Iran plans a 200 percent increase in military spending in an upcoming budget, a spokesperson said on Tuesday, and will aim to boost revenue through higher taxes despite a big deficit and a moribund currency besetting the economy.
"The military budget has increased by almost 200 percent. We hope this meets our security needs and those of the country’s military,” President Masoud Pezeshkian's spokesperson Fatemeh Mohajerani said of the proposed budget on Tuesday.
The Iranian rial hovered near all-time lows around the time of the announcement. It had plumbed lower depths after archenemy Israel on Saturday launched its biggest ever attack on the Islamic Republic, prompting calls by officials to beef up defenses.
A new report from Iran’s Parliamentary Research Center reveals that at least 20 percent of the government’s oil revenue is lost in efforts to bypass US sanctions, confirming previous reports by Iran International on the scale of revenue losses in oil exports.
The Parliament Research Center’s report highlights that in the first four months of the current Iranian fiscal year, 23 percent of the government's planned 4-month budget went unrealized. Despite the government’s extensive, unscheduled borrowing from the National Development Fund (NDF), it is projected to still face a budget deficit of approximately 880 trillion rials (equivalent to $3 billion at this year's official exchange rate of 285,000 rials per dollar) by the end of the year.
Next year starting March 21, the proposed budget will reach $105 billion, calculated on 550,000 rials per one dollar. The deficit will be around 30%, bridged by a variety of ways, including borrowing from banks, issuing bonds and diverting oil revenues from the share of the sovereign national fund, as well as up to 40% higher taxes.
According to estimates from the Parliament Research Center, despite these measures the projected budget deficit for the upcoming year may reach approximately $5.8 billion.
Components of Next Year’s Budget Bill
In the 2025-2026 budget, 33 percent will rely on tax revenues, 18 percent on the sale of bonds and government assets, and 45 percent on oil and gas revenues as well as borrowing from the National Development Fund (NDF). Borrowing from the banks is not even mentioned in the draft bill as part of the deficit, but rather as revenue. This borrowing leads to printing money, since the banks are directly and indirectly state owned and have no money of their own to lend to the government.
The proposed 39 percent tax increase in next year’s budget bill comes at a time when the country is facing over 40 percent inflation, while the government plans to raise public employee salaries by only 20 percent, with similar increases set for labor wages.
On the other hand, the projected 85 percent increase in customs revenue will significantly raise the prices of imported goods, worsening the overall living conditions for the public.
The government also intends to increase bond issuance by 96 percent to cover 11.7 percent of the budget, or more than 10%, effectively borrowing further from the banking system, which will lead to higher liquidity and inflation.
Additionally, the government plans to obtain a substantial portion of the National Development Fund’s 48 percent share of oil export revenue in the form of loans. So far, the government has borrowed $100 billion from this fund—initially established as a nest egg for future generations—and is currently unable to repay this debt.
Oil Revenue Details
Budget revenue from domestic sales of oil and gas products in next year’s budget bill is projected to reach $16.5 billion, a 14 percent increase over this year. The government plans to raise gasoline prices next year, though the exact increase is not specified in the budget bill or in the report from the Parliament Research Center.
The last time the government imposed a significant gasoline price hike in 2019, widespread public protests erupted, followed by a severe crackdown by security and military forces, resulting in the deaths of 1,500 civilians.
The government also aims to export 16 billion cubic meters of gas next year, valued at $5.2 billion. The Parliament Research Center states that, due to a severe gas shortage, only 75 percent of this target is likely to be realized.
Additionally, for the coming year, the government forecasts total daily oil and gas condensate exports to reach 1.85 million barrels, which will be allocated among the government, the armed forces and their special projects, the National Development Fund, and the National Iranian Oil Company (NIOC).
Tanker tracking companies put the Iranian oil export volume in 9 months of 2024 at about 1.5 mb/d.
A notable figure in the distribution of oil export shares is that of the armed forces, which has quadrupled compared to the initial version of this year’s budget law. However, the report from the Parliament Research Center reveals that the government, without public announcement, has significantly increased the armed forces' share in the initial budget law of current year. Consequently, next year, the armed forces’ share of oil exports will increase by only 24 percent compared to this year.
A critical point in the Parliament Research Center's report is that the government has set the price of oil at $63 per barrel for next year's budget, but Research Center says it is unlikely to sell for more than $60. Given the current oil price of around $70 per barrel in international markets, it seems more than 20 percent of the government’s oil export revenue will be lost due to sanctions evasion and discounts to Chinese customers.
The report does not address the realization of oil revenues for the armed forces. However, Iran International recently reviewed three oil trading documents from "Thunder Sahara Company," affiliated with Iran's armed forces, showing that half of the export oil value managed by this shell company is lost in the process of circumventing sanctions.
The Parliament Research Center also states that the oil export shares allocated to the government, NDF, and NIOC amount to a total 1.25 mb/d. However, actual exports are likely to reach no more than 1.1 mb/d.