The Forum for Partners in Iran's Marketplace

January 2020, No. 93

Budget & Planning

The 1399 Budget Reform Process

Consumption, investment, supply and demand would have been stimulated in tandem – to resolve conjointly the income capacity problem and the income distribution problem.

Mohammad Ali Farzin 1
Development Economist

Budget deficits, foreign exchange reserve imbalances and extra liquidity have been affecting Iran’s financial stability over the years. The Budget deficit has always forced Government to encroach on bank resources – along with its liquidity, inflation and income inequality consequences. New US sanctions, and subsequent macroeconomic shock and austerity process in Iran (devaluation, inflation, income contraction, consumption and social welfare issues, etc.) have added to this. Given that weak productivity and inappropriate investments have adversely affected Iran’s economic growth, and external financing is not possible due to sanctions, along with local banking system challenges that are endemic – and with little oil sales revenue due to sanctions – the Government has announced it will adjust its ways and undertake a reform and restructuring process for the national 1399 Budget.

About time, of course! Budget management reform is necessary and has already taken to long to happen. However, with the current weak economic growth, unemployment, inequality and poverty situation the timing of budget reforms may be quite risky, as budget reform in Iran’s case may also mean an austerity process for some entities – through more taxes and changes in expenditure. We have to see. The Government is proposing a two yearperformance based budget”: which could actually be effective if both the efficiency-based dimension is undertaken appropriately and if it retains the necessary development orientation to alleviate real problems. To what extent Government will actually undertake the second dimension, and retain required expenditure (as fiscal stimulus) will make a difference to the outcome in today’s context. 

With a population of 83 million, the United Nations considers Iran to be a “high-level human development index (HDI) and high-level middle income country: the HDI circa 0.79 and GDP/capita circa $11,500 (2015 adjusted for purchasing power parity)”. That indicates a lot of potential for development if planned, budgeted and managed right. Economically, a potential GDP growth rate of at least 5% or 6% per annum naturally and regularly; socially, Iran can have minimal poverty, full employment, and complete health and education access for all.

Of course, this is not the case and there are contradictions, Iran suffering conjointly from general low annual GDP growth (long term average is 3.5%), significant income and wealth inequality (high GINI), high unemployment and low employment generation, chronic inflation, and much vulnerability for half the population – including the inappropriate investment processes and distorted budgeting systems that contribute to such adverse development outcomes.

Overall Economic Situation

Following the shock of 2018, Government announced GDP had contracted by 4%, and inflation remained at 40%; although President Rouhani recently indicated unemployment had fallen to 10.5% (and that employment had actually risen in most sectors); but that the economy will remain in stagflation, although it is expected to return to recovery by mid-2020 or 2021. The IMF has projected a more significant decline for 2019 (minus 9%), however. Recent Majlis Research Centre reports indicate that possibly up to 40% of the population are now socio-economically vulnerable (in 2019). With real wages remaining low, and interest rates high, there is obviously no hope for wage-led growth either. Further indications of concern include the recent problems of the many fold petrol price rise – all revenues of which are subsequently transferred to targeted households (7 bottom income deciles).

A Budget document provides significant information on Government and people interaction; preferences and priorities; money, resources and activity.

The initial Government response to the new 2018 US sanctions had been the 1398 (2019/20) Budget. Initially with a huge nominal 38% increase from the previous year to a total 17,000 Trillion Rials (TR) for both the Central Government (CG) budget and State Operating Enterprise (SOE) budget; intended to stimulate the economy; based on circa $30 billion oil revenue projections; but with significant deficit and funding issues (see this authors Iran International article of June 2019). The Budget was very ambitious indeed. Large expenditure increases were foreseen for both the socio-economic (consumption) and investment components: i) for employment generation, poverty reduction and re-distribution programmes (including inclusive employment and cash transfers), and other current expenditure (wages, salaries, insurance, pensions and human capital initiatives) - at circa 70% share of the current CG budget, indicating the strong consumption (wage) stimulus; and ii) the huge rise foreseen in SOE investment expenditures for the profit-side business stimulus.

Consumption, investment, supply and demand would have been stimulated in tandem – to resolve conjointly the income capacity problem and the income distribution problem.

However, the significant fall in oil sales this year to possibly circa $10 billion, and with limited financing possibilities, led Government to respond to reduce CG expenditure levels from 4,500 TR to 3,800 TR by mid-year 1398 (i.e. back to nearly the 1397 level); and controlling for inflation. This ensemble also led IMF in revising its prediction and indicating this would lead to a possible 9% fall in GDP in 1398. The Government has, as mentioned above, recently announced an optimistic outcome, due to: its stated own direct and SOE new project activity growth in the second quarter of 1398: 95,000 new projects since mid-2018; recently 400,000 new housing starts initiated; the new monetary/fiscal injections (18% of all new bank credits were allocated to manufacturing sector); apparently creating 800,000 new jobs; and 470,000 new employment opportunities being ahead.

Government seems content with improvements in banking and forex dimensions started in early 1398: adjusting the forex market towards supply and demand balance and reduction of speculative demand (with Rial stability in mid 2019) through integrating the multi-tier forward NIMA and the new spot cash markets; stabilizing forex at circa 110,000 Rials per $ (since April); and strengthening the Central Bank of Iran (CBI) to closely monitor the banking system and realign its significant rent-based profits, to reduce variation in long term savings accounts, to improve inter-bank activity and rates, and to reform credit institutions performance. The need to control monetary base expansion (which was usually high at circa 25% per annum) is apparent.

The 1398 Budget had also tried to push for more tax based financing (aiming at 50% of revenues) and more assets sales (bonds, oil and privatization), to compensate for oil income revenue falls, and to contain high fiscal deficit (circa 5% of GDP). It was suggested that only 20% of Iran’s CG budget be dependent on oil. To finance CG expenditure of 4,500 TR, about 2,100 TR were foreseen from taxation and other tariffs/incomes (¾ from taxation); and 2,000 TR from sales of various assets (1,480 TR from oil/gas, rents and real assets and 510 TR through bonds sales and financial instruments). Raising wealth related taxes was also being considered.

If the above couldn’t fully happen, then either budget restructuring or monetary base expansion remained. Now, with the new circumstances and calculations, the budget discourse has changed to reform: including the further raising of taxes (including on wealth); financial asset sales in the capital market; more SOE revenue/expenditure control; restructuring of CG expenditure; etc.

Performance Based Budgeting

Before reviewing the newly published 1399 Budget Guidelines, based on “performance-based budgeting”, the logic of such a method should be clarified. A Budget is an instrument for both: i) financial efficiency and transparency in the revenue and expenditure side, through financing (taxes, assets sales, borrowing, money supply, reserves, etc.) and expenditures (investment or consumption expenditure); and also ii) for development purposes, making a crucial difference in the outcome of the whole development process due to the programming undertaken in the proportions (%) of revenues and expenditures involved and the scale in which they have been set at. It is, therefore, also a development programming instrument.

A Budget document provides significant information on Government and people interaction; preferences and priorities; money, resources and activity. Hence, the transparency of the budget process is crucial – the rules, mechanism’s and operating procedures available and which are to be used appropriately. These latter require institutional processes and legislation to change, and mainstreaming of good governance to be ingrained culturally.

A national Budget, then, is in principle an instrument for achieving national development objectives and outcomes, with limited available resources; an integrated framework for action to ensure systematic approach to performance-based outcomes, and preventing unnecessary, ad-hoc and disparate activities from dominating resource allocation decisions. In many countries, however, the annual budget is not used appropriately and is like a cash grabbing exercise for those lobbying better, for patronage purposes, with subsequent ineffective, rentier, cronyism, ad-hoc and non-sustainable resource allocation outcomes.

A good Budget should, of course, not be considered just in terms of finance (money and finance/expenditure) but as a programme instrument to affect real development outcomes. This requires conjoint improvements in national efficiency, equity and sustainability outcomes. That is: i) equity – minimum social protection, income distribution (Gini) and deprivation status; ii) efficiency – general productivity (value added),  employment at national and local levels and enterprise possibilities; and iii)  sustainability – better usage of primary (capital, natural and human) resources and their reduced depletion rates, as well as improved available ecological services (e.g. carbon emissions rates) and their carrying capacity.

If a performance-based budget approach is to take place, the 1399 Budget should allude to this approach. For example, it would not be only about identifying “unit cost” and undertaking those expenditures with less unit cost – as that would be merely financial and efficiency oriented.

From a development economics outcome perspective, the Budget should directly affect the indicators of investment and consumption, human capital and productivity growth, welfare and equity of various population groupings and other key development functions including eco-systems services. It should also focus on all levels, structures and interactions: i) micro-level (project) investments quality, local markets, community based development and money circulation; ii) meso-level (programme) expenditure for the bottom 40% (vulnerable) population, for essential social services (education, health and social welfare), employment generation and productivity/income growth; and ii) macro-level fiscal stimulus effects for capacity growth (investment), capacity use (more output and employment), savings generation, forex generation, monetary base, deficit financing, and their sustainability dimensions.

To make the change towards a performance-based budget, not only financial but also developmental, institutional and legislative processes should also be involved.  Will such budget reform process actually be able to take shape in current difficult circumstances? Will the 1399 Budget restructuring, taking place in stag-flationary conditions, have expansionary or contractionary effects? Will it be able to achieve crucial development outcomes – and be income distribution useful? Will it ensure appropriate investment (both public and private)? Will it be fully aligned with the Resilient Economy policy approach, or will it revert back to sole economic approaches?

Further, the Majlis (Parliament) elections are set for February 2020 and incoming MP’s will be taking office about three months afterwards. Obviously, current MP’s would not have a full opportunity to approve budget reform sections requiring legislation. There may also be little time for joint executive and legislative branches work on budget reform processes – given the Presidential elections in 2021.

1399 Budget Guidelines

In October 2019 (mid-year 1398) Government published the 1399 Budget Guidelines, signed off by President Rouhani himself - indicating next year’s Budget criteria and focus areas.

The document reports that Government is currently in process of trying to keep the Budget from going into further deficit and of the need to reduce expenditure on unnecessary items. Government will continue maintaining strategic minimum health and food expenditures, sustaining welfare cash transfers to households and pensioners, improving poverty reduction and welfare programmes, strengthening production and employment activities, ensuring bond maturity payments, and keeping the National Development Fund reserves intact. The Government reports it is also seriously attempting to not fund the Budget from new banking and monetary sources.

The Guidelines document reports that despite sanctions and adverse macro-economic effects, the overall threat to development processes have been identified and will be converted into opportunities. The chronic budgetary deficits, low public revenue, accumulated Government debt and sole oil sales reliance; the weak competitive base and continued local monopoly conditions, unemployment, poverty and wealth inequality; the banking sector focus on asset financing, and instability of Pension Funds systems; all the existing threats that are now forcing adjustment and reform in the structure of the Budget (and banking system), and initially foreseen as the Resilient Economy structural reforms.

The initial focus will be more on income generation financing through increased taxation coverage, and making more efficient existing assets and bond sales – and towards a balanced budget. Iran’s Planning and Budget Organization (PBO) is responsible for undertaking the reform and reducing dependence on oil revenues.

The 1399 Budget (2020/2021 - Persian calendar year beginning in March 2020) will, seemingly, no longer be oil revenue based (N.B. at the time of this writing, however, the Budget has not yet been presented to Majlis, and the actual numbers are unknown to the author). Government can no longer rely on crude oil as main source of revenue and will probably consider using oil income only to either cover budgetary deficit items or add to reserves for development purposes. The PBO indicates only circa $10 billion will be used for budget calculations and utilised from oil sales next year - compared to $30 billion from annual sales in previous years. The least-dependent budget on oil in Iran’s recent history is ahead.

Next year’s 1399 Budget will, probably, be circa 4,800 TR for CG and circa 13,000 TR for SOE (of which a quarter should be for capital expenditure). A Budget total of possibly nearly 18,000 TR. At current official exchange rate of circa 42,000 Rials per dollar, that comes to about $430 billion. In an economy with circa $500 billion GDP, that is quite some proportion.

The 1399 Budget will be a two-year cycle, “performance based” budgeting model based on the PBO set criteria of a) sustainable income, b) effective expenditure, c) stability in the economy, d) development and equity, and e) fundamental reforms in budgeting. It will be focused on four pillars: i) short term stability, ii) long term growth, iii) balanced and inclusive progress, and iv) reforms in Government structure.

The Guidelines specifically emphasise the need to appropriately consider the macro-economic context and Resilient Economy policy, to not include any unnecessary activities and expenditure items, ensuring productive activities, disregard for any activities that may reduce economic growth, focus on those that improve business, and with due regard to raising public revenues, and also ensure equity for all as well as public goods service provision in terms of good governance.

The PBO has already prepared a package of ten component programmes aligned with the structural reforms and Resilient Economy policy, which entails the following:

·         Improving the productivity of Government assets;

·         Enabling a new public-private partnerships approach;

·         Linking the taxation system to the social protection system;

·         Improving on the multi-layer social security system;

·         Reforming the pension system;

·         Improving the household information system;

·         Making taxation effective through:

o   improved tax rates on income groupings;

o   ensuring taxes on upper income earnings through rise in taxes on goods and services, in asset and capital gains and removal from the subsidies list; and

o   reduction in taxes on firms and businesses;

·         Improving Government contributions to funds and pension fund systems;

·         Ensuring that Provincial Governorate level PBO manages provincial investment allocations through own surpluses and also through allocations for more efficient operations;

·         The relative differences between provinces (through appropriate indicators) will be used as criteria for national resource allocations to provinces.


The above criteria, principles and components – set by PBO – are to guide the resource allocation process for 1399. We have to wait and see how the 1399 Budget actually does that.


There is much room for improvement in the system, of course, and especially the need for developing integrated (or so-called “3One” type) systems in coordination, planning and m&e systems:

§  Coordination. Inter-sector coordination mechanisms that would be able to ensure more integration in the planning, budgeting, finance and audit system – through enhanced practices (and results based performance planning and budgeting). This would be necessary for achieving outcome and impact

§  Programming. Integrated programming systems and approaches are required. This would mean taking a development approach (rather than a financial approach per se to resource allocation). Financial issues are increasingly competing with real outcome issues.  

§  Resource Allocations. Generally resource allocations are sub-optimal. Sector resource allocations need to be complemented by more inter-sector type solutions in allocation - if the current diminishing returns on effectiveness in sector productivity (and falling multiplier) is to be overcome.


Along this line of argument, then, an opportunity would also arise for improving on development outcomes due to Budget reform:

Ø  Economic Growth. Resetting policy and programmes towards more inclusive growth processes and outcomes (more employment and less inequality).

Ø  Public Finance. Continued and proactive counter-cyclical monetary and fiscal policies: maximal use of “fiscal space” to orientate fiscal and monetary policy towards national development goals, especially through local level mechanisms. This would need to improve the budgetary process towards performance based outcomes; the public financial management process; increase planning, monetary and financial coordination; and establishing the required advanced legal and infrastructure set up to improve on what exists.

Ø  Socio-Economic Development. The need to consolidate and target better socio-economic development and social support programmes (such as employment, skills, education, health, pensions, social security etc,) – and which is in tandem with the public financial management process. Examples provided below. An improved “3Ones” approach can be very beneficial for social sector institutions (and SOE) receiving central budgets, as well as for macro/strategic institutions in understanding the real needs of socio-economic development (rather than on giving weight only to economics and finance – and going just for sole growth type approaches)2.


To what extent these are integrated and compatible with each other in space and time is another issue – which requires the actual analysis of the Budget document itself (which should be presented to Majlis by mid December 2019).

1399 Budget Issues Needing Resolution

As mentioned, there are four components to the new 1399 Budget programming: institutionalization of a performance based budget; increasing efficiency of spending; maintaining revenue generation; and stabilizing and sustaining economic growth in both the short and medium term. The following issues are at the fore of such a reform.

The new Budget is confronted with many financial challenges, if the 4,800 TR for CG and central allocations to SOE investments are to happen. The revenue side challenges include: tax revenue in Iran is low compared with other countries (about 5% to 7% of GDP as compared with the global average of 19%); tariffs and bond sales don’t provide too much; oil sales is down significantly; use of reserves is legally problematic; money supply increases have limits. Possibly only 3,000 TR in total CG revenue is what is relatively easily possible; while SOE bulk finances are through own incomes, and they get their financing from the banking system (of course, by Government directives). The expenditure challenges (for 4,800 TR CG expenditure) include: how to ensure inefficiency reduction; how to get the proportion and scale right for consumption and investment items so as to ensure appropriate real development outcomes; who is to be designated what proportion of investing (Government; SOE; cooperatives; or private sector); and what investment development approaches should be taken. A conundrum indeed – in a semi-centralized economy as Iran’s. 

A budget deficit is, therefore, possible in 1399: possibly between 1,000 TR to 2,000 TR. The budget deficit will be due to: i) insufficient income; ii) the size of government and SOE sector (making up two thirds of the economy) and their large expenditure requirements; and iii) continued inflexibility in historical expenditures (partly due to rentier, power distribution and patronage) and iv) the continuous generation of new programmes and projects just to ensure keeping the system growing.

To alleviate and improve, the PBO intends to transform the Budget document into a more governance type instrument - by improving SOE performance criteria and also bringing under its coverage all the para-statal organizations (e.g. various “bonyads”). There is the real need to reduce non-transparency for oil income assessments (predictions, valuing and usage in Budget), for SOE dynamics, for subsidies use, for salary income position of SOE’s and for the National Development Fund process. The need to clarify predicted and actual expenditures – and the need to write balanced budgets for allocation purposes (so as the prevent monopoly positions of those actually disbursing the resources). The two-year performance based budgeting approach also requires a significant information base system infrastructure and an integrated indicator based approach to programming. Applying new tax laws, reforming subsidies and selling Government assets are planned to increase financial resources: the restructuring requires that all funds flow into the Treasury – rather than through other mechanisms (or bank accounts). And taxation: indirect income tax (e.g. VAT); direct income tax; sales based taxation; SOE taxation and accounting; tax evasion; tax exemptions; etc.

Other issues include the Forex Preference system for imports of Basic Needs Goods (with a $10 billion allocation) that needs to be restructured – as it is both inefficient and inequitable (see Majlis Research Centre papers) and with a reform towards SMART targeting, conditionality and NIMA forex rate it will ensure more resources and better targeting of the vulnerable groups. The petrol price issue (both an efficiency and equity concern). Measures that might boost revenues next year include improving on the privatization process, reforming SOE budgets, eliminating the non-sustainable subsidies of Government and increasing general productivity (through right investment which ensure growth with jobs – and not job less growth). The high liquidity growth, abnormal bank interest rates, costly business activity, capital flight and smuggling of goods also need reform through the Budget process (rather than through other channels). 

The PBO also proposes to transform the National Development Fund (which receives circa 20% to 30% of oil revenue) into a stabilization fund. Does this mean it intends to undertake counter-cyclical therapy through it? If so, this means that current NDF functions will change from long-term investment funding support for the private sector, towards counter-cyclical (which ideally should be from tax or bond sales financing) and then it becomes questionable.

Attaining all these reforms quickly remain unlikely. The performance-based approach has constraints and challenges in terms of institutional infrastructure and working culture. The new approach would need to be S.M.A.R.T. and well defined for both aspects if they are to outperform Budget approaches implemented previously.

Financing Improvements and Tax Reform

With regard to financing, as mentioned, tax revenue in Iran is low compared with other countries (about 5% to 7% of GDP as compared with the global average of 19%). Tax revenue made up, on average, 30% to 35% of all Government revenue (60% direct business sales taxes and 40% indirect taxes, VAT and tariffs). Taxes recently were circa 1,000 TR: there is, therefore, ample potential for doubling Government income from taxation – to 2,000 TR (which the Government aimed for in its current Budget and will do so in next years). The wealth tax component of direct taxes is low (circa 10%). Such a high potential level of development in Iran (as mentioned above) means that Iran could be paying at least 15% of its GDP in taxes into the Government Treasury, or about 3,000 TR.

Currently, the main real burden of taxation is on private sector business sales and registered employee income taxes. A proportion is on tariffs and VAT contributors; hardly any direct income tax proceeds from business or households; and small burden on capital gains (asset; property; shares) contributors. There are significant tax exemptions for some lines of activity, and especially for para-statals. Of course, also much abuse of both income and sales taxation (due to non-transparency issues): annual tax evasion is estimated to cost the government well over 1,000 TR.

The development of a sustainable tax base (beyond just immediate revenue) requires a mechanism for regulation-setting and transparency in the economy – such as direct income taxes and reduction of non-transparent parallel markets. Iranian law addresses taxes differently for corporations, independent contractors and individuals: for the first two, a non-systematic collection system has resulted in non transparent balance sheets. Information on all registered employees is transparent and readily available, however, so their tax is calculated and deducted before they are paid each month: although perhaps the real tax burden on employees is probably largely realized by those under direct supervision of Government (circa 5 million persons) - government employees pay 10% in taxes. Tax evasion remains prevalent among the wealthy - who probably only pay a similar amount tax as employees do. Taxes on some capital (unused capital capacity, empty homes and capital gains in the housing market) are rarely considered.

The special (exemption and exceptional) tax position of SOE should also be clarified in the Budget Reform – given both their immense potential for development purposes and their threat to a competitive economy - through the National Audit Court process; also, clarification as to how much of SOE funds flows go into the Treasury and how much into banking accounts (especially on employees incomes, hence reducing the tax base).

In the current economic depression, the advice is that Government should not yet increase taxes on Iranian businesses sales proceeds. Indeed, lowering such taxes and restructuring to something else would also be helpful for SME investments. Unfortunately, economic stagflation is not expected to improve anytime soon – despite Government hopes. Furthermore, eliminating tax exemptions, broadening the taxation base and levying capital gains taxes – as PBO suggests – requires new legislation. With the Majlis elections coming soon, the adoption of such laws will not be likely soon.

SOE Reform

Will the cutting and reforming of State Operating Enterprise SOE budgets be a priority in the reform? Lack of transparency and absence of strong monitoring and evaluation mechanisms for SOE means that liquidity, profitability and productivity remain unknown. The considerable burden of SOE and para-statals on budget resources and economic efficiency every year (the SOE budget was circa 12,000 TR in 1398 – although 85% from own income generation) would need much reprogramming of protocols and standard operating procedures. To improve the poor competitive business environment, and SOE investment outcome effects, the sustainability and efficiency of SOE budgets must be examined, and to also help balance the Budget revenue-expenditure gap.

There are many, many SOE’s in Iran and nearly 400 major ones. However, apparently only a few show positive profit results. Nearly 90% of total net profit of SOE’s are due to a few SOE, for example including:  the Central Bank of Iran, the National Iranian Oil Company, and the National Iranian Gas Company.  These also have the main share of tax burden. The majority of SOE’s are illiquid and probably also operate below break-even points (being kept by subsidies and new debt financing). According to the Supreme Audit Court (1396), over 160 SOE were economically unviable - a significant difference from what had been indicated in that years Budget. Also, as usual, 75% of SOE revenues are spent on current expenditures and only 25% invested. Altogether, SOE probably pay about 170 TR in taxes and dividends. Government SOE revenue is mainly from oil, banking, insurance and electricity business.

SOE also have raised the total volume of debt in the financial system: borrowing about 1,200 TR in domestic and foreign credit facilities. Substantially increasing demand for loans on the money market. They need to repay possibly 1,100 TR in servicing their debts.

How SOE will be able to cover their obligations with poor balance sheets remains unclear. It remains crucial, therefore, to assess the impact and role of SOE in the forthcoming 1399 Budget restructuring process. Corporate governance of SOE may be rigorously revised to allow Government financial resources to be more freely channeled to competitive companies. Preparing the ground for the Government to divest from unproductive SOE and focus on empowering the real private sector (and a competitive, SME business economy) is the key answer to improving an unfavorable business and economic climate in Iran. 


It seems likely that the 1399 Budget will undertake required parallel expenditures on consumption and investment – so as to raise economic activity and growth. Its four pillars indicate this: i) short term stability, ii) long term growth, iii) balanced and inclusive progress, and  iv) reforms in Government structure.

The short term stability requirement indicates allocations for consumption, and for human capital, welfare and equity of various population groupings – that itself has knock on effects for income generation, with a high multiplier. Expenditure for the bottom 40% (vulnerable) population, and for essential social services (education, health and social welfare) will be included. These allocations in 1399 will probably come to: 400 TR for the Targeted Subsidies Law programme (Iran’s equivalent to Universal Basic Income); 230 TR for new petrol-based cash transfers; 1,000 TR Preferential Forex basic needs goods, and the 30 TR Government poverty reduction budget; plus 270 TR in credits for employment generation. A sum of nearly 2,000 TR. Add to this the general Government current expenditure of probably about 2,000 TR and the 30% programme budgets of social ministries MoHME, MoCLSW and MoEd of circa 340 TR and we have a total of 4,300 TR. Quite a general consumption-based injection into the economy – if fully financed.

The long term growth condition indicates allocations in 1399 for investments and productivity growth (private sector and SOE and mainly through banking system credits) – prompting micro-level (project) investments quality, employment generation and productivity/income growth. These will come to circa 600 TR for direct Government investment (recently announced); a possible 2,000 TR in new investment by SOE; and possibly 200 TR by the private sector (if lucky). A possible total amount of 2,800 TR in investment. The multiplier effect of this would be significant, of course – but only if the banking system and circumstances enable.

The combined fiscal stimulus effect and new money circulation of the two approaches, at 7,100 TR (4,300 TR and 2,800 TR) – if made actual – will have effects for income, new capacity growth, existing capacity use, savings generation and deficit financing. It could certainly prove inflationary – given such a large scale stimulus – and add to existing inequality. It could, however, provide a possibility enable improved income distribution and stronger synergy only if the short term component is undertaken appropriately and in tandem with the long term component. If the two approaches are combined, then the multiplier effects are much more (naturally – as more endogenous inter-dependence and combination is created); the example on conditional cash transfers below is indicative of the how this may be done. Otherwise, inflation and inequality increase will dominate.

Once we discount and adjust significantly for the new income generation: due to the many inefficiencies and inequalities (e.g. low capacity usage; high unemployment; low absorption; mal-distribution; capital intensity; excess speculative funds; etc) and also for circa 30% inflation – and also assume that the multiplier has now fallen significantly over the years due to stag-flation (that is, looking at the worst case scenario), then the total injection of 7,100 TR would still have at least an equivalent nominal income effect – and so current GDP of circa 20,000 TR (in 1398 - taking IMF and CBI accounts at face value) would grow nominally by 7,100 TR. That is, once above mentioned adjustments are made, a possible GDP real growth rate of circa 3% for 2020. The inflationary, inequality and speculative side of all this – given scale – still remains of concern however.

Even if we do not include more general current expenditure of Government in the calculation, and short term consumption expenditure effect is calculated as 2,000 TR, we still have a total of 4,000 TR. That would provide (given same conditions) a lower growth rate of circa 2% for 2020.

The possible employment generation for the above (in a low income-to-employment elasticity, job-less growth technique context as Iran) is, therefore, between 1% to 1.5% - that is, on a 25 million effective employment level, we could possibly have 250,000 to 375,000 direct new jobs. Unless the Budget also manages to ensure that new projects financed are pro-employment (more labour intensive technology in the project selection credit assessment process) – and hence more socio-economic in nature – in which case the multiplier would be higher (for both growth rates and employment generated) and the direct employment figure may rise to at least 600,000.

Money Issues and Deficit Financing

How is all this expenditure to be financed? The expected fiscal deficit may probably be large, if the expenditure targets are to be kept to.

In all, given other things, and the constraints involved, above expenditures will not easily be possible – unless reserves are used up (e.g. NDF does stabilization work instead), or money supply increase by more than average 25%, or bond sales are absorbed by the large capital market in Iran. Also, taxes will have to rise from current circa 1,000 TR to at least 1,500 TR if the Government pushes for it (Government desires 2,000 TR). However, if tax and real/financial asset sales face a problem, and reserves remain unusable, then eventually monetary expansion remains. Further quantitative easing perhaps. Given historical circa 25% annual growth rates in all the three dimensions of inflation, budgetary growth and money supply growth, and their correlation (and co-integration in this particular economic context) a Budget document that is not restructured according to performance principles will just be continuation along these same lines: and, hence, money base expansion (same old story).

The CBI last year announced monetary expansion of circa 22% in the previous year: base money volume was circa 1,900 trillion Rials (growing at over 19%); total liquidity close to 16,000 trillion Rials (up by 22%); and total banking sector liabilities about 21,000 trillion Rials (of which around 50% are private sector deposits). These monetary aspects indicate both possibilities and real red lines for the 1399 Budget packages deficit financing channel. Unless wisely programmed and implemented, significant money (liquidity) expansion will probably happen by end of 1399: at a conservative 25% growth rate, while further inflation levels of above 40% are then possible. Further, financial capital and debt burden will even more increasingly constrain the workings of the real economy – especially with the high level of interest rates prevailing.  

1) The views in this op-ed / article are the sole opinion of the author and unrelated to the institution that the author is employed with.

2) e.g. see this authors “Complementary Programmes to Sole Growth Approaches…..”


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  January 2020
No. 93