News ID: 110275
Published: 0347 GMT January 26, 2015

Antidote of declining petrodollars

Antidote of declining petrodollars

Since Iran's economy is heavily dependent on oil revenues, a likely budget deficit in the upcoming fiscal year (to start March 2015) is being hotly debated.

Oil prices have tumbled below $50 per barrel, down by 60 percent from their June 2014 peaks.

The Iranian government has set oil prices at $72 per barrel in the next year's draft budget bill submitted to the legislature in early December.

This is while crude prices are projected to fluctuate between $50 and $55 for 2015, which has prompted officials to explore ways of preventing a budget deficit or blunting its fallout.

Hence, a number of scenarios have been proposed to forestall a budget deficit.

In the first scenario, some lawmakers have suggested that the government increase fuel prices and slash state subsidies granted to a large number of people.

According to Majlis ratifications, fuel prices should reach 90 percent of the Persian Gulf FOB prices. Since the Persian Gulf FOB prices are hardly more than the unsubsidized fuel sold in gas stations, the government cannot count on such revenues.

The administration has been authorized to increase household gas prices, but it has not devised any plans in this regard. This is because the government seeks to ensure household welfare.

The monthly cash subsidies paid to the rich could also be cut to offset a likely budget deficit. However, no mechanism has been formulated so far.

Second, the government can review oil prices in the draft budget bill and reset them at $55 per barrel. However, such a motion has been rejected for two reasons: The administration would have to prepare a new draft budget bill and crude prices might further decline to under $55 and create a fresh round of upheavals.

Third, economic pundits have suggested that the National Development Fund be used to compensate for the declining oil revenues. The fund can compensate the reduced state revenues, although the government must return the money as soon as oil prices rebound.

Fourth, oil prices remain at $72 in the budget bill, but the administration should redirect development projects to prevent a budget deficit.

Reports indicate that the government is planning to review the expenditures of development projects to make up for the budget deficit.

Only time will show what measures will be taken by the government to offset the decline in petrodollars.

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