Iranian President Mohammad Khatami on 29 November presented to the Majlis (parliament) the draft budget for the Iranian year 1380, starting on 21 March 2001, with total spending projected to rise by 24.6% to IR449,405bn ($56.2bn at the free market rate of $1=IR7,990 which is based on the forex certificate rate traded at the Tehran Stock Exchange). Mr Khatami told the Majlis that the 1380 budget was drawn up in line with the priorities and objectives of the third five-year development plan (2000-05), which began in March 2000. These include balanced and sustainable development, an increase in the rate of capital formation in order to raise productivity and employment, control of inflation, an increase in non-oil exports, attracting foreign investment, stabilizing the value of the rial, strengthening civil society and detente in international relations.

In his assessment of the economy, Mr Khatami was more upbeat than in the past three years, pointing out that GDP is projected to rise by 5% by the end of 1379 (20 March 2001), according to statistics from the Central Bank of Iran (CBI). This, he explained, shows that the economy was growing in line with the targets of the third plan and, contrary to claims that economic conditions are deteriorating in Iranian households, “the economic situation of the people has rather improved.” He pointed out that the rate of inflation in the past three years had averaged about 19% and is not expected to exceed 15% in the current fiscal year, the lowest level of the past 10 years. He also said that the rate of unemployment is expected to average 12.5% in the current year, a decline of 2% from the previous year.

Iran’s foreign debt has also fallen to about $10bn – the lowest ever in the past 10 years. In the forex market, the government has reduced the multi-tier exchange rate system to two rates only. Mr Khatami said that stabilization of the value of the national currency was another achievement of the government and that a stable convertible rial is one objective of the third plan. Earlier, on 28 November, CBI Governor Mohsen Nourbakhsh said that an exchange rate of $1=IR7,900 was “suitable and defendable” and that it was government policy to stabilize the forex rates. He also said that the government has projected this rate in its 1380 budget.

As in previous years, the budget comprises the general budget, estimated at IR159,332bn (up 24.9%) in addition to the budget for the state-owned organizations, estimated at IR298,738bn (up 22.7% – see Table below). The increase in the general budget exceeds inflation, suggesting that for the first time in many years there could be a real improvement in the standard of living for the average Iranian. Total revenues in the general budget (which reflects real economic activity in Iran) are estimated at IR135,370bn, a rise of 21.6% over the previous year. According to Mr Khatami, IR68,516.4bn, or 50.6%, of this total revenue, will come from oil revenue, IR43,942bn, or 32.5%, from tax revenue and IR22,877bn, or 16.9%, from other revenue. (Total does not add due to rounding.) The applicable exchange rate for oil revenue was not specified by Mr Khatami but a report from Agence France Presse said that oil income would total some $22.8bn. General expenditure increases by 22.7% to IR136,615bn.

The budget for the state-owned organizations is set to increase by 24.4% to IR 298,738bn, and is almost double the general budget. It allocates IR264,897bn to state-owned companies, IR6,862bn to non-profit making organizations affiliated to the government and IR26,979bn to banks. Mr Khatami told the Majlis that the number of state-owned companies and non-profit organizations will fall to 505 next year from 550 in the current year. In recent years there have been numerous calls from politicians and economists to reduce the number of loss making state organizations, including the bonyads, which continue to absorb the bulk of state funding without generating any returns to the state.

Iranian Budget

(IRBn)

* Consisting of 50.6% oil revenue, 32.5% tax revenue and 16.9% other revenue in 1380.

Mr Khatami said that oil revenue is projected to rise by 18.9% in the 1380 budget, without specifying the oil price assumption. However the Head of the Management and Planning Organization, Mohammad Reza Arif, stated that a price of $16/B was assumed. In the previous year the budget was based on an oil price of $15.8/B and total oil revenue of $11.5bn. However due to high oil prices in 2000-01 Iran’s oil revenue is expected to rise to $21.5bn, according to Dr Nourbakhsh. Due to this windfall and the resulting budget surplus in 1379, parliament has approved a government plan to allocate $4bn in extra oil income to help revive the stagnant economy by funding development projects and creating new jobs. According to Mr Arif, the new budget will aim to create some 650,000 new jobs next year. Mr Khatami also said that crude oil production next year is expected to average 3.82mn b/d.

Mr Khatami did not give detailed figures for other expenditure allocations under the general budget, but said that the allocation for judicial affairs would rise by 47.8%, that for national security by 40.3%, defense by 22.1% and social security by 24.7%. Current expenditure will absorb 75.1% of the general budget and development expenditure 24.9%. Underlining the government policy of supporting low-income groups, he announced that subsidies for essential goods will rise to IR10,200bn in 1380 from IR7,950bn in the current year – an increase of 28.3% over 1379. Iranian economist Mousa Ghaninejad criticized this substantial increase, telling Iran Daily on 6 December that raising subsidies was counterproductive because government policy should aim at charging real prices and eliminating subsidies. With regard to domestic oil product prices, an official of the Majlis Plan and Budget Commission, Hasan Ramazanianpour, was quoted as saying that a 5% increase was envisaged in the budget, although other officials suggested a rise of 10%.

The new budget does not differ significantly in policy recommendations and structure from previous years. However, Iran is temporarily enjoying windfall oil revenue occasioned by firm oil prices and is expected to earn up to $10bn in additional revenue in the current fiscal year, which could help boost economic activity and accelerate the repayment of debt. According to the latest CBI figures, Iranian foreign debt in September 2000 stood at $8,849mn – $5,324mn medium-term and $3,525mn short-term. Iran is also scheduled to repay $3,447bn in 2000-01, $3,022mn in 2001-02 and $638mn in 2002-03. But despite the temporary rise in oil revenue, local economists are quick to point out that Iran is still dependent on oil and will feel the economic crunch when oil prices start declining.

Although the government is aware of the urgent need to accelerate economic reforms, Mr Khatami’s current program has so far addressed mainly issues of political rather than economic liberalization with only limited success. The budget will be debated in parliament in the next few weeks, and if passed by the deputies will then need the approval of the Council of Guardians. Although the reformists have a majority in the current parliament, their views on key economic issues differ, which means that it is difficult to arrive at a consensus on appropriate economic policy measures.

© Copyright MEES 2004.