State’s Avoidance of Income Freeze

State’s Avoidance of Income Freeze

With the dissolution of the Panning Vice Presidency by Mahmud Ahmadinejad, there have been many annual budget deficits over the past eight years. As a result, the state resorted to borrowing from the Central Bank of Iran, something which was protested by many members of the Iranian Parliament. After Hassan Rouhani took office in 2013 and employed experienced technocrats in his economic team, the 2014 budget was expected to have fewer deficits than before. Although the budget was proposed to the parliament promptly, its accurate analysis has raised certain questions. Here is an interview with Pouya Jabal Ameli, a PhD graduate in economics from the University of Leicester in the UK, about the potential budget deficit in the next year.

 

According to a thorough review of the budget clauses, the state appears to have been too optimistic about the realization of some incomes. Apparently, there will also be budget deficits in the next year. What is your reflection? The main concern is that the budget deficit should be reduced and prevented. If you look at the budget clauses, you see certain figures indicating that the state has considered this concern. For instance, the state has increased the current expenditures by nearly 11%, from which we can concluded that the budget is contractive. In fact, the state has mistakenly frozen its income sources by making the budget contractive. If you look at the growth rates of other clauses, you will see that they are either negative, meaning that they have had nominal reductions, or positive, meaning that they have increased as opposed to the current inflation. This increase is not real. I have always had a monetary view of the inflation, yet there are some economists who believe that inflation has a financial source attributed to the budget deficit. However, monetarists have two views of the fiscal theory of price level. The first one is the monetary view, according to which inflation has nothing to do with the budget because it is a monetary phenomenon. This view causes a conflict between those who have a financial view of inflation and the aforesaid monetarists; however, other monetarists consider these financial views differently, which actually makes them consistent. These monetarists, whom I support, believe that although inflation is considered a monetary phenomenon, you will finally see financial factors and, above all, budget deficit, as the causes of this monetary phenomenon at a lower layer. If we had an independent central bank, we would not have to seek the lower levels of causes, as we could consider the central bank an independent organ that could stop any causes of inflation and would not inject money.

In other words, you regard the absence of an independent central bank as a factor making the budget deficit exacerbate inflation, right? When the central bank of a country is dependent and cannot act independently, decisions are made within the structure of this organization by outsiders from the lobbies of manufacturers to the interventions of the state. There are also some representatives of the state and the parliament in the Money and Credit Council, the body of which is formed outside the Central Bank of Iran. These representatives are also entitled to make decisions. As a result, the central bank is so dependent that you have to track the underlying layers of factors causing inflation and do not just rely on the first monetary level. To me and many Iranian economists, the current budget deficit in Iran is a major cause of inflation, for the state always needs to borrow from the Central Bank to meet its needs, something which leads to inflation. Therefore, if the 2014 budget is to be analyzed in this aspect, my main concern is that further deficits will even be possible, although the budget is contractive.

 

Don’t you think the attempts at contracting the budget and reducing the incomes will result in the budget deficit? Yes, but there have been other strategies for increasing the incomes.

 

What strategies have been neglected or left unused due to the pressures applied by the state? For instance, the petroleum was priced $100 per barrel, and the US dollar exchange rate was set to 2650 tomans, which makes us wonder why it should be like this when the dollar exchange rate on the market is 2950 tomans. There is a 300–400-toman gap that is considerable and could have been taken into account but was not.

 

Why do you think this important issue was ignored? I think this is mainly because of the political and noneconomic pressures.

 

However, there are various analyses, according to which if the dollar exchange rate had been considered above 2600 tomans in the budget, the prices of basic goods would increase and cause the public dissatisfaction. In addition, did the inflation decline when the dollar exchange rate decreased from 3700 tomans to 3000 tomans? At that time, it was announced that the dollar exchange rate increase was a cause of inflation, so why has not inflation declined? The is because inflation is caused by another factor. If your increase the dollar exchange rate in the budget, there will be no inflation.

 

Do you believe that the dollar exchange rate does not affect inflation? Yes, it does, but not in the way that others think it does. In my opinion, inflation emerges when the dollar exchange rate is considered lower

that what it is in reality. In fact, when this exchange rate is considered low in the budget, then the budget deficit will be possible. As a result, inflation will occur, so considering the dollar exchange rate is a negative aspect of the budget for the next year. I think the state could have reduced the chances of the budget deficit. For instance, foreign currencies could have been sold at higher prices without even creating liquidity because the Central Bank of Iran can sell the US dollar at 2900 tomans, a price which goes well with customers even now. Selling the currency exchange is the best method of creating income for countries, and the best method of gaining incomes in rials for the Iranian state is to sell foreign currencies at higher prices. The countries that need higher incomes are recommended to sell their foreign currency resources at higher prices. As I said earlier, the money circulating in the market will go to the state and will not cause liquidity.

 

Taxation can also be an efficient method for multiplying incomes and preventing the budget deficit. Let us begin with the value-added tax, which was supposed to increase but remained unchanged in the budget for the next year. This raises a question. You may say that people will be under pressure, but the thing is the state must take all these actions no matter how well it observes the financial discipline, how much it decreases expenditures, and how it reduces the chances of the budget deficit. However, the state should be careful not to experience any budget deficits as it increases the incomes because any potential budget deficits will exert much more pressure on the public than taxation does. In other words, they claim that they have not increase taxes or any other factors, but the fact is that the public will pay the costs of all of such actions. Increasing the prices of energy carriers could also be a strategy to decrease the budget deficit, although no administrations have ever dared to adopt this strategy. Even if there has been an increase, it has differed from the global prices. In fact, the prices of energy carriers constitute an important discussion. However, the state plans to make independent decisions in the next subsidy targeting phase, so we should wait to see what will happen. In the current situation, the subsidies are increasing. Although no coupons have been issued, the subsidies of energy carriers will increase on a yearly basis due to the current 40% inflation, about which nothing is done. In fact, the growing gap between the prices of energy carriers and the prices that people pay will be covered by subsidies. There was once an action plan, which I think was effective, despite all criticisms on Ahmadinejad’s administration. I think Ahmadinejad’s decision to reach the prices of energy carriers to the global level was correct, but the problem with the first phase was when the direct subsidies given to the public were higher than the state’s income. Therefore, the state had to borrow from the Central Bank, something which increased liquidity. However, if the direct subsidies had been equal to the state’s income, things would have gone well.

However, the Sixth Parliament ordered Khatami’s administration to gradually reach the prices of energy carriers to the Persian Gulf FOB, something which was unfortunately stalled by the Iranian Principlists. Yes, it started in the Third Development Plan. It should have been kept on, and there was no need to transfer funds at all, but the Seventh Parliament prevented the plan and ordered the fixation of prices introduced as a gift to the public. It is still debatable. Our friends from the Seventh Parliament owe a big apology to the public. If it had been done at that time, there would have been no need for any sudden shocks. Anyhow, we are now experiencing similar days, as the energy subsidy has been raised once again. Iran is now rich in gas, but the National Iranian Gas Company is unfortunately bankrupt. It is unbelievable. Mismanagement in this area is really awful. These losses should be avoided. Smuggling should be avoided. I mean that we should continue with the second phase of subsidy targeting and keep on increasing the prices of energy carriers. In my opinion, a monetary policy should be adopted with regard to energy carriers. In fact, the state should not decide to annually increase the prices of energy carriers in a time-consuming process. This was a dynamic action in the Third Development Plan. Therefore, we need to devise a formula by which the state does not want to propose the budget of energy carriers to the parliament every year and cause consequent problems. We need to reach a dynamic formula to fix the prices of energy carriers and prevent economic losses. I think increasing the prices of energy carriers can be a source of income rather than a cause of budget deficits.

 

In the earlier clauses of the budget, it is mentioned that liquidity is to be controlled in the next year. Do you think this will happen?

All economists agree unanimously that liquidity is in the hands of the Central Bank. By the budget, the solution is that the state operates regularly. Another solution is that the state gives more power to the Central Bank so that it can act more efficiently in the economy, as the officials of the Central Bank are mainly concerned with inflation. In today’s world, the central banks only seek inflation goals and no longer care about economic growth. They only take a brief look at the real economy. The technocrats at our Central Bank have the same perspective. A great deal of work should be done to practically give the necessary power to the central bank, but nothing can will be achieved unless the formation of the Money and Credit Council, its members, and its membership selection process are changed. These current relationships are very strange, as there are no advanced laws. If the state wishes to empower the Central Bank, it should arrange the Money and Credit Council differently by setting new laws. If we aim to control inflation in the long run, the only solution is to change the monetary and banking laws. With this kind of decision-making and selection of members, a one-digit inflation rate will be impossible. However, we have not had an inflation rate on a global scale in the recent decades. We need to set another law, which

has nothing to do with the budget. --------------------------. Many manufacturers believe that the state or the Central Bank, as you said, should direct liquidity toward production and prevent imports, although import taxes are to be raised in the next-year budget. What is your reflection? Production does not need money; it needs capital. No matter how much money the central bank injects, it is still considered insufficient by many. Not only does this action fail to improve production, but it also causes inflation. In fact, if you finance manufacturers with the components of the monetary base, the money will be injected into the entire economy no matter how much you finance the manufacturers. Money will be published, but no production and labor will be generated as much as the money that is injected. Instead, inflation emerges and rises. With higher inflation, manufacturers need further money for production. This is a vicious cycle that should be avoided.

 

Why are manufacturers always complaining about the lack of liquidity then? It is in favor of their lobby. When other sectors receive no money but one sector does, it is in its favor to make complaints because it first spends the money. The money is injected from the production portal to the economy, and manufacturers will benefit from the money, a process which will finally turn into an economic rent for manufacturers. In my opinion, if the state wishes to control liquidity, it should outrun the lobby of manufacturers. We have never tried to fix production because we have always considered it to be fixed by itself. We think any interventions in production will cause false prosperity that will never work well. However, we should forget about these notions and start helping manufacturers, but the monetary policy cannot be used for this purpose. Bureaucracy should be mitigated, and cumbersome laws should be limited. Private ownership should be protected. Governmental pricing should be stalled, and transparent rivalry should be guaranteed. These are the policies that can improve production, not low-interest loans based on the resources of the Central Bank that will finally solve no problems but will cause inflation.

 

The next-year budget will also be based on the petroleum revenues. What is your point of view? After these sanctions, our dependence on the petroleum revenues decreased. In other words, we achieved an accidental success, which we should not ignore in the current situation with the petroleum sales of 1–1.2 million barrels. The situation is so dire that we should not ignore every single drop of petroleum that can be sold. In fact, everyone should make extra efforts. This is very beneficial when the investment opportunities are provided for foreigners in Iran; however, nothing can be achieved as long as there are sanctions. The other countries experiencing similar situations have had other sources of income such as the tourism industry. In another case, China has benefited from the direct foreign investment. These opportunities do not exist when sanctions are imposed. What should we do even if we sell the petroleum?

Should we demand taxes? There should first be production on which taxes can be imposed. There will be no taxes when there are no incomes. We have no other options but to sell petroleum. After the situation turns in our favor, we can think about other options. However, we should never forget about selling petroleum. In my opinion, we should never design a budget in which petroleum sales have no roles.

 

Given the current situation, do you think we will witness the predicted 3% economic growth rate in the budget? I think we can witness economic growth in the next year now that we have managed to reach it from -5% to -0.5% in the current situation. The economic-political conditions of Iran allow us to increase the economic growth rate to 2% or 3%. According to the predicted conditions in the budget, the state does not intend to only announce, like in Ahmadinejad’s administration, that it has taken some actions. What the state wants in practice is to finish the job.

 

The first thing that people expect the state to do is to decrease inflation. Do you think the state will be able to decrease inflation nearly to 20% by using the next-year budget? According to statistics, the point-to-point inflation has decreased since May (Khordad) due to the expectations. However, this situation cannot continue as expected. Expectations can have short-lived effects on inflation. When people think that they are in a better situation, they will affect pricing. Finally, you have to control liquidity. It should also be mentioned that, unfortunately, there have been no reductions in the monetary variables and liquidity as opposed to the last few months of the previous administration since the new state took office. Can we control inflation? If we wish to decrease inflation much further, we need to adopt more contractive monetary policies. Although there have been some hopes in the current situation, nothing special has happened in the past few months. However, there are still some glimmers of hope. For instance, the technocrats at the Central Bank claim that the rate of interest must be raised or that a secondary market should be set up for corporate bonds. The state should support more contractive policies. More importantly, such policies should not be feared. The state should not think that such policies will obstruct production more than ever before, as any anti-inflation policies can help production in countries like Iran dealing with uncontrolled sanctions. In fact, such policies can reduce the economic risk and improve the economy.

 



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