Iran Government planing to get monthly taxes from its central bank!

Iran government has put up a proposal which will require the central bank to wire 50% of its profits immediately to the government. These payments will be paid as monthly taxes.

In the initial budget draft, due to the expected difference between rates set in the budget law and open market rates, the government had predicted about 100 trillion rials ($2.38 billion) in currency revaluation profits from oil sales to be extracted from the central bank in the form of monthly taxes. Members of parliament took this out of the budget draft due to ambiguities, and the fact that the central bank would need to first assess its performance by yearend to pay up.

Fast forward a year and a hefty government resource crunch later, and the tax proposal has come back to bite the central bank again. On Feb. 3, parliamentarians ratified an amendment to the annual budget law that legally binds the central bank to immediately wire 50% of its currency revaluation profits to the government treasury as taxes. The amendment is seemingly the product of lobbying by factions of the government, specifically the Management and Planning Organization, as a cash-hungry government faces the prospect of public demand for goods and services in the run-up to the Iranian New Year holidays next month.

But in trying to keep face and provide for public needs, the government and parliament will be effectively strong-arming the central bank into exacerbating an inflation rate that some estimates put at higher than 40%. That will make life more difficult for many more middle- and lower-class Iranians.

Interestingly, the central bank is in a loss and any such proposal means printing money:

Indeed, this was effectively the message that central bank chief Abdolnaser Hemmati tried to convey to lawmakers when he went to parliament to argue against approving the amendment days before it was passed. As he stated, the budget law currently envisions central bank profits from revaluation of oil revenues for the current year at 186 trillion rials ($4.42 billion). So, the central bank would have to pay the treasury roughly 93 trillion rials ($2.21 billion). That would be fine had the central bank generated that revenue, but as Hemmati told lawmakers, the central bank’s currency performance this year has actually left it with a deficit of 24 trillion rials ($571 million).

In order for the central bank to pay that amount to the treasury, it would have to print a significant sum of “strong money.” That, he said, would increase the monetary base by 6-7% by yearend. This is of note, as taming the rampant money supply — which steadily grew by an alarming 30% annual rate for a decade, until about two years ago, and is still rising by 21% yearly — is a major government focus. Total liquidity stood at a whopping 17.252 quadrillion rials ($411 billion), according to the latest central bank report for the eighth Iranian month (running Oct. 23-Nov. 21, 2018).

The form of monetisation may change, the outcomes are similar…

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