Inflation Fueled by Rising Debt
Iran began the new fiscal year on March 21, having recorded an estimated GDP growth rate of around 4% over the previous year and 3% for the non-oil sector.
The consumer price index rose 35% year-on-year, according to the Statistical Center of Iran.
While GDP growth could be the result of economic stabilization after several years of recession due to harsh sanctions and poor economic management, a constant high inflation rate is alarming for the Iranian economy, reads a article written by Mehdi Qodsi – an economist at the Vienna Institute for International Economic Studies and adjunct professor at the Vienna University of Economics and Business – for the Middle East Institute. Excerpts follow:
Over the past decade, the CPI has risen 735%, while the economy has grown just 7.2%, according to SCI data.
The Central Bank of Iran puts the figure even lower, at just 5.7%. During the same period, regional peers Saudi Arabia, Iraq and Turkey increased by 16.2%, 31.9% and 48.8% respectively, while their CPI increased by 115 %, 114% and 248%, according to World Bank data.
Iran’s divergent performance is the result of various sanctions regimes imposed by the international community in 2011-2015 and by the United States since 2018. It is also the result of poor fiscal discipline caused by the dysfunctional nature of Iran’s political economy, which allows for the full interdependence of the CBI and the government.
The curse of natural resources
Oil revenues have long been the main source of government revenue.
When oil prices peaked in 2008, oil accounted for 30.7% of Iran’s GDP (see Figure 1). After the international community stepped up sanctions, the share of oil in Iran’s GDP fell significantly, falling to just 10.6% in 2015. As shown in Figure 1, Iran’s budget State to GDP over the period 1997-2020 has tended to keep pace with oil’s share. of GDP, but fluctuations have generally been smaller.
When oil revenue fell short of the government budget, the government sought other sources of revenue. These are underdeveloped and difficult to find, given the size of the public tax-exempt economy, which has meant that the government has often had to resort to borrowing as a last resort.
The options available to him include borrowing from the banking system by issuing Islamic bonds, from the National Development Fund of Iran, from the CBI by printing money and selling government assets through informal channels and the Tehran Stock Exchange.
These mechanisms have generally contributed to a substantial increase in the monetary base due to the limitations of Iranian financial and capital markets, which are cut off from the global economy.
Although in the past oil revenues have exceeded the general state budget, Iran has allocated part of the budget to repaying pre-maturity debt. But when oil revenues are so low that they cannot cover overdue debt, the amount borrowed exceeds the repayment of previous debt.
It was only in 1999-2001 under President Mohammad Khatami that the government’s net borrowing was negative (see figure 1), which means that part of the public debt was repaid without creating new debt.
In every other year, governments borrowed more than they repaid. Fiscal discipline was at its worst in real terms in 2006-09 under former President Mahmoud Ahmadinejad, despite the spike in oil revenues, and during ex-President Hassan Rouhani’s second term (2017-21), especially since that the United States reimposed sanctions in 2018.
Large public economy, growing public debt
Before each fiscal year, the government submits the draft national finance law to parliament for legislation.
According to the Supreme Court of Auditors, however, the total budget of public companies — that is, all public companies, banks and institutions — has been much larger than that provided for by law in recent years. (see figure 2).
According to SAC annual reports, over the past four decades, the total national budget, including the general government budget and that of public enterprises, has fallen from 40% of GDP (according to CBI figures) in 1980 to 91% in 2018. .
According to nominal GDP figures provided by SCI, the relative size of the national budget peaked at 78% in 2011 before the international community stepped up sanctions.
Looking at both sources, it is clear that most of Iran’s economy is controlled by the public sector and only a small part is controlled by the private sector and parastatals.