Iran to hike military spending despite lower oil prices, sanctions

(Reuters) - Iranian President Hassan Rouhani will hike military spending by more than a third in the next fiscal year despite presenting a “cautious, tight” budget to parliament on Sunday in response to falling oil prices and punishing sanctions arising from the country’s disputed nuclear program.

Rouhani proposed a general budget of 8,400 trillion rials ($312.13 billion at the official exchange rate) for the Iranian fiscal year starting March 20, 2015. This includes the entire the sprawling public sector.

A smaller government budget, part of the larger general budget, was set at 2,200 trillion rials.

These are based on an oil price of $70, as opposed to $100 this year, Rouhani said. Oil has fallen some 40 percent since June to under $70 on Friday.

"The budget is drafted with a cautious eye to the oil prices,” Rouhani said in a speech to parliament broadcast live on state television. “The current situation demands a more subtle and realistic approach to (the) budget draft.”

The 2015 general budget will be six percent above this year’s, Rouhani said, although inflation means this will be a cut in real terms and will tighten spending in some areas.

Yet defense expenditure will rise 33.5 percent to about 282 trillion rials, most of which will be assigned to the elite Revolutionary Guards. The Guards' budget will increase by about half to 174 trillion rials.

Iran is stockpiling rockets, missiles and other conventional weapons to deter what it sees as threats from Israel, the United States and Sunni Muslim militants in the Middle East, despite pursuing a diplomatic solution to its nuclear dispute with the West.

Nuclear talks between Iran and six powers have been extended until June. In the meantime, Iran can still access $700 million per month of frozen oil revenue held abroad.

Iran hopes to meet an oil-related budget shortfall this year by increasing non-oil exports.

It will also dip into an oil revenue reserve fund, which Rouhani's predecessor Mahmoud Ahmadinejad is said to have drained to implement his populist agenda.

Elected by a landslide and in office since August 2013, Rouhani claimed victory in curbing inflation, which has fallen to around 20 percent from more than 40 percent 17 month ago. Rouhani has proposed a 14 percent wage hike for public employees.

Iran’s economy has shrunk a cumulative 8.6 percent in the past two fiscal years, the Institute of International Finance (IIF) estimates.

Brent Crude ended Friday at $69.07, down 40 percent from June’s 2014 high of $115.06. [O/R]

According to official Iranian figures, the country produces 2.7 million barrels of oil per day, of which 1.4 million barrels are exported.

($1 = 26,912 Iranian rials)