Iran Faces Major Budget Challenge

The national budget is an important issue everywhere, but especially so in countries like Iran where government has a major hand in the running of the economy.



For most of President Mahmoud Ahmadinejad’s time in office, high oil prices created a revenue surplus which allowed high levels of spending, creating an excess of cash in circulation and fueling inflation.



That has all changed for Iran, like many other oil-producing nations, as world prices have plummeted from last summer’s highs of close to 150 US dollars a barrel to around 45 dollars.



With only three months to go in Iran’s financial year, the government announced on January 4 that the next two annual budgets would be based on predicted oil price of 37.5 dollars a barrel. At the same time it is also having to reassess budgetary predictions for the current year, given that revenues will come in much lower than anticipated.



As economic growth slows, Ahmadinejad must be weighing the political implications of the sudden change in circumstances. He faces a presidential election in 2009, and some are predicting that voters may turn their backs on him as harsh economic realities set in. This, after all, is the president who campaigned on a pledge to “bring oil money to people’s tables” in 2005.



Facing a budget deficit currently estimated at nearly 6,700 billion toman, or 6.7 billion dollars, the government has come up with revisions to the current budget, asking parliament to look at them urgently.



As long ago as September, the governor of Iran’s central bank warned that falling oil prices could lead to a revenue shortfall of 54 billion dollars, in a budget in which the spending target was set at some 300 billion dollars.



The abrupt downturn in revenue expectations lays bare another flaw in Ahmedinejad’s expansionary spending policies – the allegation that he has underwritten a lot of them by dipping into Reserve Fund, the surplus of oil revenue.



The ILNA news agency, for instance, cites a recent central bank report that of the 73.6 billion dollars in oil revenues paid into the reserve fund in the three years from 2005, the year Ahmadinejad was elected, through 2007, a massive 63.2 billion had been withdrawn. That compares unfavourably with the mere 20 billion that was withdrawn in the last five-year term of his immediate predecessor as president, Mohammad Khatami.



Some believe that this discrepancy could give Khatami a stick to beat his rival with should he choose to stand in this year’s election.



The fiscal crisis is undoubtedly the most serious one that Iran has faced in recent years, but the annual budget has consistently been a controversial subject ever since President Ahmadinejad came to power, with questions asked about changes to the drafting process as well as about the wisdom of injecting large amounts of cash into the economy.



Decision-making on expenditure was shaped by the massive growth in oil revenues thanks to high world prices. Flush with cash, the government came up with supplementary budgets to allow more spending in the financial years beginning March 2005 and March 2006. These were duly approved by the compliant parliament of the time.



These “mini-budgets” allowed the government to withdraw some four billion dollars from the foreign currency reserve and convert this into Iranian rials, creating a deluge of liquidity. The resulting unrestrained spending splurge contributed to the high inflation we now see in Iran.



The following year, beginning March 2007, the government thought it could curb rampant inflation by delivering a tighter budget and increasing imports. However, not only did the inflation rate fail to come down, the import surge hit local manufacturers hard and many factories such as sugar refineries faced bankruptcy.



In addition, the 2007 budget assumed very unrealistic revenue levels, so a subsequent amendment was sent to parliament to make up for an anticipated deficit of four billion dollars.



The instability was further aggravated by the abolition of the Management and Planning Organisation, the government agency then in charge of budgeting, a decision Ahmadinejad took in June 2007 because the 2005 and 2006 budgets had needed so many subsequent revisions.



The institution’s planning and bidding functions were delegated to the provincial governors’ offices, while the national budget is now generated by a department within the presidential administration, from where it is submitted to parliament.



There were loud protests from both statesmen and economists.



Discussing the move, Mohammad Ali Najafi, who was head of the planning organisation when Akbar Hashemi-Rafsanjani was Iranian president in the early Nineties, says the decision had “negative consequences”.



One of the specific objections to subsuming management and planning offices into the regional governorships is that budgetary policy decisions becomes politicised when it should be neutral. Decisions taken within a governor’s office will reflect the particular view of the governing party, and not necessarily the national interest. This is true, of course, under all governments, not just Ahmadinejad’s.



Second, there is a constitutional problem to do with authority. While the president is allowed to delegate some of his powers to another official, he is not empowered to re-make whole institutions. In this instance, Ahmadinejad effectively transferred budget-making powers to the interior ministry, to which the provincial governors are subordinate. Yet by law, only parliament has a right to reconfigure the ministry’s remit.



“The plan to dissolve the Management and Planning Organisation was not thought through at all,” said former economic and finance minister Davud Danesh-Jafari, who was dismissed in April following differences of opinion with President Ahmadinejad.



The president’s rationale was that devolving budgetary planning instead of having all the allocations going to national ministries would make the process more transparent and reduce the scope for the haggling that used to go on in parliament among representatives of regions, cities and organisation for a larger slice of the funding.



When President Ahmadinejad submitted the 2008 budget bill in January 2008, it was only to be expected that legislators and economists would raise their voices in protest, as this was the first budget compiled by government itself rather than the Management and Planning Organisation.



One objection was that the document was much shorter – if previous budgets were divided into around 600 items, this one had only 60 or so.



This simplification resulted from a decision to cut the number of designated budget-holders. Now just 39 executive agencies and structures are allocated a budget, rather than some 600 as used to be the case. These latter organisations are now supposed to get their funding from one or other of the designated budget-holding ministries or vice-presidents’ offices, which can decide whether to finance them, and if so how much they will get.



This new method of planning came in for a lot of criticism. Some members of parliament even proposed ditching the entire bill and using a modified version of the 2007 budget instead.



The head of parliament’s research centre, Ahmad Tavakkoli, argued that the principles behind the new system were unconstitutional. Allowing designated budget-holders to dish out funds to other agencies meant that legislators could not get full and direct accountability from the all the main recipients of government money.



“This bill anulls the authority of parliament and transfers it to government,” said Tavakkoli. “That prepares the ground for [government] officials to make decisions that reflect their own preferences and do not fall within the law.”



Eshaq Jahangiri, who served as industry and mining minister under the last president, Mohammad Khatami, argued that the old system for compiling the budget contained checks and balances that had now disappeared.



“It was only the Management and Planning Organisation that used to protest against such measures from a position of expertise. It acted as a brake on the political establishment,” he said, adding that the current government had abolished an institution that had served Iran well for 60 years.



Many economic analysts argued that the new system would inevitably result in anarchic, unaccountable governance.



“Under this chaotic method of budgeting, there is no supervisory system – in fact no one is accountable, and parliament is totally sidelined,” said Ali Qanbari of Tarbiat Modarres University in Tehran, and a member of the Iranian Central Bank’s Money and Credit Council, which provides oversight of monetary policy. “Setting out the country’s total budget under [just] 50 general items will lead to a waste of funds, as it isn’t clear who’s monitoring the spending, where it’s going, who is accountable, and ultimately what its impact is.”



One immediate problem with the budget in its final version was that its revenue projections assumed an oil price of 40 dollars a barrel, at a time when it was already heading towards 100 dollars.



The discrepancy begged the question of what the government planned to do with all that spare cash, with concerns expressed that oil money would be dissipated on general running costs rather than used to invest in development. Shortly before the 2008 budget was passed, the Fars News Agency announced that it contained massive spending increases for Islamic institutions – average government spending on religious activities was up by 600 per cent.



At this point, the main concern has to be how to deal with the consequences of all this spending in light of what is likely to be a massive shortfall in revenues.



Mohammad Mahdi Afkari is a journalist and editor with the Andishe-ye Nau daily in Tehran.



Mianeh is an IWPR-run initiative to provide an independent open webspace for ideas, analysis and debate for Iranian journalists and writers. This article is taken from Mianeh’s bilingual website, http://mianeh.net/