Iran’s Finance Minister: We must change the course of our fiscal policy

The author is Finance and Economy Minister of Iran

In Iran, sanctions, currency fluctuations and high inflation rates have led to below-average economic output and a negative growth rate in recent years. Other negative shocks such as the Covid-19 pandemic and natural disasters have further increased fiscal pressures. Therefore, the budget has grown faster than inflation – that for 2021 was about three times what it was for 2019.

I don’t yet know what the outcome of Iran’s ongoing nuclear negotiations with the 4+1 in Vienna will be. Regardless, we must approach our next budget carefully so as not to upset the administration of the economy. Our government’s strategy was to first stabilize the economy and then stimulate inclusive growth. In recent months, part of the first target has been met, with point-to-point inflation falling on a monthly basis (from an increase of 3.8 percent to 1.6 percent). The 2022 budgetary framework, which begins with the Iranian New Year on March 21, must continue this strategy.

Given the current sanctions impediments to exporting crude oil, the previous government’s strategy to finance the growing budget deficit increased our dependence on the bond market. The repayment and settlement of these debts is the responsibility of the new administration. During our seven-month tenure, we have also sought to sell more oil (up 40 percent) and tax revenue under existing restrictions.

The recent explosion in Iran’s budget was a direct result of an increase in the government’s current spending while its investment in various sectors has declined. This, along with widespread uncertainty about the country’s economy due to the pandemic, has also led to a drop in private sector investment. This, in turn, has led to negative net investment in recent years, seriously undermining future production and household well-being.

Against this background and in response to growing inequality, the new government has sought to change the course of fiscal policy. Our goal is to promote economic growth, price stability and inclusive growth. We also seek institutional reforms to improve fiscal discipline and reduce spending.

Our budget for 2022, which has already been passed by Parliament, contains a number of structural reforms. We will cut corporate tax rates by 5 percent and reduce our reliance on bonds. We hope to reduce the budget deficit by increasing government employees’ salaries by less than the rate of inflation. We also anticipate rising oil export earnings.

Iran’s new budget aims to promote equitable growth, including by increasing government investment. The public sector needs to play a more active role in investing in physical capital. Capital acquisitions have declined from 24 percent in 2012 to 14 percent in 2021, but in the new budget, the share of capital acquisition loans has increased by 4 percent. This is an essential step in strengthening public investment.

We also want to curb the growth in current expenditure. In the 2021 budget, this was around 60 percent. This was reduced to 38 percent in the new draft law.

Finally, we plan to increase tax revenues. Despite cutting corporate tax rates, the government is increasingly focusing on sustainable tax revenues instead of relying primarily on oil. This has been achieved through comprehensive reforms of the tax system, 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 for variables such as output, investment, employment and inflation. The approach taken in the 2021 budget is expected to significantly reduce inflation over the next three years. In addition, overall investment and non-oil production will grow faster.

It goes without saying that the government is determined to keep the money supply and the monetary base under tight control. This requires significant reforms in the banking sector as well as in non-government budget areas (such as pension funds, national wealth funds, etc.). The ongoing negotiations in Vienna could potentially lead to positive economic outcomes for Iran, particularly in the banking and foreign exchange sectors. We are prepared for every scenario – pessimistic or not. Iran’s Finance Minister: We must change the course of our fiscal policy

Adam Bradshaw

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