The Impact of Reduced Development Budget on Employment in Iran

The Open Data Iran database is an innovation project aimed at collecting data related to Iran in one place and presenting it in easily accessible formats. Radio Farda, in collaboration with this entity, publishes a series of articles. Let’s start with the question: What does a decade of Iran's development budget and the performance of Iranian governments from 2007 to 2016 tell us about unemployment rates and the performance of the governments of Mahmoud Ahmadinejad and Hassan Rouhani? The Iranian government's development budget, unlike the current budget, is not allocated to daily consumption and government expenses. In other words, the development budget is part of the government's investment (excluding the oil industries which have a separate budget) that results in job creation and increased economic growth. First of all, it is necessary to clarify that contrary to public perception and despite the existence of a term called "development budget," such a title has not been used in the annual budget laws of Iran in the past decade. In fact, what is considered the criterion for the development budget is the ownership of capital assets, which is separated from non-produced assets (reserves and mineral resources). Nevertheless, due to the years of using the term development budget, this term has become established in the governmental and budgeting literature in Iran, and this report uses the same title, but it refers to the items related to the ownership of capital assets in the budget laws. Comparing Ahmadinejad's government performance with Rouhani's government To clarify the impact of inflation on the amount of Iran's development budget over a ten-year period, the development budget figures have been converted to a fixed number for the year 2011, which the Central Bank of Iran announces annually based on the inflation rate in the goods and services sector. The ten-year period under review begins in 2007, one and a half years after Mahmoud Ahmadinejad's first government took office. The amount of the development budget in this year was equivalent to 35 trillion tomans at the fixed rate of 2011. In this ten-year period, the development budget of Iran was higher only two other times, in 2009 and 2010. In those two years, global oil prices were at their highest, and Iran's economy, which is reliant on oil exports, was able to allocate more budget to development issues. As shown in Chart 1, Iran's development budget decreased consecutively in 2007 and 2008, coinciding with Ahmadinejad's first government. In the following two years, as mentioned, due to the increase in oil prices, the share of the development budget also increased. However, with the intensification of sanctions, we see that the development budget has been continuously decreasing from 2012 to 2015, and more importantly, when we look at the performance chart of the government that shows the actual expenditure in this area, we see a significant decline in 2012, where the performance reached its lowest figure in a decade, around 11 trillion tomans. Although in the following years, the proposed budget until 2016 continues to trend downward, we see that the performance of the budget improved slightly under Rouhani's government, increasing to about 17 trillion tomans. However, it still remains far from the years before the imposition of sanctions against Iran. Now let’s compare the performance percentage over this decade to see how much each of these two governments was able to realistically allocate their development budget each year. As Chart 2 shows, except for 2008 when the performance percentage reached its highest point of 96 percent, the performance percentage of the budget under Ahmadinejad showed a downward trend, while conversely, after Rouhani took office, this performance percentage showed an upward trend. Thus, it can be said that in the two years of 2014 and 2015, Rouhani's government managed to achieve a better record compared to the previous year while advancing its policies. It is essential to note for comparing the performance of the two governments, Ahmadinejad and Rouhani, that Rouhani's government was caught in a major disaster during these years, the effects of which have not yet fully manifested: economic sanctions. The impact of sanctions on the amount and execution of the development budget Iran's economy has faced an extensive and unprecedented system of sanctions since 2011, one of the main goals of which was to cut the Islamic Republic of Iran's access to its oil revenues. The drastic reduction in Iran's oil sales, which dropped from about 2.5 million barrels to 800,000 barrels per day by the end of the sanctions, and the unprecedented difficulties this country faced in accessing the resources from selling that amount of oil, negatively impacted the development budget and the government's ability to implement it. The extensive economic sanctions against Iran began in 2011 with UN Security Council sanctions and faced unilateral sanctions from countries (for example, the US, UK, and Japan) and EU sanctions. The Central Bank of Iran, entities related to Iran's oil industries, transportation companies including the Islamic Republic's shipping, were sanctioned, and multiple banking and financial restrictions peaked in 2013. In late 2013, the Iranian government reached a temporary agreement with six world powers and the EU, which halted some sanctions and ended the imposition of new sanctions. About two years later, in late 2015, the comprehensive nuclear agreement between Iran and six world powers (including the US, UK, France, China, and Russia, plus Germany and the EU) entered into force and ended the nuclear sanctions. The performance of the Iranian government in implementing the development budget in 2014, which largely occurred at the peak of the sanctions, was 40 percent. In 2015, when the issuance of new sanctions was halted and some of Iran's assets were released, the performance reached nearly 58 percent, but in the following year, when the final agreement had not yet been reached, it dropped again to about 50 percent. In 2016, which was the first year without nuclear sanctions under Rouhani's government, the government's performance in implementing the development budget reached 73 percent. The return of Iran's economy to the pre-sanction era and, for example, the recovery of the lost oil export market, although it was not immediately possible after the sanctions ended, is evident in the increased development budget and the government’s success in implementing it. Other indicators that show the detrimental impact of sanctions on Iran's economy include the unemployment rate over these ten years. The relationship between the amount of budget and performance with job creation A look at the development budget chart over the past ten years shows that the development budget has significantly decreased with the start of Hassan Rouhani's government compared to the years before it, but the unemployment rate in these two periods is very similar. In other words, although Rouhani's government has invested less in the development budget than Ahmadinejad's government, it has performed similarly in controlling the unemployment rate. The unemployment rate in the ten-year period covered in this report has never fallen below 10 percent and has not risen above 14 percent. We observe that even the better performance of Rouhani's government after the JCPOA did not have a positive impact on reducing the unemployment rate in that year, one of the reasons being the severe inflationary recession in Iran's economy. Conclusion Despite the cessation of unprecedented economic sanctions and the improved performance of the government in implementing the development budget despite the reduction in the budget amount over the past ten years, it has not been able to improve the employment situation. The significant inflation rate, especially in the middle years of the ten-year period discussed in this report, has limited and constrained the effectiveness and power of the development budget so that, accounting for annual inflation, the value of Iran's development budget in the last year, 2016, was about 30 percent less than in the first year, 2007. In other words, accounting for the annual inflation rate, the value of Iran's development budget has gradually decreased over the past decade. According to the targets set in the Fourth Development Plan, the Iranian government was obliged to reduce the unemployment rate to 8.4 percent by the end of the last year of the plan, which was 2009, while the unemployment rate in that year was close to 12 percent. The Fifth Development Plan also obligated the government to reduce the unemployment rate to 7 percent by the end of the plan, which was 2015, while this figure was recorded at 11 percent in that year. This trend indicates that the Iranian government needs to significantly increase its development budget in the coming years to be able to invest more and get closer to the targets of the Sixth Development Plan and the forecasted unemployment rate of 8.6 percent for the year 2021.