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Can Khamenei Lead with Reduced Oil Revenue?

June 7, 2020
Ali Ranjipour
8 min read
Supreme Leader Ayatollah Ali Khamenei’s slogan of an "economy without oil” belies the Islamic Republic’s true sentiments.
Supreme Leader Ayatollah Ali Khamenei’s slogan of an "economy without oil” belies the Islamic Republic’s true sentiments.
Without oil, Khamenei will not be able to maintain his power. He cannot pay for the suppression of internal tensions and will not be able to engage in regional and international adventures.
Without oil, Khamenei will not be able to maintain his power. He cannot pay for the suppression of internal tensions and will not be able to engage in regional and international adventures.
Khamenei chants the slogan of an "economy without oil" without being willing to change his approach and the military and economic institutions under his supervision.
Khamenei chants the slogan of an "economy without oil" without being willing to change his approach and the military and economic institutions under his supervision.

In the previous part of this report, IranWire looked at the question of why Iran’s Supreme Leader Ayatollah Ali Khamenei’s slogan of an "economy without oil” belies the Islamic Republic’s true sentiments.

Khamenei wants to have his cake and eat it, too. He speaks of the cessation of Iran’s dependence on oil, but in practice he and the powerful and wealthy institutions under his control are indebted to oil. Without oil, he would not be able to balance power to his own benefit. Iran without oil would be unable to pay for the suppression of internal tensions and would not be able to engage in regional and international adventures. Khamenei may bring Iran to the brink of civil war, among other dangers, but without oil he would never be able to keep things as they are in the country.

Iran’s economy is something beyond the government's budget. But given that the general perception of an oil-free economy also demands an oil-free budget, IranWire will explore how a budget without oil would look.

Has Iran inevitably achieved independence from oil?

No. The coronavirus outbreak and American sanctions have helped deprive Iran of oil revenues this year. But there is no sign of a declining dependence on oil in the policies and behavior of the Iranian government and other agencies in the country.

The share of oil revenue and oil-derived spending in this year's budget seems lower than ever, but in reality, instead of oil, the government will be forced to auction off other assets to temporarily fill the oil gap.

Last week, Mohammad Bagher Nobakht, Iran’s Vice President and head of the country’s Planning and Budget Organization, announced in parliament that "Iran's revenue from oil sales last year was less than US$9 billion. This year's revenue will be still less ... But our ambition must be to put aside oil revenue and implement the country's plans without oil."

Is it possible to run Iran without oil? Can the wish of the Supreme Leader of the Islamic Republic of Iran be fulfilled?

It is possible – on paper. If the government can increase its non-oil revenues or reduce budget expenditures by the same share as oil revenue generate d in previous years, it will be able to run Iran without oil. But is that feasible?

What is the share of oil revenue spending in the budget?

In the 2020-2021 budget, nearly 50,000 billion tumans [US$3.3 billion] in spending are based directly on oil revenue. According to forecasts, Iran could earn about $10 billion this year by selling 500,000 barrels of oil a day, at US$52.00 a barrel; that is about 8 percent of the total budget.

This is probably the lowest share of forecasted oil revenue and projected spending in Iran's budget history. But it is unlikely that even half of that forecast will be met. According to Reuters, Iran's oil exports fell below 70,000 barrels a day in April, and the historic drop in oil prices has led producers to celebrate the arrival of US$40.00 a barrel.

Is there an alternative to compensating for oil revenues?

Yes; but again, only on paper. Instead of oil, we can define both sustainable and unsustainable incomes.

A sustainable alternative income is an increase in tax revenue. But given that Iran is going through a severe recession for the third year in a row, the increase in tax revenue is the last thing that could happen. According to estimates by the International Monetary Fund, Iran's compound rate of economic growth has fallen to minus 18 percent in the past three years; in other words, Iran's economy at the end of March 2021 will be one-fifth smaller than at the beginning of 2018. Meanwhile, the share of tax revenues from this year's budget resources is slightly higher than the 2018 budget. This means that the unrealistic tax burden is currently being placed on the budget.

It is also another matter whether the government can tax rich and powerful institutions that are now evading tax. Most of these are tax-exempt by Khamenei's personal decree. If one day it is to reform the tax system in Iran, economic transparency and tax collection from institutions such as Astan-e Qods, the Imam's Executive Headquarters (EIKO), the Mostazafan Foundation, and economic institutions under the control of the Revolutionary Guards and the armed forces is the first thing to do. So far, oil revenue has given Khamenei and the institutions under his control the opportunity to avoid a tax burden, but in a non-oil economy, any economic activity is transparent and taxable, especially the activities of institutions which control a huge part of Iran's economy and, in a sense, have taken the economy hostage.

By this logic, we should ask whether Khamenei, in wishing for an "economy without oil," appreciates the fact that it would oblige tax transparency for institutions across Iran? Is he willing to step back and unveil his huge economic organizations? Or does he mean something else when he speaks about "oil-free economy?"

Unsustainable alternative incomes are both temporary and detrimental in the long run. And since there is no sustainable solution, we must start by going through the unsustainable options. When a part of Iran's economy, confiscated by Khamenei, is not willing to pay taxes, the free sector of the economy is no longer able to cover government spending due to the recession, so there is no sign of any sustainable income.

The government hopes to compensate for the oil deficit through the unprecedented sale of government property on the one hand, and the sale of financial securities on the other. But government property is limited and ultimately meets the needs of the budget for one or two years; it will then drop off. On the other hand, the maturity of this year's bonds will finally come to an end, just as the maturity of the previous bonds is due. The government may be able to make ends meets in this year's budget, but the situation will definitely be far more critical in one or two years.

How much will it cost to free Iran from its oil shackles?

Until last year (despite US sanctions), the real dependence of Iran's budget on oil – including indirect oil revenues injected into the budget from the National Development Fund – was about 40 percent.

Therefore, the dream of freeing the budget from the shackles of oil and fulfilling the dream of building a non-oil economy is possible only if at least 40 percent of budget expenditures are eliminated. Is such a thing possible?

No. According to calculations by the Parliament Research Center this year, about 80 percent of expenditures are spent on salaries for employees and payments to state pensioners; this is around 292 thousand billion tumans [US$19.5 billion], which is equal to half of the total public budget.

This means that it is impossible to touch half of the country's budget unless the government fires its payroll workers or reduces payments to pensioners – which is unimaginable.

Of the remaining half of government expenditure, about 30 percent consists of development projects. Eliminating some of the development project is commonplace, but in the current fragile situation, cutting funding to development projects will increase unemployment and the bankruptcy of companies whose tax revenues are part of government revenue.

The "financial costs" account is also different because the provision of "financial resources," which is three times higher than projected costs, depends on the payment of expenses.

So there is no choice but to save 30 percent of the current budget. Part of the budget is spent on essential public sector projects such as health, with some spent research and education, other than salaries for education staff, and cannot be eliminated. The other part is military spending, which happens to be a major part. This year, during a crisis situation, the military and law enforcement agencies will have one-fifth of the country's total budget resources. Even if we remove the 35,000 billion tumans [US$2.3 billion] of social security payments for the armed forces, a significant amount is still available to military and security institutions. Among them, we can mention the budget of 33,000 billion tumans [US$2.2 billion] of the Revolution Guards, which has been increased by at least 6 thousand billion tumans [US$400 million] in the law approved by parliament’s synthesis committee.

In the current public health crisis,, it is impossible to reduce the health budget. The research budget is already negligible. In practice, after the elimination of salaries, there only remains a handful of executive programs, the elimination of which does not fix the problem. If there is a place to reduce costs, it is the budgets for the military and security agencies.

If the budget is to become independent from oil, reducing the military budget and eliminating the Revolutionary Guards and the paramilitary Basij is probably the wisest course of action. On the one hand, these institutions have their own economic organizations that can at least cover necessary expenses for several years; and like any other country, instead of the unnecessary cost of foreign adventures, taking the path of peace and reconciliation with neighbors and the world would reduce overwhelming security costs.

This is exactly the contradictory situation in which Khamenei finds himself. On the one hand, he celebrates the idea of an "economy without oil;” on the other hand, he is not willing to change his approach and the military and economic institutions under his control.

 

Read the first part of this report: Khamenei's Pipe Dream: A Future Free of Oil Dependency

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