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Iran’s Falling Revenue

11 Jan, 2016

Vistar Business Monitor

With Iran’s crude oil being traded at $29, Iran’s revenue from oil sales have decreased to 31 trillion rials. The revenue is too low to cover government expenditures, given the fact that authorities should spend 34 trillion rials on cash subsidies and 100 trillion rials on the salaries of millions of employees. 

According the Central Bank data, the budged allocated for development projects in spring fell by 94 percent due to the financial constraints. Despite pressures, the first vice president, Eshaq Jahangiri, says the administration will continue to pay cash subsidies, but the spokesman for the administration has announced that the cabinet has not yet decided on the controversial issue of cash subsidies for the coming fiscal year.

In his recent remarks, Jahangiri noted that substantial changes are on the way in the next year’s budget; however, he refused to identify the changes. The subsidies issue has seemingly caused a delay in the sending of the budget bill to the parliament.

With oil prices having reached record lows in recent years, speculations are again fueling that cash subsidies must be cut in the next fiscal year. Under financial pressures, the government has failed in the past couple of months to pay salaries of its employees on time. The employees now fear that the government would be unable to pay them in the remaining months of the year.

Challenge of Paying Cash
Observers note that the government will hardly afford to pay the cash subsidies payable each month to all citizens.

At present, the monthly revenue of the government reaches $870 million per month. Given the US dollar traded at 36,000 rials in the free market, the total monthly revenue of the government is 1,320 billion rials per month. This is the fact while the administration pays 34,000 billion rials in cash subsidies each month. That means the administration has 2,680 billion rials in deficit each month. The costs of development projects and the monthly salaries of employees must be added to the deficit. 

According to Mohammad Bagher Nobakht, government spokesman and president of the Management and Planning Organization, the government has to pay 100 trillion rials in staff salaries each month or 1,200 trillion rials each year. The figure is estimated to increase by 12 to 14 percent in the coming fiscal year. Experts are warning that the government will face 70 trillion rials in deficit next year, if it is to count on oil revenues only.

The Central Bank data show that the government was able to spend only 390 billion rials on development projects, down by 94 percent year on year. The development budget was originally supposed to be 473 billion rials for the first season of the year.

Paying Subsidies to Politics
Paying cash to almost all citizens every month is going to become a major problem in the country as the government hardly affords to cover its own costs. Under the current budget law, the administration received a go ahead from the parliament to drop at least six million citizens from the list of those receiving cash subsidies every month. But that has not yet happened, with liberal economists saying that the impact of dropping of six million people from the subsidy list is too little on government’s rising costs.

Out of the total population of 78 million, nearly three million only do not receive the cash subsidies. That means the administration is now only saving 1,330 billion rials in cash subsidies each month – 3.8 percent of total cash payment. Even if the authorities can drop six million from the list of cash receivers by the end of this year, it would be able to save 2,730 billion rials per month and 32.76 trillion rials per year. 

Thus, the oil revenue which was previously able to cover all costs, including those of cash subsidy payments, will fail to do so while crude is traded below $30. During the administration of Mahmoud Ahmadinejad, oil price was well above $100 per barrel. It would be enough for the incumbent administration if it stood at $50. However, that is not the case currently. So, for the coming fiscal year, the administration should count on tax revenue if it is serious in its plan to continue to pay cash subsidies to over 70 million people each month.


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