1
Iran Economy Update
Issue 101/2017 TUESDAY DECEMBER 12TH
Rouhani submits the 1397’s job-oriented budget draft to parliament
President Rouhani on Sunday handed over the next fiscal year’s $337 billion1 draft budget bill to the parliament for approval, and said this bill is the manifestation of all the frameworks of the promises he made during the presidential campaign in May 2017, including job creation, achieving economic growth, eliminating poverty, and reducing inequalities. “If I were to summarize the next year’s budget in one sentence, I would say that it is based on a comprehensive employment, eliminating poverty and establishing justice,” said the president, according to Mehr news agency.
The next year’s budget bill earmarks about $104 billion for public service programs (public revenue and spending), which is up by 6.5 percent from the budget plan of the current year but assuming an annual inflation rate of 10 percent, it indicates that the next year’s budget is contractionary. The next year’s budget is based on an oil price of $55 a barrel, up from the current year’s $50 a barrel. Also, the official foreign exchange rate is set at 35,000 rials, up from the current year’s 33,000 rials, but still far below the open market exchange rate of 42,070 rials.
"With the $55 a barrel crude price and the 35,000 rials per US dollar rate, the administration expects earning 1,000 trillion rials in revenues from crude oil exports next year," the daily Financial Tribune quoted Mohammad-Reza Pour-Ebrahimi, the head of parliament’s Economic Commission.
Rouhani said on Sunday that his government plans achieving an annual economic growth rate of 5%, and maintaining the inflation rate in a single digit realm. The government’s revenues, the funds from the NDF (National Development Fund) and bank loan facilities were the three sources Rouhani said his government will use next year to create thousands of jobs.
The next year’s budget envisage a massive cut in subsidy cash handouts, a program started since 2010 under which, 76 million Iranians receive 45,500 tomans ($13) monthly as a compensation for the surge in price of energy carriers and food which took place under the administration of former president Mahmoud Ahmadinejad2. Local media reported that the total amount the government has projected to the subsidy cash program next year has dropped from about $13.5 billion3 in the current year to $6.5 billion. This implies that the government is going to slash the current number of the Iranian subsidy cash receivers. Head of the Management &
Planning Organization (MPO) Mohammad-Bagher Nobakht has said that 21 to 34 million
1 Amounts to 11,949 trillion rials
2 Under this program, the Ahmadinejad ‘s administration removed part of the subsidies on food and energy carriers like gasoline, gas oil and some food staples like bread, and instead paid 455,000 rials to almost all Iranians on a monthly basis. When the Rouhani government took office in 2013, he was willing to terminate this program which incurred huge financial burden on its shoulder but give then fact that an overnight suspension of this program could be a political suicide, this government tried to revisit the program by reducing the number of cash receivers and exclude the financially well off Iranians from the list of cash receivers.
3 48 trillion tomans
2 Iranians will be excluded from the list of subsidy cash receivers next year, but ensured that the needy people will continue receiving the payouts next year.
There are some key features regarding the next year’s budget bill among which are (1) the share of the government’s tax income, fines, tariffs and licenses, and also revenues from borrowing has increased, versus a decline in projection of oil revenues. (2) The budget for development projects has declined from around $20 billion4 in the current year to about $16.9 billion5 and (3) Increasing the price of energy carriers (gasoline and gas oil), and eliminating between 20-30 million Iranians from the subsidy payment program (based on an assessment of their financial situation). Some key figures in the next year’s budget bill draft has been summarized in the following table.
Note 1397 1396 change
Total budget 1,195 1,085 3.7%
revenues from tax collection 129 116 11.2%
revenues from oil/oil products exports 106 119 -10.9%
revenues from borrowing (banking system, issuing bond, NDF resources, foreign facilities
68 53.7 26.6%
Current expenditures 276 253 9.1%
salaries and wages 106 95 11.6%
development budget 60.4 71.3 -15.3
projected oil price ($ per barrel) 55 50
official exchange rate (tomans per US dollar) 3,500 3,300
inflation rate (%) 9.1 8.9
unemployment rate (%) 11.3 12.1
GDP growth rate (%) 5.5 5
Figures are in trillion tomans unless specified An official US dollar/toman rate was 3543 on Dec 12
Source: the daily Donyay-e Eghtesad
In the next year’s budget bill, the government has seen the departure tax [an unavoidable fee the Iranians should pay upon leaving the country] as a new source of revenue, and tripled it, from about $21 (at the official exchange rate) to almost $60. The Bloomberg reporter tweeted on Monday that the departure tax will increase by 50% each additional time you travel abroad, capped at the third time you travel in the same year. If you travel more than three times, you’ll have to pay around $115. MPO Head Nobakht has explained that the revenues collected form tripling the departure tax will be spent on developing the tourism sector.
Indeed, the Iranian government has always had the mentality that the people who travel abroad belong to the upper class families and can afford extra taxation. By extra taxation which just turns the screw on the upper/middle classes, the Rouhani government is to increase its non-oil revenues without causing harm to the lower income and poor Iranians. Also, in the next year’s budget, like the last year, people can still pay military absence fine to be exempted, and the payable amount depends on their education level, and varies from $5,600 to $14,100 (at the official exchange rate).
4 71 trillion tomans
5 60 trillion tomans
3 Reducing the subsidy cash paying is a solution the government pursues next year to reduce its spending, but it appears to be concerned about losing the backing of the low income Iranians, as Government’s Spokesman Mohammad-Bagher Nobakht assured on Monday that the name of those who declare they’re in need of receiving subsidy cash won’t be eliminated from the list.
Nobakht also stated that the government predicts an inflation rate of about 9%. He said that in a plan B scenario, if the price of crude oil reaches $60 a barrel, the GDP growth rate, inflation rate, and unemployment rate would be 5.7%, 9%, and 11.2%, respectively.
$55 a barrel $60 a barrel
inflation rate 9.1% 9%
unemployment rate 11.3% 11.2%
GDP growth 5.5% 5.7%
In the 1397 budget bill, the price of gasoline6 and gas oil are projected to be increased by 500 tomans (14 cents) and 2 cents, respectively, that according to Mr. Nobakht, will generate some 17.4 trillion tomans ($4.9 billion at the official exchange rate) in revenue for the government, which will be spent on job creating programs. Tasnim news agency wrote on Monday that among the 18 ministries, the ministry of Labor, Cooperative & Social Welfare will get the highest amount of budget next year, receiving about $9 billion.
An interesting feature in the next year’s budget bill is the official exchange rate the government has defined, which stands at 35,000 rials, while the current official and free market rates are 3,543 rials and 4,208 rials respectively. The following graph shows the upward movement of the price of the US dollar in the open market, versus the Iranian rial.
MPO Head Nobakht on Monday defended the government’s decision to set the official exchange rate at levels below the current ones, and said he believes the ongoing slide of the Iranian rial in the open market is transitory, and that the national currency value will be recovered in coming months. Nobakht underscored that the government does not recognize the open market rates. A few months ago, and in reaction to the rial’s drop in October, CBI Governor Valiollah Seif had made remarks similar to that of Nobakht and said such plummet in
6 About 82 million liters of gasoline and 68 million liters of gas oil is being consumed in Iran per day 38000
38500 39000 39500 40000 40500 41000 41500 42000 42500
US dollar/rial
11 Dec 4,2060 rials 11 Nov
4,086 rials
4 rial value is a reaction to political comments and represent a temporary shift. He said other international currencies are similarly fluctuating in reaction to the development in the global markets. Referring to the recent trend of the rial depreciation, both Seif and Nobakht have stated that similar fluctuations were experienced in the last quarter of 2016, but the rial value was recovered later.
Mehr news agency wrote that the government’s decision to disregard the free markets rates and identifying an official rate much lower than the open market levels indicate that the decision to unify the foreign exchange rate in the country and putting an end to the existing two-tier foreign currency system has been postponed for another year. Opponents believe that the continuation of this two-tier system has created opportunities for rent-seeking activities.
TCCIMA Chairman Massoud Khansari has expressed dissatisfaction with the official foreign exchange rate in the next year’s budget and called it “irrational and unrealistic”. Renowned Iranian economist Mohammad-Mehdi Behkish similarly expressed dissatisfaction with the rate, saying it would open the doors for more corruption. “When the US dollar is available at the below-the-market official rates to a limited number of people, the rest should go to the open market to get the foreign currency they need and here is where corruption enters as traders pay bribes to some government employees to receive more currencies at official rates,” said Behkish.
Iran and Korea signed 22 agreements on technology transfer cooperation
During the 4th session of the Iranian and Korean SMEs technology session, companies from the two sides signed 22 agreements on transferring technology, the daily Donyay-e Eghtesad wrote on Tuesday. The agreements were signed between eight Korean companies and 50 Iranian counterparts on several areas including auto parts, thermal and refrigeration insulation, renewable energy and social panels, lithium batteries, and electric engines. Speaking at the event, the managing director of the Iranian Small Industries & Industrial Parks Organization (ISIPO) said the organization’s priority is establishing links between the domestic industries and the foreign SMEs. Iran should get rid of single product economy and a solution to realize this goal is developing the small and medium industries, he said. “The experience of cooperation between the Iranian and Korean private sector should be used to develop exchanging experience with other export target countries like Japan and India,” said Sadegh Najafi.
As another speaker at the event, the ISIPO deputy director said following the visit of the then Korean president to Iran last year, implementing an agreement between the ISIPO and the Korean ministry of SMEs and Startups was placed on agenda. Gholamreza Soleimani said that so far, 55 agreement shave been signed in this regard of which, 10 agreements have been implemented. “Four technology-related seminars are being held annually between Iran and Korea and the purpose is transferring technology in the SME sector and not purchasing machinery.”
