Iranian President Mohammad Khatami on 23 December presented to the Majlis (parliament) the draft budget bill  for the Iranian year 1381, starting on 21 March 2002, with total spending projected to rise by 45.6% to IR663,757 ($86bn). Mr Khatami said the budget was based on a unified exchange rate of around $1 = IR7,700 and that the multi-tier exchange system, which has been in effect for some two decades, would be abolished. The move to unify the exchange rates was commended by the International Monetary Fund (IMF) in its assessment of the Iranian economy last September (MEES, 10 October 2001).

In his presentation to parliament, Mr Khatami said that the draft budget “contains the government’s key policies for promoting structural economic development, reviving construction activities and making subsidies purposeful; it has been devised according to a new budget planning approach, based on a unified currency rate.” He added that these policies were aimed at “sustaining economic growth, social justice and employment of productive factors realistically” and that his government had tried to present “a precise budget that is transparent and in line with the realities of the national and world economy.” However, Mr Khatami admitted that Iran’s oil-based economy was experiencing severe problems and was struggling to cope with high unemployment and the challenge of diversification. He said the government planned to reduce economic dependence on oil revenues and improve economic performance. Looking back at the past few years, Mr Khatami said that the country had achieved economic development while having simultaneously “cut our foreign debt, raised our foreign exchange reserves and controlled inflation.”    

According to Mr Khatami, inflation is projected to be around 12-14% and GDP growth around 5.5-6% in 2002-03. GDP grew by 5.9% in the year ending 20 March 2001. Mr Khatami also noted that Iran’s foreign debt has continued to fall and now stands at $7bn. He denied that the improvement in economic growth was mainly due to higher crude oil prices and pointed out that the government had saved most of its extra oil revenue instead of overspending.

As in previous years, the budget bill comprises the general budget for 1381, estimated at IR243,898bn ($31.7bn), up 48.5% on 1380, and the budget for the state-owned organizations, estimated at IR435,842bn ($56.6bn), up 45.1% on the previous year (see Table). The latter is 78.7% more than the general budget and accounts for 66% of total spending. The increase in the general budget exceeds the projected official inflation rate of 14%, suggesting that there could be an improvement in real terms in the standard of living for some sectors of Iranian society provided government spending is channeled into the right activities. Mr Khatami said that in the general budget an amount of $2bn was earmarked for job creation projects and that subsidies for essential goods will be set at about $4.8bn. Under the current development plan, the government has set for itself the objective of creating 750,000 jobs annually – a target it has so far failed to achieve. In 1380 an allocation of IR10,200bn was made to subsidies (at the preferential exchange rate of $1=IR1,750 in 1380 this figure was equivalent to $5.8bn). The bill also allocates IR15,000bn ($1.9bn) for key development projects.

Iranian Budget

(IRBn)

Mr Khatami did not specify a budget oil price assumption and offered no indication of expected oil revenues. However the Chairman of the Majlis Energy Commission, Hossein Afarideh, indicated on 20 December 2001 that  the budget would be based on an oil price of $18/B and said that if this target price was not feasible in 1381, any likely budget deficit would be covered from the Oil Stabilization Fund (OSF). The final figure, however, is still uncertain since Hojjatolah Ghanim Fard, the Acting Vice-President of the National Iranian Oil Company (NIOC), later said that the government has assumed an oil price of $19/B in the new budget. With average crude oil exports of 1.736mn b/d – based on an OPEC production quota for Iran of 3.186mn b/d effective January 2002, less 1.45mn b/d for domestic consumption – Iran is likely to earn some $11.4bn at the assumed oil price of $18/B. As for the current year, the Governor of the Central Bank of Iran, Mohsen Nourbakhsh, has announced that by the end of the third quarter of 1380 (December 2001), Iran had earned all its budgeted oil revenue of $12.84bn and that the oil revenue for the fourth quarter ending in March, estimated at $2.5-3.0bn, would go to the OSF. The latter is unofficially estimated at around $10bn. The oil price assumption in the 1380 budget was $20/B (MEES, 26 February 2001).

Although the new budget is nominally balanced, a deficit cannot be ruled out. According to member of parliament Mohammad Baqer Noubakht, Iran could face a $4bn shortage in its oil revenue in 2002-03 if oil prices slump. He estimated that the country loses $1bn in revenue with every $1/B decline in oil prices. At the same time analysts have warned that the adoption of a unified rate, which introduces transparency, could be inflationary. Allocations calculated at the new rate of $1=IR 7,700 are now inflated in rial terms compared to previous years when there were several rates. Economist Fariborz Raisdana was quoted by Reuters as saying, “whenever the state has access to larger sums, there are more chances of wasteful and inflationary spending.” Other analysts disagree and say that the success of the new policy will depend on how it is managed.

The draft budget bill did not specify the expected increase in the domestic price of petroleum products in the new year. However, according to the Head of the Management and Planning Organization, Mohammad Sattarifar, the price of gasoline will not exceed IR500 ($0.065) per liter, or a rise of around 10% from current levels.  

The reformist-dominated parliament will debate the bill over the next few weeks, after which it will be presented to the Guardians Council (GC) to ensure that it conforms to the tenets of Islam and Iran’s constitution before receiving final approval. Given the sharp differences between reformist supporters of President Khatami and conservatives over major political and economic issues, the bill may not be approved by the GC the first time around, especially if it attempts to introduce new policy measures that are not to the liking of the conservative elements in the Iranian establishment. In a gesture aimed at rendering the bonyads (or charitable Islamic foundations) accountable, Iran’s supreme leader, Ayatollah Ali Khamenei, indicated on 8 January that he was ready to tax them and restrict their privileges. Previously, under his direct control, they enjoyed significant unaccounted for freedom in their economic activities. The GC has recently blocked the new foreign investment law, the future of which remains uncertain (MEES, 10 December 2001).

Copyright © 2002 Middle East Economic Survey

© Copyright MEES 2004.