With oil sales hobbled, Iran faces tough budget choices

Iran looks to cut benefits and overhaul taxes as United States sanctions ravage its economy.

Iranian rial currency notes are seen at a market in the holy Shi''ite city of Najaf, Iraq September 22, 2019. REUTERS/Alaa al-Marjani
Low- and middle-income Iranians are grappling with a contracting economy and a currency that has only recovered partially after having lost some 60 percent of its value last year [File: Alaa al-Marjani/Reuters]

“Dear head of the household, your subsidies have been eliminated”.

That was the text message sent to hundreds of thousands of Iranians over the summer informing them that they and their dependents were no longer eligible for monthly cash subsidies from the government.

Some 78 million of Iran‘s 83 million citizens receive government cash handouts of around 455,000 rials ($10.8) a month under a programme launched in 2010 by former populist President Mahmoud Ahmadinejad.

Eliminating that benefit, at least for the wealthy, has been on the agenda of President Hassan Rouhani‘s administration for years. So has reforming Iran’s tax code. But with United States sanctions ravaging Iran’s economy and slowing oil sales to a trickle, the need to turn belt-tightening talk into action is urgent.

The budget chasm

Global benchmark crude is trading around $62 a barrel. Iran needs it to fetch upward of $196 to balance its budget next year, says the International Monetary Fund (IMF).

Tehran has run deficits for years. But the fiscal gap started widening into a chasm last year when Washington signalled that it would unilaterally withdraw from the nuclear deal with world powers and reinstate sanctions on Iran’s oil and banking sectors. Iran’s currency, the rial, spiralled downward as financial markets around the world prepared for the US Department of the Treasury to blackball Iran from the global banking system and strangle exports of its biggest money-spinner – oil.

A year ago on Tuesday, the Trump administration levied those sanctions as part of its “maximum pressure” campaign to force Iran back to the negotiating table.

Instead, Iran has been reducing its commitments under the accord, with the latest step back happening on Wednesday, when President Rouhani announced that Iran would start enriching uranium again at its Fordow nuclear facility.

But sanctions have nevertheless pounded Iran’s economy, shrinking tax revenues, gutting government coffers and heaping pain on low- and middle-income families grappling with high inflation and double-digit unemployment.

Iran’s economy is on track to contract 9.5 percent this year, says the IMF. Oil sales have been gutted and the rial, which lost more than 60 percent of its value last year, has only partially recovered.

Housing costs have also soared as Iranians, keen to shelter their earnings from inflation, plough their money into real estate and other assets.

For struggling familes, one cash payout can purchase a kilogramme (2.2lb) of Iranian rice with change to spare. Three individual monthly payments can buy a kilogramme of red meat.

Losing that benefit in such an environment is enough to derail a vulnerable household’s finances, but the government says only well-off households will be affected.

“I’d like to reassure you again that only the wealthy will have their subsidies cut and not even the middle class will be subject to this,” government spokesperson Ali Rabiei said in September.

To determine whether a household is no longer eligible for cash subsidies, the government looks at both income and assets including cars and real estate. Less tangible benchmarks of wealth are also taken into consideration, such as the number of foreign trips a household makes abroad.

Payam, who asked Al Jazeera to withhold his surname to protect his privacy, is a 41-year-old head of a household of three who will keep the cash subsidies. He says he’s fortunate enough to be able to get by without them, but he feels for other families who depend on the benefit for basic necessities.

“I imagine every bit counts for some families,” he said.

One government economist argues that the near-universal handout is not an optimal safety net for low-income families.

“These subsidies, in addition to at least fuel subsidies, should immediately be eliminated for all citizens and a new framework should be devised to help low-income families,” said Mohammad Mahidashti, an economist with Iran’s Ministry of Economic Affairs and Finance.

Though he predicts that a policy overhaul would invite “short-term social and political tensions,” Mahidashti says the economic pressure felt by the estimated one million wealthy Iranians who will lose the benefit would not be as severe as the currency crisis that roiled the country last year.

“Due to a sharp increase in general prices, the purchasing power of cash subsidies for individuals has become insignificant, but it is still a very significant volume for the government,” Mahidashti told Al Jazeera.

Beyond oil

Iran is conducting limited oil sales under the radar, which makes it difficult to pinpoint exactly how big of a hit the sector has taken. But in August, US Secretary of State Mike Pompeo said sanctions had managed to take almost 2.7 million barrels a day of Iranian crude off the market, costing Tehran billions in lost revenue.

Government coffers have been so squeezed that in early February, Parliament Speaker Ali Larijani created a media frenzy when he announced that Supreme Leader Ayatollah Ali Khamenei had personally called for “structural reforms” to Iran’s budget.

Since then, Mohammad Baqer Nobakht, head of Iran’s Plan and Budget Organization, has said that oil revenues will fund only 10 percent of the budget for the next Iranian fiscal year starting March 21, 2020, and be solely earmarked for infrastructure projects.

To offset the loss of revenue, the government plans to rein in visible and hidden subsidies totalling 13 quadrillion rials ($309bn), he said.

Tax reform is also under consideration, including eliminating tax-exempt status for some entities, and introducing new tax on capital gains and empty homes.

“About 40 percent of the Iranian government’s expenses are accounted for through taxes, a ratio that is much lower than most developed countries,” government economist Mahidashti said. “In the medium-term, this ratio could reach 50 percent through eliminating exemptions and increasing efficiency in tax collection, but would still not fully account for the missing oil revenues”.

The new budget bill is expected to be unveiled on Wednesday.

Source: Al Jazeera