Iran’s finance minister: we need to change the course of our fiscal policy
The current negotiations in Vienna could lead to positive economic outcomes for our country
Ehsan Khandouzi: ‘Our models suggest that Iran’s new budget will lead to positive medium-term outcomes in variables such as output, investment, employment and inflation’ © Iranian Ministry of Economy
March 18, 2022 10:00 am by Ehsan Khandouzi
The writer is Iran’s minister of finance and economic affairs
In Iran, sanctions, currency fluctuations and high inflation rates have led to subpar economic performance and a negative growth rate in recent years. Other adverse shocks such as the Covid-19 pandemic and natural disasters have further increased the fiscal pressure. Hence, the budget has grown faster than inflation — that for 2021 was about three times that for 2019.
I do not yet know what the outcome of Iran’s current nuclear negotiations with the 4 + 1 in Vienna will be. Regardless, we must take a cautious approach to our next budget so as not to upset the administration of the economy. Our government’s strategy was first to stabilise the economy and then to stimulate inclusive growth. In the past few months, part of the first goal was achieved, with point-to-point inflation decreasing on a monthly basis (from a 3.8 per cent increase to 1.6 per cent). The 2022 budget framework, which begins with the Iranian new year on March 21, must continue this strategy.
Given the current sanctions-related obstacles to exporting crude oil, the previous government’s strategy in financing the growing budget deficit increased our reliance on the bond market. The repayment and settlement of these debts are the responsibility of the new administration. We have also tried, over our seven months in office, to sell more oil under the existing restrictions (with an increase of 40 per cent) and to raise tax revenues.
The recent mushrooming of Iran’s budget was a direct result of an increase in the government’s current expenditure, while its investments in various sectors have declined. This, along with widespread uncertainty over the country’s economy because of the pandemic, has also led to a decline in private sector investment. This in turn has resulted in a negative net investment in recent years, severely undermining future production and household welfare.
Against this background, and in response to growing inequality, the new government has sought to change the course of fiscal policy. Our aim is to promote economic growth, price stability and inclusive growth. We also seek institutional reforms to improve financial discipline and reduce spending.
As such, our budget for 2022, which is already approved by the parliament, includes a number of structural reforms. We will lower corporate tax rates by 5 per cent and reduce our reliance on bonds. We hope to reduce the budget deficit by increasing the salaries of government employees at rates less than the inflation rate. We also predict increased oil export revenues.
Iran’s new budget is designed to promote equitable growth, including by increasing government investment. The public sector must play a more active role in investing in physical capital. Capital asset acquisition declined from 24 per cent in 2012 to 14 per cent in 2021 but, in the new budget, the share of credits for acquiring capital assets has increased by 4 per cent. This is an essential step in strengthening public investment.
We also wish to reduce the growth in current expenditure. In the 2021 budget this stood at around 60 per cent. This has been reduced to 38 per cent in the new bill.
Finally, we plan to increase tax revenues. Despite the reduction in corporate tax rates, the government has increased its reliance on sustainable tax revenues instead of mainly depending on oil. This has come about through substantial reforms to the tax system as well as by increasing financial transparency to reduce tax evasion and introducing a capital gains tax.
Our models suggest that Iran’s new budget will lead to positive medium-term outcomes in variables such as output, investment, employment and inflation. The approach adopted in the 2021 budget is expected to reduce inflation significantly in the next three years. Moreover, total investment and non-oil production will grow more quickly.
Needless to say, the government is determined to keep the money supply and monetary base under tight control. This will require significant reforms in the banking sector, as well as in areas outside the government budget (such as pension funds, the national wealth fund and so on). The current negotiations in Vienna could potentially lead to positive economic outcomes for Iran, especially in the banking sector and foreign exchange. We are ready for whatever scenario emerges — pessimistic or otherwise.
Iran’s finance minister: we need to change the course of our fiscal policy
The current negotiations in Vienna could lead to positive economic outcomes for our country
Interesting that this articles appears in an American outlet.
