
The budget projects that revenue from Iran’s oil exports will cover 16 percent of expenditures, assuming exports of 1 million barrels per day at a price of $50 per barrel. Independent estimates now place Iran’s exports at 250,000 to 600,000 barrels per day, although these estimates include exports to Syria for which Iran may receive no compensation. Thus, Tehran will likely collect only half to one-quarter or less of the amount it hopes.
Rouhani’s budget also envisions a 26 percent increase in tax revenue despite Iran’s two consecutive years of sharp economic contraction. The country’s GDP shrank 4.8 percent in 2018 and an estimated 9.5 percent this year, according to the IMF. Together with tariff revenue, taxes provide 40 percent of the state’s income. A substantial portion of that revenue is unlikely to materialize due to the current recession, although inflation is likely to offset some of the potentially lost tax revenue.
Two additional sources of projected revenue are the issuance of bonds and a major sell-off of state assets, both capital and financial. The budget projects bond sales will cover 17 percent of spending, yet in the middle of a recession combined with high inflation, it is not clear if there will be enough appetite in the market for this debt. An assumed eleven-fold increase in the sale of capital assets is supposed to cover an additional 10 percent of Rouhani’s proposed spending. The budget forecasts that a sharp increase in revenue from the privatization of state-owned firms will cover 3 percent more. Both of these assumptions are optimistic in light of Iran’s two consecutive years of recession and the grim prospects for the coming year.
In light of the government’s financial distress, Rouhani’s proposed funding for institutions propagating state ideology is especially egregrious. This category includes seminaries, religious and cultural entities and foundations, and military-connected ideological institutions, none of which generates prosperity for the Iranian people. Specifically, Rouhani requested a 50 percent increase in the budget for Al-Mostafa Univerity, a 29 percent increase for the Council for Coordination of Islamic Propaganda, a 35 percent increase for the Supreme Council of Cultural Revolution, and a 47 percent increase for the Policymaking Council of Friday Prayer Imams.
The government could print money to cover its expenses, yet this could set off hyperinflation. It could also run massive deficits while cutting funds for various programs and entities, which could alienate additional parts of Iranian society. Unless Tehran pursues a deal with the Trump administration and accepts Washington’s demands, it will face economic challenges that may further threaten the regime’s stability.
Saeed Ghasseminejad is a senior Iran and financial economics advisor at the Foundation for Defense of Democracies (FDD), where he also contributes to FDD’s Center on Economic and Financial Power (CEFP). To receive more analysis by Saeed and CEFP, subscribe HERE. Follow him on Twitter @SGhasseminejad. Follow FDD on Twitter @FDD and @FDD_CEFP. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.