Although Iran has taken steps since 2000 to improve its fiscal policy transparency, it is not currently in compliance with International Monetary Fund (IMF) fiscal transparency standards. It does not meet the specifications required to subscribe to either the IMF's Special Data Dissemination Standard or the less rigorous General Data Dissemination System. While implicit energy subsidies are now acknowledged in the annual budget (since 2002), other implicit subsidies, such as those to the "revolutionary foundations" remain off-budget, distorting the fiscal picture. The adoption of General Financial Statistics Manual (2001) categories for the reporting of core government operations is a good first step, but this practice should be extended to all agencies involved in the budget process. The cash-based accounting system needs to be improved upon, as well. The budget process must be streamlined, and the Five-Year Plan should be revisited annually to account for and accommodate changes that may materially affect its assumptions and estimates.

General Overview

In 2002, the International Monetary Fund (IMF) published a Report on the Observance of Standards and Codes (ROSC) covering Iran's achievements in fiscal policy transparency. Due to the vast and complex Iranian public sector, wherein the central and local government agencies, public enterprises, "revolutionary foundations," and state-owned banks are deeply intertwined, transparency is very low. Beginning in 2000, at the inception of a 5-year Development Plan, authorities have taken some steps toward improving the budget process, in an effort to raise the level of fiscal transparency, particularly by including a number of implicit subsidies in the formal budget and eliminating the use of multiple exchange rates. In addition, Iran has instituted a strong legal framework to underpin its audit function for the public sector, adopted international auditing standards, and now follows a budget classification structure based on the principles of the Government Financial Statistics Manual of 2001 (GFSM2001). Iran is not a subscriber to the IMF's Special Data Dissemination System (SDDS) or the General Data Dissemination Standard (GDDS), but in the course of the IMF's 2004 IMF Article IV Consultation, Iranian Authorities did express a commitment to complying with SDDS principles of coverage, periodicity, and timeliness.

At the time of the IMF's 2002 ROSC, Iran's deficiencies in fiscal data reporting and transparency were identified as fivefold. First, the GFMS2001 principles need to be extended for use in data reporting throughout the government and all aspects of the public sector, not restricted to use in the budget itself. Second, the administrative and financial relationships across the central and local government, state-owned enterprises, and nongovernmental public institutions need to be made more explicit. Third, the accounting processes need enhancement, and the quality of fiscal data needs to be improved. Fourth, the procedures for budget management, including the roles of various agencies, parliament, and the public, need to be clarified. Finally, the dissemination of fiscal data, both in terms of timeliness and content, must be improved.

A central issue contributing to Iran's lack of fiscal policy transparency has been the government's dependency on oil revenues to prop up public finances. Further complicating the issue, according to the IMF's 2006 Article IV consultation (published in 2007), has been the persistence of strong political pressure to address economic and social demands through ever-increasing levels of public expenditure. The 2004 Article IV Consultation report noted that the government had initiated reforms intended to reduce its dependency on oil dollars, including tax reforms to improve non-oil revenues, the creation of an Oil Stabilization Fund (OSF) to reduce the fiscal impact of volatility in oil prices, and certain other, administrative reforms. The requirement that "revolutionary foundations" (long opaque, but whose operations had profound distorting effects on fiscal policy) submit to, and publish, annual audits was judged to be a major achievement. The IMF's 2007 publication also recognized that advances in these areas have enhanced transparency. Particular improvements have occurred in the area of broadening the tax base beyond oil revenues and the empowerment of the OSF. The 2007 IMF report noted, however, that, "containing current expenditures and phasing out subsidies has proven difficult, as the authorities continue to face strong political pressure to increase spending in order to promote growth and reduce unemployment" (p. 6). The report strongly recommended that Iran continue to strengthen the role of the budget as the primary fiscal policy instrument. It cautioned that, "frequent recourse to the OSF to finance additional spending and lend resources to the private sector should be avoided, and consideration should be given to transferring net lending operations to the budget to improve transparency and strengthen fiscal management (p. 21).

That the Iranian government continues to rely on OSF expenditures, and the executive branch's intervention in areas of ostensible CBI responsibility has led to a recent ministerial upheaval. In mid-August 2007, the Minister of Oil was fired for his opposition to President Ahmadinejad's policy of redistribution of oil revenues (rather than reinvestment), and the Minister of Industry resigned his post after voicing similar disagreements. CBI Governor Ebrahim Sheibani was also vocal is his opposition to the intrusion of the government's political agenda in the conduct of CBI policy. Following Ahmadinejad's unilateral decision to dramatically lower interest rates, it was widely reported in the financial and regional news outlets that Sheibani had resigned the CBI Governorship in protest. On August 26, 2007, President Ahmadinejad announced his acceptance of Sheibani's resignation.

The Principles

Clarity of roles and responsibilities.

NC

The Iranian Constitution clearly defines the roles and responsibilities of the executive, legislative, and judicial branches. However, the IMF's 2002 ROSC notes that other constitutional bodies are closely implicated in fiscal policy, but that their roles are not clearly defined. Further, a large portion of public sector expenditures are handled through extra-budgetary funds, which are not accounted for in the official budget documents. The report also cautions against the limited independence of Iran's central bank and its implication in the fiscal policy process. Similarly, the fact that the bulk of Iran's banks are state-owned and actively used in fiscal operations was seen by the authors of the 2002 ROSC as problematic. While reforms initiated in 2000 have reduced the government's reliance on quasi-fiscal activities (mainly through the elimination of multiple exchange rates), these still constitute a substantial part of fiscal operations. Finally, the ROSC noted that there is too much inconsistency in the categorizations used by the various government agencies at all levels, as well as by partially or wholly state-owned entities, with significant negative implications for transparency.

The IMF's 2002 ROSC did note that there is a relatively clear legal foundation underpinning the system of taxation and for government administration. It cautions, however, that these laws may not always be reliably enforced. The same may be said with regard to ethical standards. There is a law against bribing public officials, and there are requirements, such as the disclosure of assets by high-ranking public officials and civil servants, that aim to reduce corruption. Within the Ministry of Economic and Financial Affairs, a formal disciplinary committee is empowered to deal with breach-of-conduct issues alleged against officials in the departments of taxation, customs, and in the treasury. The practical application of these measures, however, is uncertain.

Particularly problematic, according to the 2002 ROSC, is the fact that there is no clear definition of the role played by the central bank and its agencies on the government's behalf. Further, to comply with international best practices, there should be "an arm's length relationship between the government as the owner and the state-owned enterprises, to enable them to operate on a commercial basis, with the full cost of their Quasi-Fiscal Activities (QFAs) covered by the budget" (p. 19). Finally, the budget process should be reformed such that disclosure is made of the financial operations of currently excluded non-government public institutions such as municipalities, the social security fund, and the "revolutionary foundations" (bonyads).

Open budget processes

NC

The annual President's Report contains the policy objectives of the annual budget, which form a part of the larger Five-Year Development Plan, according to the 2002 IMF ROSC. The budget documents do not analyze fiscal sustainability or potential risks that might affect key variables on which budget estimates are based. Although the annual budget is intended to function within a larger, five-year plan framework, the 2002 ROSC argues that its position within that longer-range plan lacks coherence, because the five-year plan is not updated to account for actual events. The 2000-2004 Five Year Plan helped to strengthen the budget process. Beginning in the 2002-2003 budget year, Iran adopted a system of classifications in some of its central government ministry budgets which the IMF ROSC judged to be broadly consistent with international standards. A cash-based accounting system is used, which inhibits the development of data on certain liabilities. There procurement process is not uniformly applied across the government's various ministries and agencies, and there is no legislation to insulate the offices of taxation and customs from political manipulation, according to the ROSC.

The 2002 IMF ROSC further cautions that the Treasury does not produce monthly revenue and expenditure reports, nor does it issue a mid-year report on implementation. There is no regular schedule for the issuance of updated macroeconomic forecasts or other periodic reports that would allow Parliament to assess divergences from original budget expectations. The ROSC notes, however, that the Parliament, Central Bank, and Management and Planning Organization can call upon the Treasury to generate reports on revenues and expenditures, should any or all of them so desire. The central government's annual accounts are compiled and presented to the Parliament by the Ministry of Economic and Financial affairs within about 12 months from the close of the target year. The accounts must be certified by the Supreme Audit Court, after which the final version is again presented to Parliament. This latter procedure takes an additional six to twelve months.

All nongovernmental public institutions are in need of substantial improvement, according to the 2002 ROSC. At present, data on municipal budgets are excluded from the annual budget, and these, too, should be added. The ROSC further recommends steps be taken to improve the timeliness and quality of fiscal data. For instance, the formal presentation of the governments annual accounts of fiscal operations should be done only after the Supreme Audit Court has affixed its audit opinion, and this should be accomplished no later than 12 months after the end of the year in question. In addition, the IMF ROSC recommended that "the existing cash-based accounting system should be upgraded to enable recording of expenditures at the pre-payment stage" (p. 21).The IMF report also suggested that the Five-Year Plan be revisited during each interim year to accommodate any necessary updates that would reflect the real-world impact of events and outturns on fiscal estimates. The assumptions underlying the budget framework should be explicitly stated, and real expenditure caps should be set for each budget manager. Sufficient detail should be provided so that the Parliament's budget committee can appropriately evaluate the budget document when it is presented.

The IMF's 2007 publication acknowledges some progress that has been made in Iran's approach to the budget process. Budget classifications for core central government operations now conform to the GFSM2001, although this practice should be extended to all ministries and agencies contributing to the budget document. The 2003-2004 budget was the first to include coverage of implicit energy subsidies, but other implicit subsidies remain unreported.

Public availability of information.

ID

Iran does not subscribe to either the IMF SDDS or the IMF GDDS. The Iranian government did express a commitment to comply with SDDS requirements during the IMF's 2004 Article IV Consultations, but progress has been slow. Iran has adopted the GFSM2001 classifications in reporting central government financial operations and, in a break with long-standing practice, the 2003-2004 budget disclosed figures on government energy subsidies. However, data classifications employed outside the core central government remain inconsistent with GFSM2001 principles, rendering comparisons and analysis extremely difficult. The 2007 IMF report also noted that central government operations data needs to be consolidated, and that the GFS's financing data should be broken down into significant subcategories such as residency of debt holders and type of debt instruments.

The discrepancy between fiscal and monetary data on deficit financing has often been relatively large, according to the 2007 IMF report. This is partly due to foreign currency valuation problems. The report suggested that "there is a need to develop a comprehensive database on domestic public debt, with a breakdown by domestic creditor" (p. 7). The 2004 Article IV Consultation recommended that "the existing cash-based government accounting system should be upgraded to enable recording of expenditures at the pre-payment stage," (p. 46). However, the 2007 report noted that this had yet to be done. The IMF's 2004 report further disclosed that there was a large discrepancy between fiscal and monetary data on financing the deficit, which called into question the reliability of fiscal data. While an SDDS mission worked with Iran to discuss ways in which the procedures for compiling and reporting government debt might be improved, there is no publicly available information as to whether or not these potential improvements have been implemented.

Finally, publications regarding fiscal operations, including the budget process, include the Bulletin of Socio-Economic Statistics, published by the Management and Planning Organization. The Bonyad-e-Mostazafan va Janbazan ("Foundation of the Oppressed and Injured") publishes some fiscal data in its quarterly Economic Trends, and the Statistical Center of Iran puts out a Statistical Yearbook. Other sources of fiscal data tend to be sporadic in their production, usually appear on the Treasury website, and include press releases and occasional papers dealing with one or another aspect of the budget.

Independent assurances of integrity.

EN

The Iranian government prepared its annual budget according to the Five-Year Development Plan, of which it forms a part. The formal budget is subject to revision toward the end of the year in order to adjust the original estimates of revenues and expenditures to actual outturns, according to the IMF's 2002 ROSC. The budget does not include an explanation of the accounting assumptions and methodology, but the IMF ROSC notes that the system can be characterized as "modified cash-basis" accounting. Some effort is made to ensure internal consistency in the presentation of fiscal data, but limitations in accounting and payment systems make this impractical at times. Auditing of the public sector is carried out by the Ministry of Economic Affairs' Audit Organization, in conjunction with the Supreme Audit Court. The Audit Organization was established in 1987 and is overseen by the Parliament. The legislation that created the organization also mandates its independence of operation. The Supreme Audit Court Act likewise mandates the Supreme Audit Court to be independent from political interference. The compilation and preparation of fiscal data is the responsibility of the Statistics Center of Iran, which is overseen by the Management and Planning Organization. Its charter grants it technical independence. The IMF ROSC notes that the Center does not undertake the verification of the data it produces, however, and calls for the creation of an internal audit system to strengthen controls over the quality of statistical data.