Next year’s budget increases challenges
Next year’s budget increases challenges. According to Iran Gate and the Washington Institute, the Iranian president has considered reducing real wages and subsidies in next year’s government budget despite inflation, while proposing more funds for the Revolutionary Guards. In this situation, the government seems to be avoiding the fundamental reforms that Iran’s economy needs.
On January 11, President Ebrahim Raisi submitted his 2023 budget proposal to parliament. This proposal comes amid the most severe protests the Islamic Republic has faced since its establishment in 1979. The budget offers no economic relief for the people and lacks structural reforms that could help curb inflation and boost growth.
In fact, Raisi’s election in 2021 solidified the hardliners’ position in all centers of power in Iran. Some expected that this consolidation of power would lead to more cohesive foreign and domestic policies. Initially, this seemed to be the case. For example, Raisi’s team made significant moves to import foreign COVID-19 vaccines and curb the spread of the disease. However, hardline elites are divided on other key issues such as reviving the nuclear deal and responding to anti-regime protests. Additionally, in the economic front, the disorganized implementation of reforms in the currency subsidy system last May led to unprecedented levels of inflation.
The government could have used the budget process to build consensus on reducing economic pressure and implementing necessary reforms for economic stability. Since September, when widespread protests began and nuclear negotiations essentially failed, the Iranian rial has lost more than 20% of its value against the dollar.
The government employed many of its usual tools to curb this decline in the currency’s value, from arresting currency traders to promising progress in nuclear negotiations. Even with measures like halting currency outflows and dismissing the central bank governor, the rial remains in a weak position.
Despite this crisis, Raisi’s government has failed to address these issues through constructive engagement with parliament. Instead, it spends most of its energy clashing with parliament members, some of whom are undoubtedly eyeing the 2024 election cycle. Raisi submitted the budget a month late and became embroiled in disputes, drawing little public attention to its content.
Overly optimistic revenue estimates
In a January 10 speech to parliament members, Raisi announced that the main goals of the budget are financial discipline, liquidity management, reducing inflation, and sustainable, efficient, and justice-oriented growth. The total proposal, approximately $52 billion at the free market exchange rate, represents a 42% increase over the previous budget and is likely to keep pace with inflation, which the International Monetary Fund expects to reach 40%.
However, the budget does not fully cover government activities. Officials often rely on additional financing methods, such as requiring banks to lend to specific groups at discounted rates. It seems the government’s revenue expectations are overly optimistic.
According to state media, the government predicts that Iran will export 14 million barrels of oil per day at an average price of $85 per barrel, along with an equivalent amount of natural gas.
But this forecast is unrealistic. In fact, Tehran made the same budget and export volume predictions last year and failed to meet the target.
Organizations like TankerTrackers and Vortexa estimated Iran’s crude oil and gas condensate exports from January to November 2022. The government’s forecast also contradicts the parliament’s research center’s estimate, which predicts exports of about one million barrels per day.
This discrepancy almost certainly reflects an overly optimistic assessment of current conditions and ignores sanctions.
Energy market analysts and investment banks predict that Brent crude oil prices will range between $80 and $100 per barrel in 2023. Additionally, the revenue converted to 230,000 rials per dollar will remain the same as last year’s value.
Iran is also likely to fall short in issuing bonds. The government budget predicts a roughly 28% increase in bond sales, an ambitious target that the government has struggled to attract investors in its auctions. Revenue expectations from taxes are also forecasted to increase by 5%.
The government’s poor performance in selling oil and bonds is likely to cause a financing gap at the heart of Iran’s budget, a recurring issue. It’s important to note that budget deficits also fuel inflation, as the government relies on direct or indirect borrowing from the central bank to pay its bills.
Reduced wages, increased military spending
Raisi proposed only a 20% increase in government employees’ salaries, which, given high inflation, effectively means a reduction. Cash subsidies will also not increase with inflation. These figures are likely to be scrutinized during parliament’s budget review and may be adjusted. For example, last year Raisi similarly proposed subsidy increases, which were revised by parliament.
Development spending, such as investment in infrastructure, is also planned to be reduced by 10% in the budget because the government has not met its development spending targets this year. Therefore, further cuts will harm the government.
However, defense spending has increased by about 5%. Although defense entities have other sources of income, such as smuggling, official budget figures are a benchmark. Entities benefiting from this budget increase include the Islamic Revolutionary Guard Corps, the police command, the Ministry of Defense and Armed Forces Logistics, and the Armed Forces Social Security Organization. However, the army and the General Staff of the Armed Forces faced budget cuts.
Raisi has also continued to allocate some oil export revenues directly to the defense sector, separate from regular budget allocations. Specifically, about $33 billion from oil sales next year will be allocated to the Ministry of Defense, down from about $5 billion allocated this year.
By directly linking oil sales to military purposes, the regime inadvertently provides Western governments with a golden opportunity to deter more companies from participating in Iran’s oil sector.
Finally, the government has proposed tripling the budget for the Organization of Defensive Innovation and Research (SPND). SPND, previously led by the late Mohsen Fakhrizadeh of the IRGC and nuclear leadership, is the successor to Iran’s past AMAD nuclear weapons program.
This significant increase may serve as a signal to the West amid the failure of nuclear negotiations and progress in the regime’s uranium enrichment activities. In contrast, the Atomic Energy Organization of Iran, which oversees the civilian nuclear program, faces a 4% reduction.
Complex outlook
The budget process is now in the hands of parliament, where members have already expressed frustration with Raisi’s proposal being submitted without the seventh development plan, which is over a year overdue. Members have also indicated that their review may not be completed before the start of the new Iranian year on March 21.
Economic experts must consider any edits made by parliament. However, parliament often increases military spending beyond what the government wants. Given widespread public anger, lawmakers may also be inclined to increase social spending and wages this year. However, finding sources for this additional spending will be challenging. The budget approval season in Tehran is turbulent, but given public unrest, this year’s version will be volatile.
Source: Washington Institute
