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Iran's Parliament Approves 40% Increase In Expenditure Under Budget Law For 2003-04
MEES
17 February 2003 Volume 46, Issue 7 - FINANCE
 
 
CountryReport
IRAN

The Iranian parliament on 6 February approved the budget law for fiscal year 1382, which starts on 21 March,  with total expenditure set at IR968,261bn ($121bn), an increase of 40% over the previous year’s budget. The total for 2003-04 has been increased by IR108,517bn ($13.6bn) from the initial amount proposed by the government in December 2002, when President Mohammad Khatami presented his draft budget to parliament. Outlining the budget priorities then, Mr Khatami said that the emphasis will be on privatization, job creation, the attraction of foreign investment and the introduction of structural economic reforms (MEES, 23/30 December 2002). The increase was introduced by parliament because of changes in accounting procedures and the introduction of real market prices for oil and gas used in refineries and power stations instead of subsidized prices. A member of the parliamentary economic commission, Rajab Ali Mazrui, said “we have not really modified the draft budget submitted by the president” and that to a large extent the rise is due to a change in accounting procedures which is expected to introduce more transparency. Nevertheless this sizeable increase in the total budget is likely to be expansionary, resulting in high inflation and an increase in liquidity. The 1381 budget, which projected a rise in expenditure of over 50%, was artificially inflated to accommodate the unification of the exchange rate system (MEES, 11 March 2002).

The 1382 budget bill comprises the general budget, estimated at IR436,022bn ($54.5bn), up 59.5% on 1381, and the budget for the state-owned banks and enterprises, estimated at IR554,336bn ($69.3bn). In the general budget the government estimates its general revenues at IR395,554bn ($49.4bn) and other revenues of ministerial and state organization at IR40,468bn ($5.1bn). Oil revenue is estimated at $15.3bn, based on an oil price assumption of around $19/B. But this price may be too high, according to the chairman of the parliamentary energy commission Hossein Afarideh, who warned that oil prices are not likely to remain at their current high levels in the next fiscal year. Any surplus in oil revenue above the projected level will be transferred to the Oil Stabilization Fund (OSF), which was set up in 2000. OSF’s balance at the end of 2002 was estimated at $6.6bn by the Central Bank of Iran (CBI). The government is allowed to withdraw $2.5bn from the OSF in 1382 to pay off debts and prevent a rise in government debt to the CBI arising from the unification of exchange rates in 2002-03.

In the 1382 budget bill the general budget accounts for some 45% of the total spending while the budget for the state-owned enterprises accounts for 55%, compared to 40% and 60% respectively in 1381. A member of the parliamentary budget commission, Ali Nazari, has criticized the large allocation to these enterprises and said it was a mistake for the Management and Planning Organization (MPO), which draws up the budget, to earmark some 60% of total spending for these loss-making units because they “may lack proper supervision and have a tendency to squander public funds.” To remedy the situation Mr Nazari suggested that these loss making enterprises should be transferred to the private sector as soon as possible so that their huge budgets could be used instead for infrastructure development projects or to improve the people’s standard of living. This is not the first time that allocations to state enterprises have come under fire. In past years various local economists and analysts have objected to the large budgets allocated to these enterprises, particularly to the charitable organizations, or bonyads.  But these complaints have largely gone unheeded by the authorities because of the political influence they yield within the ruling establishment.

Iranian Budget

(IRBn)

1382

1381

% Change

(2003-04)

(2002-03)

General Budget

436,022

273,400

+59.5

Budget of State-Owned Banks and Enterprises

554,336

na

Total of Two Budgets

990,358

na

Less Adjustment for Double Counting

22,097

na

Net Total Budget

968,261

693,500

+39.6

Although the Iranian budget is usually nominally balanced, deficits have occurred in the past few years. According to a member of the parliamentary joint commission, Mohammad Reza Khabbaz, the draft bill will run a deficit of some IR12,000bn ($1.5bn), significantly less than the initially forecast IR40,000bn ($5bn). To lower the deficit the commission has added an article in the budget law which compels the government to cut unnecessary expenses. But he noted that the government does not have much room to economize in such sectors as salaries for civil servants and state subsidies.

The budget bill has allocated a total of IR27,886bn ($3.5bn) for subsidies, including IR14,447bn ($1.8bn) for basic goods and IR650bn ($81mn) for services. The law authorizes the government to borrow $2.3bn internationally in order to fund development projects and to approve a number of measures to attract foreign investment. It also authorizes the inflow of investment capital to establish 300,000 b/d of refining capacity under build, operate and transfer (BOT) contracts. According to member of parliament Mohsen Farahani, some 46% of the general budget in 1382 has been allocated to the social sector. The parliamentary energy commission has approved a 10% increase in average domestic prices of oil products and natural gas in line with the government’s five-year plan.

The new budget will aim to create some 800,000 jobs a year, but analysts point out that one million will be required to make a real dent in the unemployment rate. According to government spokesman Abdullah Ramezan Zadeh, the resources allocated to creating one million jobs annually are insufficient and the country will need to attract foreign capital for job creation.

The Iranian economy is currently going through good times due to high oil prices. GDP is expected to rise by 6% in 1382 and inflation is not expected to exceed 15%, although some projections put inflation at over 21%. At the end of the first half of 1381 (22 September 2002), revenue from oil and gas stood at $9.795bn and from non-oil exports at $2.427bn and the trade balance had a surplus of $1.478bn, according to CBI statistics. The CBI Governor, Mohsen Nourbakhsh, is upbeat about the economy. He considers that Iran’s foreign exchange reserves are satisfactory and that the current exchange rate of around $1 =IR8,000 is adequate.  Iran’s debts in 2003-04 will be $7bn, with contingent obligations of about $23bn. However not everyone shares Dr Nourbakhsh’s optimism, and according to Iranian economist Bahman Arman, the country is suffering from a capital outflow of some $3bn yearly resulting from the “dubious and unclear policies” of the CBI. Last July the IMF warned in its Article IV consultation with Iran about the government’s expansionary policy and its effect on inflation, but at the same time commended the country’s recent economic performance, with high growth rates, low external debt and high foreign exchange reserves (MEES, 19 August 2002). Before it is finalized the budget law has to be ratified by the Guardians’ Council (GC) to ensure that it conforms to the tenets of Islam and the Iranian constitution. The law has already been presented to the GC.

© Copyright MEES 2004.

 
© Middle East Economic Survey (MEES) 2014.
 
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