ANALYSIS: Iranian Government’s Two-Year Non-Oil Budget Is a Fanciful Plan

By Roshanak Astaraki


The Iranian government is to submit its two-year budget proposal for 2020-22 (year starting March 21) to the Majlis (Iranian Parliament) on December 6, Mohammad Bagher Nobakht, the head of the Planning and Budget Organization of the Islamic Republic of Iran (PBO) has said.

Mr. Nobakht made the remarks during the 14th meeting of the Ways and Means committee on October 28. According to Nobakht, the government’s two-year budget does not include the country’s oil revenue.

“We will submit the combined 2020-21 and 2021-22 budget to the Majlis on December 6,” Nobakht was quoted by the Tasnim news agency as saying on October 29. “The proposed budget does not include oil revenue. The package will include a line-item budget presentation, listing expenditures for various institutions and departments. It will also contain an executive summary of the proposed two-year plan.”

“The government will also submit three two-year programs to the Majlis with the focus on development plans that rely on investment and must, therefore, include the oil revenues,” Nobakht explained. “The other two-year program aims to create one million jobs a year. So by 2021-22 [the government] will create two million job opportunities in the country.”

“The international community will realize that Iran can function with a non-oil economy,” Nobakht added. “This is a blessing in disguise resulting from unjust economic sanctions imposed on the country.”

The two-year budget proposal does not come as a surprise to anyone. Nobakht discussed the plan during a closed-door session of the Majlis in July. According to Nobakht, the idea was first proposed by Iran’s Supreme Leader Ayatollah Ali Khamenei and later ratified by the Supreme Council of Economic Coordination.

According to the Islamic Republic Constitution, however, the government must submit an annual budget for the following fiscal year.

Beside the legal issue, a two-year budget proposal is beyond the capabilities of President Hassan Rouhani’s government which, in the past six years, has committed major mistakes in managing the country’s annual income and spending, even after the 2015 Joint Comprehensive Plan of Action (JCPOA), better known as the Iran nuclear deal.

After the U.S. pulled out of the JCPOA in May 2018, the government had to adjust the oil revenue in its 2018-19 budget to $18.4 billion, which was a massive drop compared to $45.5 billion in the previous year’s budget.

The government did not, however, take any workable and economically sound measures to compensate for the loss. It instead shifted funds from one sector to another to keep the economy afloat.

According to a report released in April by the World Bank (WB), the government budget deficit for the first nine months of 2018-19 reached a record high of $13.5 billion.

Most economists believe that a two-year budget plan cannot accurately forecast revenue, expenditures, and the inflation rate.

Doctor Abdolhossein Sasan, a prominent Iranian economist, argues that a two-year budget would not help the country’s economic growth.

“The main problem with a two-year budget plan is that it uses creative mathematics rather than real income calculations to estimate the revenue and expenses for that period,” Dr. Sasan said in an interview with the Tehran-based Mostaghel Online news agency on July 16. “Economic variables make it hard to predict income, output, and spending in an annual budget, let alone for one that covers two years. “

It is abundantly clear that the government cannot implement this budget. It will eventually have to dip into the country’s Foreign Exchange Reserve, or worse yet, try to make up the budget deficit by collecting taxes and revenue from people and businesses.

According to another report by the World Bank, Iran needs to sell its oil at $194 a barrel to make up for its budget deficit for next year.

At the time of writing, the price of North Sea Brent, which is usually higher than Iranian crude, was $62.61 a barrel. Several sources, including the U.S. Department of Energy, predict that the price of Brent will remain at around $60 barrel this year and will drop to approximately $60 a barrel next year.

The government budget for this year and next will show a massive deficit. According to the WB’s Global Economic Prospects, the government budget deficit will be 8 percent and 8.1 percent of Iran’s Gross Domestic Products (GDP), respectively, for 2019-20 and 2020-21.

Iran’s oil exports dropped from 2.5 million barrels per day (bpd) to 100,000 bpd, the Tanker Tracker website said in July. The government budget cannot depend on oil revenue, given the sharp decrease in the sale of Iranian crude in the past year. Oil revenue would be so insignificant that, even if the government wanted to, it could not include the income in the budget.

However, excluding oil revenue from the budget as an act of defiance against U.S. sanctions is a rash and reckless measure that will harm an economy that is on the verge of total collapse because of decades of mismanagement. Raising taxes to make up for losing oil revenue is an example of such ineffective measures.

Some $14.2 billion in taxes which the government collects every year reportedly go missing. Also, many influential, powerful, and wealthy people who have close links to the regime enjoy tax-exempt status, which means a significant amount in unpaid taxes is missing from the government budget. It is difficult to calculate the tax liability of many state institutions, given that most of them do not disclose their income.

A government plan to reduce government subsidies for gasoline, diesel fuel, residential electricity, and electricity production could compensate for losing oil revenue, but it also means that people have to pay more for those products and services. However, fearing a public backlash, the government did not implement the plan last year.

It is abundantly clear that Mr. Rouhani’s government has not calculated the income, expenses, and risks of its plan. The two-year budget proposal is more of a fanciful idea than a practical and workable plan given record inflation, lack of productivity, and crippling sanctions that have brought the country’s economy to the brink of total collapse.

[Translated from Persian by Fardine Hamidi]