Introduction
Iran cannot get rid of double-digit and long-term inflationsunless it can separate oil revenues from the governmental budgeteither the government possesses enough oil incomes or not. It is expected that oil revenues should be used upfor intergenerational interests (infrastructure development andtransfer of advanced technology). Separation of petrocurrenciesfrom the government budget impossible unless the government tries round-the-clock to reduce the operating balance deficit to the level of below 15 percent; to the extent that it can overcome fluctuations in the operational balance of the budget (deficit and surplus) by the use of bonds.
The policy report has been prepared with the aim of providingmethods to eliminate the root causes of chronic and double-digit inflations in Iran's economy and proposesolutions for decreasing the movementtowards the operating budget deficit.
In a bid to make the issue more tangible, on one hand, and regarding the time of preparation of the report, coinciding with the endorsementprocess of the government budget for Iranian year of 1400 (March 21, 2021 to March 20, 2022), the report pays a special focus on the 1400 budget bill. Nevertheless, a great part of the analyses and recommendations are useful for the Iranian government’s annual budget.
As the 1400 budget bill was drafted, Iran's economy was alreadyexperiencing three years of crippling recession and inflation caused by sanctions, Covid-19 pandemic and a set of incompetent and ill-advised economic strategies.
The Iranian economy enters the year 1400, when in addition to the problem of 1) budget deficit and the deficit-induced inflation, the countryfaces the problem of 2) negative net investment and production growth, and 3) deterioration of situation of livelihoods for the low-income people.
Thus, the budget of year 1400 should be drafted in such a way that it considers the three mentioned issues and pursues to lessendifferent dimensions of the difficulties. The main issues to be considered in approving the annual budget bill are:
• Controlling and reducing budget deficit and helping implement the contractionary monetary policy;
• Paving the ground for economic growth by increase of investment motivation;
• Forming a protective mechanism to provide vulnerable families with minimum livelihood.
The report presents some of the main amendments to the 1400 budget bill, which can be executed and also have a noteworthy impact in respect of all the existing conditions.
The proposed necessities and strategies are as follows:
The growth rate of present budget expenditures should be less than 15% and the total budget should not grow more than 20%.
The report specifically suggests:
• Application of 20% cap to salary increase comparing to the Budget Law of 1399 (March 21, 2020 to March 20, 2021);
• Other nominal increase in government expenditure should stand at up to 15%;
• Hand-over of development projects via public-private partnership to the private sector;
• Prevention of increase in expenses by the Islamic Consultative Assembly (parliament);
• Organization of pension funds.
The report also urges prediction of growth of government revenues based on realistic facts and figures.
Suggestions for increasing government revenues are:
• Improving anticipated tax incomes on the basis of inflation and enforcing Law of Store Terminals and Taxpayers System to prevent from tax evasion;
• Regulating projected tax incomes based on taxation on consumption and at the same time decreasing performance tax rates;
• Reforming the customs offices' exchange rate from 4200 tomans to the NIMA rate (and simultaneously decreasing import duties by 50%) and allocating half of the released resources to the integrated protection plan;
• Eliminating 4,200 Tomans exchange rate from basic goods totally and allocating half of its released resources to the integrated protection plan;
• Regulating the prices of fuel for industries such as steel and petrochemical industries in line with inflation rate;
• Granting licenses for transfer of automotives from free zones to inside the country observing 100% tariff (or auctioning licenses) along with outlawing imports of cars to the regions;
• Materializing other predicted incomes in the budget bill in particular oil revenues and sales of government stocks.
The report expects that the budget deficit of the year 1400 would be a maximum of 3% of the GDP. The growth of government debts, derived from budget and extra-budget deficits, should be transparent in the form of one type of tradable bonds.
Dependence on oil revenues should decline so that all increased oil sales and exports are spent to invest in the leading industries and strengthen public-private partnerships.
All resources of subsidies should be united in order to create a protection plan to guarantee subsidizing the low-income classes in a step-by-step manner and based on database information.
The protection plan's resources should be supplied from the aggregation of all subsidies seen in the budget, in addition to half of the resources released due to the exchange rate reform of 4200 Tomans for basic goods, reform of customs exchange rate from 4200 Tomans to NIMAI exchange rate as well as 20% of new tax revenues that is expected to be added in the future.
Reforms, which are applicable in the budget structure in the last year of the government, should be conducted to pave the way for decreasing the budget deficit in the coming years.
The proposed reforms are:
• The report of sustainability of the government debt should be approved and published for public usage; the government debt consists of all sorts of budgetary and extra-budgetary debts;
• The issuance of short-term bonds in a bid to activate open-market operation;
• The turning of government debts to the Central Bank of Iran (CBI) and the banking system into securities;
• The modification of financial relationship between oil and gas, and moving towards stabilizing the inflow of oil revenues into the government budget;
• The clarification and decrease of government's extra-budgetary commitments;
• The obligation of the Planning and Budget Organization to provide supervision report of programs of budget payments and its responsibility to allocate supervision-oriented budgets.
The policy report has been prepared with the aim of providingmethods to eliminate the root causes of chronic and double-digit inflations in Iran's economy and proposesolutions for decreasing the movementtowards the operating budget deficit.
In a bid to make the issue more tangible, on one hand, and regarding the time of preparation of the report, coinciding with the endorsementprocess of the government budget for Iranian year of 1400 (March 21, 2021 to March 20, 2022), the report pays a special focus on the 1400 budget bill. Nevertheless, a great part of the analyses and recommendations are useful for the Iranian government’s annual budget.
As the 1400 budget bill was drafted, Iran's economy was alreadyexperiencing three years of crippling recession and inflation caused by sanctions, Covid-19 pandemic and a set of incompetent and ill-advised economic strategies.
The Iranian economy enters the year 1400, when in addition to the problem of 1) budget deficit and the deficit-induced inflation, the countryfaces the problem of 2) negative net investment and production growth, and 3) deterioration of situation of livelihoods for the low-income people.
Thus, the budget of year 1400 should be drafted in such a way that it considers the three mentioned issues and pursues to lessendifferent dimensions of the difficulties. The main issues to be considered in approving the annual budget bill are:
• Controlling and reducing budget deficit and helping implement the contractionary monetary policy;
• Paving the ground for economic growth by increase of investment motivation;
• Forming a protective mechanism to provide vulnerable families with minimum livelihood.
The report presents some of the main amendments to the 1400 budget bill, which can be executed and also have a noteworthy impact in respect of all the existing conditions.
The proposed necessities and strategies are as follows:
The growth rate of present budget expenditures should be less than 15% and the total budget should not grow more than 20%.
The report specifically suggests:
• Application of 20% cap to salary increase comparing to the Budget Law of 1399 (March 21, 2020 to March 20, 2021);
• Other nominal increase in government expenditure should stand at up to 15%;
• Hand-over of development projects via public-private partnership to the private sector;
• Prevention of increase in expenses by the Islamic Consultative Assembly (parliament);
• Organization of pension funds.
The report also urges prediction of growth of government revenues based on realistic facts and figures.
Suggestions for increasing government revenues are:
• Improving anticipated tax incomes on the basis of inflation and enforcing Law of Store Terminals and Taxpayers System to prevent from tax evasion;
• Regulating projected tax incomes based on taxation on consumption and at the same time decreasing performance tax rates;
• Reforming the customs offices' exchange rate from 4200 tomans to the NIMA rate (and simultaneously decreasing import duties by 50%) and allocating half of the released resources to the integrated protection plan;
• Eliminating 4,200 Tomans exchange rate from basic goods totally and allocating half of its released resources to the integrated protection plan;
• Regulating the prices of fuel for industries such as steel and petrochemical industries in line with inflation rate;
• Granting licenses for transfer of automotives from free zones to inside the country observing 100% tariff (or auctioning licenses) along with outlawing imports of cars to the regions;
• Materializing other predicted incomes in the budget bill in particular oil revenues and sales of government stocks.
The report expects that the budget deficit of the year 1400 would be a maximum of 3% of the GDP. The growth of government debts, derived from budget and extra-budget deficits, should be transparent in the form of one type of tradable bonds.
Dependence on oil revenues should decline so that all increased oil sales and exports are spent to invest in the leading industries and strengthen public-private partnerships.
All resources of subsidies should be united in order to create a protection plan to guarantee subsidizing the low-income classes in a step-by-step manner and based on database information.
The protection plan's resources should be supplied from the aggregation of all subsidies seen in the budget, in addition to half of the resources released due to the exchange rate reform of 4200 Tomans for basic goods, reform of customs exchange rate from 4200 Tomans to NIMAI exchange rate as well as 20% of new tax revenues that is expected to be added in the future.
Reforms, which are applicable in the budget structure in the last year of the government, should be conducted to pave the way for decreasing the budget deficit in the coming years.
The proposed reforms are:
• The report of sustainability of the government debt should be approved and published for public usage; the government debt consists of all sorts of budgetary and extra-budgetary debts;
• The issuance of short-term bonds in a bid to activate open-market operation;
• The turning of government debts to the Central Bank of Iran (CBI) and the banking system into securities;
• The modification of financial relationship between oil and gas, and moving towards stabilizing the inflow of oil revenues into the government budget;
• The clarification and decrease of government's extra-budgetary commitments;
• The obligation of the Planning and Budget Organization to provide supervision report of programs of budget payments and its responsibility to allocate supervision-oriented budgets.