October 30, 2020
The Rohani Administration has decided to sell crude oil to individual citizens in yet another effort to raise revenues to close the yawning budget deficit—but vocal opposition has put the initiative on hold for now.
The president’s chief of staff, Mahmud Vaezi, said anyone “can buy as many as 50,000 to 100,000 barrels of oil on the energy stock market and get a small ship and export it.” But such shipments would still be subject to US sanctions. Vaezi did not explain why he thought a private citizen could sell oil that the government is unable to sell.
In addition to such large purchases, individual citizens can also buy as little as a single barrel to show their patriotism and support for the regime. The Financial Tribune said the Rohani goal was to sell 220 million barrels of oil over the next year. That would be the equivalent of two months’ worth of production in normal times, that is, before the imposition of sanctions. If the sale works, it would generate 2 quadrillion rials ($9 billion) for the government and plug the deficit gap, officials said.
The government would buy the oil back after the US embargo on Iranian oil sales is lifted. Assuming the price of oil goes up by then, citizens would profit. But if the price of oil should decline, the government said it would buy back the oil at the price the people paid for it, guaranteeing them against any loss—an unheard of guarantee against investment loss.
Across the political aisle, parliamentarians with conservative party affiliations who are long-standing political opponents of President Rohani have criticized the oil sale plan over the possible long-term consequences for inflation.
The Energy Committee of the Majlis submitted a letter to the speaker asking him to warn the government about its hasty decisions, the Mehr news agency reported.
The Financial Tribune said both Majlis Speaker Moham-mad-Baqer Qalibaf and Judiciary Chairman Ebrahim Raisi opposed the Rohani plan and wrote a joint letter to the Supreme Leader making their opposition known.
With that opposition, Vice President Mohammad-Baqer Nobakht announced August 21 that the plan had been put on hold.
Rohani had announced the plan in a session with his cabinet members August 12, saying it is “a safer investment for the people” than buying gold or foreign exchange.
The complex economic conditions of the country have made the selling of oil on the international market a Herculean task, but experts say they are suspicious about the long-term success of the plan to market oil to individual citizens.
What’s more, the government seems to have come up with two plans—the one announced by Rohani to sell oil by the barrel, and a competing plan from the National Iranian Oil Co. (NIOC) to market bonds backed by crude oil.
Iranian economist Mousa Ghaninejad told ABC News that while selling bonds is a standard tool that a government can use to help with a budget deficit, he does not see the oil sale gimmick as a viable option.
“It sounds like there are people in the administration who want to reinvent the wheel from scratch. It is not how the global economy works” he added, saying the plan is “vague and unclear.”
The head of the energy stock market, Ali Hosseini, said NIOC oil would be offered on the market starting August 16. But that morning, the start of the sales was postponed, with no new date announced. “They are two-year bonds with an interest rate of around 19 percent,” Hosseini said of the NIOC plan.
However, Ghaninejad said the two-year bonds are not the most sensible option for most people.
“With an inflation rate of around 50 percent [inflation is actually about 40 percent now], no wise business person would buy a two-year bond with a 19 percent interest rate. It means they have to bear around 30 percent of negative interest,” he said. “If the government mandates the banks to buy the bonds and shares, then the banks have to borrow money from the Central Bank to compensate for their loss in the coming years, which means more inflation,” Ghani-ßnejad explained.
The governor of the Central Bank, Abdolnasser Hemmati, said the country is running out of options to cover the budget deficit.
Hemmati wrote in an Insta-gram post that the government has four methods to remedy the deficit: “reducing expenses, increasing tax revenues, selling government assets, and issuing bonds or selling sanctioned goods such as crude oil.”
Saying the first two options are poor choices and the third is already being implemented, he believes issuing bonds and selling oil is the preferred option now as the bonds are “less costly and more manageable for the government.”
Technically, under the Rohani plan, citizens would not be buying actual oil, but purchasing “parallel salaf contracts,” a standard practice in Islamic finance that is roughly the equivalent of futures contracts.