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By Farhad Daneshvar/ Trend

Iranian President Hassan Rouhani’s proposed conservative state budget of about $104 billion for next year has caused concerns over its possible contribution to a rise in the country’s inflation and unemployment rates.

In order to reduce its budget deficit the administration is apparently planning to borrow money from the National Development Fund of Iran (NDFI) over the coming fiscal year (starting March 20).

While the bill has reduced the government’s projected oil income by 10.5 percent (about $28.8 billion), the administration is supposed to transfer about 32 percent of its oil revenues to the NDFI.

The administration says the bill seeks to reduce the budget deficit through increasing the prices of commodities including energy carriers.

National development fund’s role in economy

The budget plans of Iranian administrations over the past decades have heavily relied on oil incomes.

Having a look at the budgets of the governments, the one can easily find out that any changes in the country’s oil incomes in both, increase and decrease, have left a negative impact on the inflation rate.

Administrations increased their spending when they saw a hike in oil incomes, as a result the country’s current and development budgets as well as the resources of the Central Bank grew which eventually caused a rise in the inflation rate.

In fact the governments’ interest in spending their revenues over the past four decades was among the main reasons behind growing inflation rate in the country.

On the other hand a drop in the oil income also pushed up the inflation rate due to the governments’ failure in reducing expenditures according to the occurred decline in income. In this case the governments had to borrow more money which fueled the inflation.

Concerning the issue of oil incomes the national development fund appears capable of playing a key role as many believe that the income from the oil exports must directly go to the NDFI and the government’s current spending should be covered from its income from tax, customs duties and shares’ dividends. In this model the income from the oil sales should go to making profitable investments that could generate higher revenue and taxes in future without leaving any negative impact on the inflation rate.

Unemployment rate

The country’s unemployment rate in summer stood at 11.7 percent which means about 3.1 million individuals were unemployed.

Unemployment in the country is thought to be triggered due to a drop in the amount of investment in the country by the government and private sector.

Over the past 12 years the governments have failed to prepare proper business environment for the private sector which resulted in a decline in the amount of investment.

The Rouhani administration adopted anti-inflationary policies over the past four years which slipped the country into a deep recession and aggravated the unemployment rate. The inflation rate in Iran’s urban areas for the 12-month period to Nov. 22 stood at 9.9 percent.

Obviously the real economic development in the country will not take place unless the private sector turns into a main force in the economy.

Long-term policies

In addition to inflation issue, Iran’s economy is seriously suffering from shortcomings in financial and economic policymaking.

While slower economic growth than trading partners, high governmental spending and high unemployment rate are among the typical factors contributing to budget deficits, the economy can counter budget deficits by promoting economic growth, reducing government spending and increasing taxes.

This is while cutting back on certain expenditures and increasing revenue-generating activities could help the government correct budget deficit.

It appears that the country’s policymakers need to adopt long-term polices aimed at lessening the country’s reliance on oil incomes and increasing the role of non-oil sector in the economy.

A decision on the gradual correction of the prices of commodities in particular the energy carriers as well as the government services may lead to a hike in the prices but it will probably perform as anti-inflationary measure due to its role in helping the administration tackle the budget deficit.

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