Blog

Iran Government Plans to Bring Big Reform

Vistar Business Monitor

By the next strategic plan of the country, dubbed as the 6th Five-Year Economic Development Plan, authorities would do their best to reduce the size of the government and improve business environment, according to media reports.

It seems that the incumbent administration is serious to give priority to address the economic woes in the coming years, since it has come up with ideas and plans to reduce the size of the government and budget reliance on oil revenue, cut its debt to banks and contractors, reform the bureaucratic system and push for subsidy reforms. In the meantime, the administration of President Hassan Rouhani tries to make the economy more transparent, improve the business environment, organize credit and financial institutions, pay its debt to the private sector, and pave the ground for the inflow of foreign capital.

The 6th Five-Year Economic Development Bill was submitted to the parliament earlier in January, with a focus on economy, society, and culture. But what is the 31-article bill included?

No Reliance on Oil
The first article of the bill has called the government to totally cut reliance on oil revenues by the end of the five-year plan – March 2021. To that end, the government has been urged to reform its budgeting mechanism through taking two major measures: first, all tax holidays, and discounts will have to be ended by 2021, and second, the administration will have to levy further tax on value added, polluting factories, natural gas, and registering vehicles.

Of note that if pollutants are spread beyond the city in where the polluting factory is located, the pollution tax will be increased appropriately. The tax received will be distributed to the affected cities and provinces. Also in Article 8 of the development, the government says, “The administration, private sector, and cooperatives are obliged to respect all the environmental rules and regulations while planning for new projects.

Sovereignty Fund
Many experts believe that Iran’s sovereignty fund, dubbed as the National Development Fund, should be paid special attention when oil prices increase. So, the government has announced that it will revive the Oil Reserve Fund as a complementary fund to the NDF. Experts believe the ORF can contribute more to the government when oil prices fall in global markets putting pressure on the national budget. However, the five year development plan still insists that the NDF has a more important role for the economy.

The second article of the development plan calls for depositing 30 percent of oil revenue in the NDF, while calling on authorities to add the fund’s share from the oil revenue by two percent each year. The suggestion comes as oil market experts forecast that the oil price will not exceed $70 by the end of the development plan. On the other hand, the government has proposed in Article 5 of the plan, “The NDF should provide loans in foreign currency to the projects in which each of the IDRO, IMIDRO, ISIPO, NIPC and TAVANIR owns 49 percent of shares, and if the projects are located in deprived regions.

Foreign Loans
While submitting the bill to the parliament, President Rouhani underlined the need for the country to use foreign investments to address economic woes and push the economy to grow 8 percent each year. Addressing the lawmakers, he said that Iran has great potentials to attract foreign investments as the Iranian economy has been stable in the past two and a half years.

The third article of the development plan has called for reforms of the financial system and improving the banking system in a move to accelerate financial transactions between domestic and foreign entities. However, all projects applying for foreign investment or loans must be economically and environmentally justified and confirmed by a minister or a high-ranking official. In addition, the projects must be confirmed by the Supreme Economic Council. However, critics say the council’s member have not so far met regularly, arguing that its confirmation is not needed.

If the article is approved in the parliament, all foreign contracts valued at $10 million or more must be signed only through official tenders published by the Iranian newspapers and online media outlets available in Iran and abroad. The latter move will help make business environment more transparent.

Save Environment
The sixth article of the development plan has focused on business environment that needs to be improved. According to the article, “The Ministry of Economy is obliged to prepare a plan to safeguard capital, create jobs for domestic experts, and reduce investment and social risks for business people in cooperation with the Science and IT Office of the president, Ministry of Intelligence, Ministry of Justice, and Interior Minister. The plan will have to be confirmed by the National Security Supreme Council.

Other articles of the plan have paid attention to the private sector, too. For instance, in the 12th article, the government needs to take three measures to empower business people and develop infrastructure required for further foreign trade. First, the Ports and Maritime Organization is allowed to make deals with reputable global companies. Second, the organization is allowed to provide incentives to active private companies. And third, the National Airports Company will have a monopoly to provide air services to the provide sector. In the 13th article, the government grants a privilege to non-governmental companies which invest in the transportation industry; that is, the government will treat them as if they have invested in deprived regions.

Debt Crisis
In 2013 soon after taking office, President Rouhani talked about crises that his administration would face. Some of those crises were the heavy debt inherited from the previous administration. Since then various figures have been announced as the government debt to banks, contractors, Social Security Organization, etc. The latest announcement is that by Minister of Economy Ali Tayebnia. The minister said in December that total debt held by the government, including that held by the National Oil Company, is 5.4 quadrillion rials, of which 3.8 quadrillion rials should be repaid by the government to the banking system. However, in the five-year development plan, there is no mention of the remaining 1.6 quadrillion rials in debt which must be paid to non-banking companies. 

According to Article 4 of the development plan, the government will have to pay all its debt, calculated by the end of this fiscal year, to individuals until 2021, when the development plan expires, through publishing bonds in the capital market. To provide credits required for the annual payments, the government is obliged to put a special section in the Budget Law. Thus, if the government fails to provide the required credit the payments will be made through the bonds published by the Ministry of Economy.

Of not that the government claims the bonds are protected from inflation and will be traded in the organized bond markets which operate under the supervision of the Tehran Stock Exchange. In addition, the government has suggested in Article 11 that the debt held by the OIC can be paid through the Central Bank of Iran. However, only the debt pertaining to years 1387 through 1392 can be repaid through the CBI in the years running to 2021. The central bank is set to repay the debt after receiving the extra projected revenue of the sales of oil, gas and gas condensates.  Critics say it is not yet clear whether the government can deposit any extra oil money to repay the debt, given the fact that oil prices have hit 12-year lows.

Great Disaster
On August 17, 2015, Ali Tayebnia, the minister of economy, called the cash subsidies as the great disaster the government has to deal with every month. As seen in the development plan, the administration does not have any plan to cut the cash subsidies in the coming years though it has planned to reduce the number of cash subsidy receivers. According to Article 9 of the development plan, the government would be allowed to increase the price of energy carriers by the end of the Iranian year of 1399 in a move to raise funds that could be spent to increase production, create jobs, protect non-oil exports, improve productivity, reduce energy consumption and air pollution, improve social justice indexes, supported the poor and provide financing for development projects.

The point is that the government has not mentioned anything about the continuation of the cash subsidy payment, probably because it wanted to have the choice how to protect the poor in the future. On the other hand, the way the government has raised funds for its development projects could be different in the years to come. Of course, as announced by government officials so far, the funds raised through energy price reforms have so far spent on cash subsidies, leaving little funds for the government to spend on development projects. However, it seems that the government will make changes in the methods it has so far applied to spend savings earned from subsidy reforms.

Homework for IRIB
One of the most important parts of the development plan is the homework the government has prepared for the national television or the IRIB. If this part passes the parliament, the IRIB will be obliged to make a list of cultural activities by the end of the first year of the five year development plan to be transferred to the private sector by 2021, when the plan expires. Furthermore, according to Article 19 of the development plan, the Ministry of Sport and Youth will be in charge of determining how the IRIB would broadcast sports competitions.

War on Unauthorized Institutions
Another important issue raised in the development plan is the announcement of war against a series of credit and financial institutions which do not carry operation permission from the central bank. Authorities of the central bank say there are more than 7,000 such entities operating across the country holding 120 trillion rials worth of deposits. The central banks and government officials have repeatedly threatened these institutions with closure, but this time the government is trying to establish a legal base in the development plan to root out these entities.

If the parliament approves Article 23 of the 6th development plan, the central bank will be authorized to take five measures against illegal financial institutions. First, the entities may be fined one percent of their registered capital; second, they may be stopped from distributing shareholders’ profit; third, the right of some or all shareholders to vote may be denied temporarily or permanently; fourth, their operation permits may be annulled; and finally their executives may be barred from managing the institutions.

Furthermore, the same article has urged the central bank to adapt rules and regulations with international standards regarding the capital adequacy ratio, how to classify assets and calculate nonperforming loans, how to determine liquidity ratio, how to determine minimum regulatory requirements. Also the police have been obliged to shut down the branches of the offending institution.

The development plan also has regulations for the health care system. It also has plans to address the looming water crisis, develop e-government plans, improve economic productivity, urge the culture ministry to reduce bureaucracy in the art and culture sector, help renovate historic and cultural sites, boost efforts to combat drug smuggling, help improve justice in legal and judiciary cases, press executive organizations and armed forces to be in harmony with the Foreign Ministry, boost women status in the society, and urge the Atomic Energy Organization to adopt measures to address emergencies regarding nuclear power plants and other atomic facilities. The latter will have to be confirmed by the cabinet.

The last article of the development plan suggests measures that need to be taken by the government in a bid to implement the plan in an appropriate way. For instance, the government will have to report to the parliament every year how it has implemented the development plan. And secondly, the Management and Planning Organization will have to prepare all directives and bylaws required for the implementation of the 6th development plan and submit it to the cabinet for review.