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Economy + Policy E1:R1

Economy + Policy E1:R1

Key Developments

◢ Salary scandal puts Rouhani's commitment to clean government to the test

◢ New budget amendments pursued as in effort to boost banks through repayment of long-owed government debts


 

The Battle for Responsible Government

The recent scandal over the high salaries of top directors at Iranian state-affiliated companies has brought economic mismanagement and chronic corruption into the public debate. The debate has been fueled by competition between different political camps ahead of next year’s presidential elections. The salary scandal has been used by critics of President Hassan Rouhani to question the integrity of his administration and its capacity to manage Iran’s economy. 

The salary scandal stems from a historical sensitivity in Iran to economic inequality. The Islamic Republic has sought to limit inequality as a matter of economic policy, most notably by instituting wide ranging welfare programs. Executive pay is itself governed by a law that mandates that the highest salary at any government owned enterprise can be no more than 10 times that of the lowest.

Leaked documents and payslips revealed that senior executives at many leading government companies were being paid up to 1,000 times the lowest salary in the organization. The revelations created uproar and led to a series of resignations at some of the countries leading banks, including Mellat, Saderat, Refah, and Mehr.

The Rouhani administration initially questioned the authenticity of the leaked documents in the media, and tried to deflect the criticism as politically motivated. However, as further revelations came to light, and with the Supreme Leader Khamenei demanding firm action, Rouhani changed tact. The government devised a precise and efficient mechanism to trim the salaries of state directors, capping monthly salaries at $6,250. The government also took immediate steps to investigate the directors suspected to have engineered high salaries and removed those who were found to have violated rules through forced resignations.

President Rouhani, mindful that effective management of the economy remains the most important political issue for post-sanctions Iran, has since taken direct responsibility for the scandal. His primary aim is to distinguish his administration from that of the previous president, Mahmoud Ahmadinejad, whose tenure was marked by high levels of corruption in state enterprises. Rouhani has sought to cultivate an image of courageous and responsible government, and a strong response to the salary scandal was necessary.

The question is whether the salary scandal, and the clearing out of senior leadership from key state firms, may act as the impetus for a wider program to improve transparency among government agencies and enterprises. Despite the sensitivity to issues of economic injustice among the Iranian electorate, no Iranian administration has been able to significantly reduce levels of corruption and cronyism. Some observers expect Rouhani to make the fight against corruption a central tenant of his reelection efforts, but a more structured program to create responsible government has yet to emerge.

Amending the Budget

The Rouhani administration has sent several proposed amendments to its budget bill for the current Iranian calendar year of 1395 (21 March 2016-2017) to the parliament. Although the budget bill had been approved roughly 40 days ago by the previous sitting of parliament, the amendments were deemed necessary in the face of changing macroeconomic conditions and reflect two notes that were rejected from an earlier version of the bill.

The most important amendment stems from concerns about the capitalization of Iran’s banking sector. A high debt-load and limited reserves have put Iran’s banks in a precarious position. The governments own debts to the Iranian banking sector are estimated to range between IRR 3.8 quadrillion to IRR 5.4 quadrillion.

The possibility of quantitative easing or a more complete “bail-out,” has been mooted for several years and the latest amendment is aimed at earmarking more funds for such monetary interventions ahead of an urgent need. The amendments are necessitated in part by the slow pace of capital inflows from Europe following the lifting of sanctions earlier this year.

While recapitalization mechanisms were part of the budget originally presented to parliament they were rejected. Note 19 covered the government’s ability to use the extra revenues that it obtains from the net re-evaluation of foreign assets to pay its debts to the Central Bank of Iran (CBI) as well as other Iranian banks. Note 20 concerned the issuing of Islamic government bonds to increase the pool of working capital, and also to enable the government to pay long-standing debts to organizations and contractors. The bond offering is meant to raise IRR 300 trillion (revised from an original target of IRR 400 trillion), just a fraction of the government’s debts, but an initial step to show the ability to make payments in good faith, meanwhile putting capital back in the hands of enterprises. As the Rouhani administration evaluates the central role that government expenditure will play in turning the engine of the Iranian economy, additional resources are clearly necessary.

However, there is also speculation that the administration will reverse an earlier move to streamline the budget and reduce welfare spending by asking parliament to reverse a previously agreed cut to cash handouts effecting 24 million Iranians. As the presidential election approaches, the slow pace of economic recovery has left Rouhani vulnerable to dissatisfaction among lower-class voters. The administration seems ready to slow down a key aspect of their economic reforms—the reduction of welfare programs—ahead of this election.

Rouhani has been laying the groundwork for these amendments for some time, having stated publically that the amendments would include two articles for “improving banking issues” and “paying the government’s debts to banks and contractors.” However, there is expected to be competition around any amendments that strengthen the reform capacity of the Rouhani administration. Given the importance of these amendments for investor confidence and for the continuation of Rouhani’s economic reform plan, it is expected that parliament will approve the amendments

Financial Markets E1:R1

Financial Markets E1:R1