Inflation in Iran may skyrocket to unseen levels
Recently there's been a lot of discussion about budget reform in Iran: it's in the news, debated in parliament, and a preoccupation for Ebrahim Raisi’s cabinet, Iran Wire writes. The problem is quite simple. Iran's budget revenue and its expenditure are out of synch. For example, for the 2021-2022 budget, oil revenues were calculated on the basis of the export of two and a half million barrels of oil per day, but in reality, over the first five months of the year, oil revenues amounted to just three percent of what had been forecast.
"The total revenue collected from the sale of oil were predicted to be 395,000 billion tomans, of which 150,000 billion tomans should have been acquired in the first five months of the year,” Mohammad Hosseini, an advisor with parliament’s Program and Budget Committee, announced recently. “But to date [August 17, 2021], only 23,000 billion tomans of revenue has been generated. In other words, only 28 percent of the tax and customs revenue for the first five months of this year, and three percent of the total revenue for the entire year, has been realized."
There is not much hope for other sources of income either. In the current economic downturn, it is unlikely that even state-owned companies will be able to afford to pay taxes. With the double blow of the recession and the coronavirus pandemic, private companies and businesses will not be able to meet the burden of government tax revenues either. Government revenues from bond sales are also low, with only 20 percent of the bond budget forecast sold in five months. There is no available information regarding the sale of government property and practically nothing has amounted from the 150,000 billion tomans projected in the budget. As a result, more than half (54 percent) of the projected revenues for the first five months of the year have been lost. The treasury has been supplied with just 18 percent of the revenues that should have been produced by the end of the year.
When it comes to expenditure, the first five months of the year saw more than 280,000 billion tomans being spent, an amount totalling appoximately 54,000 billion tomans more than the revenues raised. This amount has been provided by the treasury, which by law must be settled by the end of the year. What Hosseini referred to as "essential and necessary expenses" have not been fully paid. In addition, the government was expected to pay about 45,000 billion tomans to the state pension and social security funds, although only 31,000 billion tomans of that amount has been invested. Given this, it seems likely that the budget deficit crisis will soon manifest itself into another crisis altogether: government employees and former employees will not be paid their salaries and pensions.
No solutions on the horizon
Revenues must rise, and if this is not possible, costs must be cut. About two-thirds of the government's current expenditure in 2021-2022 has been spent on two areas, which the government describes as employee compensation and social welfare. Essentially, this means two-thirds of the budget has been spent on salaries and retirees’ pensions. Of the remaining one-third, the bulk is spent on funding military, religious, and propaganda institutions, and the day-to-day expenses of government agencies. In the current environment, it is unconceivable to not pay salaries or even to reduce them. It is unlikely that Ebrahim Raisi’s administration would take such action. The social and political consequences would be dramatic.
Historically, military, religious and propaganda outfits always get pay-outs — their budgets are never cut. So cutting costs and expenses is currently impossible. In fact, there has been speculation that the government will even increase its spending in the second half of the year. But it’s difficult to see how further revenue can be generated, and the budget deficit is so vast that even if sanctions were lifted with immediate effect, the situation would not begin to improve by the end of the year. It’s clear, however, that there is absolutely no possibility of sanctions being lifted. It seems unlikely that what Hassan Rouhani's diplomats could not accomplish could be achieved by Ebrahim Raisi's diplomats. Even if an agreement could be reached, it would take months to convert into cash.
Last year, the Rouhani government worked hard to make up for the shortfall in oil revenues, selling government property, bonds and treasury bills. If Iran’s budget deficit problem could be solved by this method, this would have happened last year.
The current situation is the worst in recent history. Continuous spending without any revenue being generated has had a devastating effect on Iran’s economy and society. It’s not far-fetched to forecast the government debt — currently 54,000 billion tomans — to double, triple or even quadruple by the end of the year. The government keeps borrowing and spending, and it keeps trying to stimulate the markets. All of this will result with the inevitable: a monumental rise in inflation. Iranians are no strangers to this predicament, but the period ahead will see inflation skyrocket to levels never experienced before.