What do you do when your ambitions are bigger than the resources you have to pursue them? The Tehran leadership must have asked itself this question when drafting the national budget for the next year (according to the Iranian calendar), which starts on March 21.
Since his election, President Hassan Rouhani has missed no opportunity to paint a black tableau of an economy, which he says—shaking his head in feigned sorrow—he inherited from “that man,” former President Mahmoud Ahmadinejad. Rouhani has promised to “repair the damage” done by Ahmadinejad and restore the health of the economy.
However, his new budget, because he is either unable or unwilling to contemplate serious reforms, amounts to a bill of goods rather than serious economic policy.
When presenting the draft budget, Rouhani made three claims. The first was that the budget was based on oil prices of around 75 US dollars per barrel. While oil represents around 11 percent of the Iranian gross domestic product (GDP), it accounts for almost 30 percent of the 312 billion US dollar budget. The trouble is that no one knows where oil prices might go over the next year. The problem is further complicated by the freezing of over a billion dollars of Iranian oil revenue every month by the so-called P5+1 group (the US, UK, France, Russia, China, and Germany).
Rouhani’s second boast was that he is offering a balanced budget. He must have got that obsession from his band of “Chicago Boys,” US-trained economists who regard the need to balance the budget as an article of faith. They don’t realize that when an economy is in decline, as is the case with Iran’s right now, cutting public expenditure, which means reducing demand, could worsen the situation.
According to the Institute of International Finance, the Iranian economy has shrunk by 8.6 percent since 2012. This has led to a jump in unemployment from 11 to 16 percent, which, in turn, has provoked a sharp fall in consumer expenditure. In such a situation the sanest policy would be to aim to raise investment in sectors, most notably infrastructure, that could boost the job market. Obsessed by his “balanced budget” boast, Rouhani has done the opposite by reducing or cutting funding for over 4,000 projects of all sizes.
The president has also increased the military budget by 33 percent. The lion’s share goes to the Islamic Revolutionary Guard Corps (IRGC), which sees its budget rise by 50 percent to 6.7 billion dollars. If we take into account the part of the public sector controlled by the IRGC, often through Khatam Al-Anbia Holdings, it appears we are witnessing a dramatic militarization of the economy.
Then we have the separate, and secret, budget allocated to the IRGC’s Al-Quds Force, whose mission is to export revolution through Hezbollah and a network of other Khomeinist outfits in seventeen countries. Deeply involved in Lebanon and Syria, which costs the Treasury an estimated 2.8 billion dollars a year according to conservative estimates, Iran is being dragged into the Iraqi quagmire in the hope of seizing control of a corridor spanning from the Iranian-Iraqi border to Syria and Lebanon.
To balance his budget, Rouhani has done something else. Not only has he all but ended transfers to the Oil Revenues Reserves Fund set up by Ahmadinejad for a rainy day, but now envisages treating it as a cookie jar to be raided. Yet another trick Rouhani has used is to slash many subsidies that help the poorest Iranians survive. One immediate effect of this is a 30 percent rise in the price of bread, the staple food of 90 percent of Iranians.
Even then the figures simply don’t add up. By our calculation the proposed budget has a 7.8 percent built in deficit.
The draft is based on the hope that the inescapable deficit would be covered by an increase in indirect taxes, customs duties and a new generation of treasury bonds. Rouhani is not the first to use that stratagem. All Khomeinist presidents have practiced what could be called economic taqiyah (dissimulation) to produce balanced budgets. Rouhani is also counting on further falls in the value of the currency, the rial. Iran finds itself in a peculiar situation in which the government has a vested interest in the decline of its currency, which would allow the government to get more rials for its dollars. Thus, Rouhani’s promise of increasing public sector pay by an average of 14 percent could easily be covered with a 20 percent fall in the value of the rial. With inflation estimated at around 20 percent, public sector workers will end up at least six percent poorer.
In the best circumstances the Iranian state’s ability to collect taxes of all kinds is equal to 25 per cent of GDP. However, no government, under the Shah or under the mullahs, has ever come close to that amount. And yet the Iranian economic model is a top-heavy statist one. I remember a visit in 1978 by Margaret Thatcher, then leader of the British Conservative party but not yet prime minister, during which she mocked Iranian leaders for having created an economy that was “more Socialist than that of Poland,” then under Communist rule. Though not entirely accurate, the jibe contained a grain of truth.
However, the difference between then and now is that under the Shah the state did indeed dominate, and to some degree controlled, the economy. Under the mullahs the state has become one player among many. Para-state players, notably the IRGC, revolutionary foundations, the network of businesses reporting to the “Supreme Guide,” and business empires controlled by mullahs, are regarded as part of the public sector and pay no taxes to the state. They constitute a parallel “grey economy” worth at least 100 billion dollars a year.
Even in the private sector, many entrepreneurs have learned to circumvent the state by setting up businesses alleged to have a religious mission. Instead of paying taxes to the state, they claim to be paying the “share of the Imam” (sahm e emam) to mullahs, and refuse to publish their accounts.
Call it “Islamic Socialism” if you like, but the system in which Rouhani presents his budget is a strange beast in which religion is in the service of business. Some in the West claim that Islam needs a separation of religion and politics. However, in the case of Iran at least what is more urgently needed is a separation of religion and business.