Fiscal Sustainability in Tehran municipality: Current Situation and Suggested Reforms

In recent years, the concerns about the fiscal stability of the Tehran municipality have increased. Construction fees, as the main source of municipalities’ revenue, are volatile and unpredictable. During recession periods, the reduction in construction fees enhances the municipality’s budget deficit, and consequently, the municipality issues debt to cover the deficit. An enhanced budget deficit and an increased debt level lead to unsustainable fiscal conditions. In Tehran, recent housing market recessions and covid pandemic have reduced the municipality’s revenues and forced it to borrow money from the banking system. This paper explores the status of the fiscal stability of Tehran municipality in the period 1400-1405.

Materials and methods:

In this paper, we use two different approaches, debt to GDP and debt to asset ratios, to forecast the level of municipal debt and investigate the status of the fiscal stability of Tehran municipality. The balance sheet of Tehran municipality (available until 1397) is used to compute the debt-to-asset ratio. We also used the reported debt and GDP level of the municipality of Tehran to calculate the debt-to-GDP ratio of the year 1399 in our analysis. In the next step, we employed fiscal programming and policies framework (FPP) to forecast the revenue and expenses of Tehran municipality. Consequently, the budget deficit of Tehran is forecasted in the period 1400-1405.

According to our findings, Tehran municipality was in an unstable fiscal condition in 1399. The debt to asset ratio was more than 67% in 1397, and the debt to GDP ratio was 16% in 1399. The desired target rate for these two ratios was 50% and 9.9%, respectively. Based on our forecast, the municipality is expected to face a high budget deficit. The municipality will be forced to borrow from the banking system to cover the deficit. Furthermore, It may be unable to settle the previously issued debt. Accordingly, the Tehran municipality debt-to-GDP ratio is expected to reach 25% by the end of 1405.

In this paper, we aimed to assess the fiscal stability of the Tehran municipality and suggest a series of reforms to enable the municipality to achieve fiscal stability. The debt to GDP ratio of 16% and the debt to asset ratio of 67% in 1399 demonstrates that the municipality is fiscally unstable. Although the target rate of the debt to GDP ratio is 9.9% in 1405, our forecast shows that the ratio will approach 25 percent by then. Accordingly, the fiscal status of the Tehran municipality will remain significantly unstable in 1405.The required reforms to achieve fiscal stability should be implemented in two dimensions. First, policy reforms are needed to reduce expenses and increase revenues. To prevent the financial crisis, in the medium term, the GDP of Tehran should experience an average increase of 1.54% each year. Second, Institutional reforms are necessary to increase the transparency of budget spending and enhance the efficiency of the reporting process. In this regard, implementing budget classification and coding reforms and fully applying accrual accounting are among the necessary reforms.