Persian Empire 1845

Chapter 625 Fiscal Deficit
After the ceremony, Naser al-Din did not hold a grand banquet, but immediately convened the first joint meeting of the court in the palace conference room. High-ranking officials from both Iran and the Ottoman Empire participated, and the topic was the most pressing Bosnian crisis and financial bankruptcy.

"Sudan, this is the country's current financial situation. Due to the treaty signed with Europe, tariffs are capped at 5%, and there are numerous trade privileges, so revenue has been unable to increase."

The Ottoman Empire was undergoing a difficult financial transition, with land tax and poll tax consistently accounting for the bulk of revenue, roughly 75%.

Then there were indirect taxes, with the government exercising monopolies on commodities such as tobacco, salt, and nitrates, which provided stable and important revenue. There were also tributes from the autonomous provinces, though these were often delayed.

Customs duties were also the most important tax. According to the privilege treaty signed with Europe, the Ottoman Empire's customs duty rate was limited to an extremely low level. While this promoted trade, it also severely restricted the government's fiscal revenue, making it impossible for the Ottoman Empire to protect its domestic industries or increase revenue by raising customs duties.

Many taxes are still collected through a "tax farming" system, where the government auctions off the right to collect taxes in a particular region to private individuals. This leads to severe corruption and inefficiency in the process, with far less tax revenue actually reaching the national treasury than the amount actually paid by the public. The central government has limited control over the provinces, and much tax revenue is used by local officials for local expenses or embezzled before it even reaches Istanbul.

How much is the national debt?

Kamil Pasha produced the documents, saying, "After calculation, the total is 14 billion lira, roughly 12 billion riyals. More than 80% of it is long-term debt of five to ten years."

Upon hearing this number, Nasserdin stared at the other person in disbelief. This was incredibly extravagant. He himself had never spent money so lavishly.

"12 billion... How much money is still available in the national treasury?"

"With only 46 million, it can only last for two months. By June, we will need to take out another loan."

Naser al-Din then realized just how massive the Ottoman Empire's mess was. The 12 billion riyals of debt weighed heavily on everyone's hearts like an invisible mountain.

"We need to raise at least three months' worth of funds to keep the government running. We need to discuss this with banks in the country and in Baghdad. The government will provide comprehensive support. In addition, we need to restructure the tax system immediately, and the profession of tax farmers must be completely eradicated!"

This system has severely damaged the Ottoman Empire's finances and must be eliminated immediately. However, this will certainly have a significant impact on the local areas, as a considerable number of governors are tax farmers.

"Eliminate the tax farmers?" Ali Pasha abruptly stood up. "Sultan, sixty percent of Anatolia's land tax is collected by tax farmers, with twelve governors directly holding the power. If this is suddenly abolished, we won't even be able to raise enough funds for next month's military pay!" "Ali Pasha, Anatolia reported 1900 million in land tax last year, but the treasury actually received less than 1400 million. Where did the difference go?" He gestured for Camille Pasha to unfold the ledgers. "The tax farmers in Bey province collect 15 rials per mu, but only pay 5 rials to the central government. If this bloodsucking model isn't eliminated, the empire will be hollowed out sooner or later."

Mohammad Khan, the Iranian Vice Minister of Finance who accompanied him, said: "Shah, our country was also subject to the tax farming system ten years ago. Our solution was for the royal family to issue three-year bonds, with 70% of the tax farming revenue converted into principal, in exchange for the tax farmers' right to collect taxes. At the same time, royal tax bureaus were established in each province, and European students were recruited as tax officials. Within two years, the collection efficiency was increased by 40%."

Kamil Pasha immediately objected: “Iran has the backing of its oil trade, while the Ottomans don’t even have bonds as collateral. Last year we tried to issue 5000 million rials of national bonds, but only raised 12 million, and that was underwritten by British banks, with an annual interest rate as high as 1200%.” He opened the debt list of the European powers, “What’s even more troublesome is that among the debts deferred in 1870, there is a clause for 3 million rials: if the finances continue to deteriorate, Europe will form a joint administration to take over the customs and tobacco monopolies.”

“Then let’s squeeze profits from the monopoly.” Naserdin’s hand landed heavily on the Black Sea coast on the map. “The monopoly revenue from tobacco, salt, and nitrates should have been 1.8 million last year, but only 9000 million actually went into the coffers. The rest was intercepted by officials at all levels. From today onward, all monopolized goods will be subject to ‘source control’: central warehouses will be set up in Izmir and Bursa, and merchants must use Ministry of Revenue receipts to pick up their goods. Sales data will be compiled and sent to Constantinople every week.”

Mohammed Khan added, “We could emulate Baghdad’s tea trade model by imposing a ‘country of origin surcharge’ of 20 riyals per carton on tobacco exported to Europe. This revenue could be specifically used to repay short-term debts. In addition, Baghdad’s banks should have 3 million riyals in liquidity and would be very willing to lend.”

Naserdin pondered for a moment and wrote down three instructions on the paper: "First, establish a fiscal reform committee, led by Ali Pasha, to complete the plan to buy back the tax-collecting rights within three months, with funds allocated from the increased revenue after the consolidation of the franchise rights."
Second, send a delegation to Vienna to negotiate, demanding that tariffs be raised from 5% to 12%, even in exchange for opening up Black Sea shipping. Without tariff autonomy, any reform is meaningless. Third, have Kamil Pasha negotiate loans with Baghdad bankers, with annual interest rates not exceeding 9%, and collateral including ten years' worth of revenue from the tobacco monopoly, but absolutely prohibiting the involvement of territory and resources.

In addition, an Imperial Trading Company was established to centrally manage the export of cotton and silk, thus avoiding price gouging by European merchants. Local textile mills were exempted from land tax for three years, and workshops using new spinning machines received a 50% loan for their equipment.

Before the meeting adjourned, Mehmed Khan left behind a Persian economic report: "Your Majesty, the essence of the Ottoman predicament is sluggish trade. The prices of exported raw materials such as cotton and wool are controlled by Europe, while imported textiles are subject to high prices. In the past, our country protected its domestic industries by using tariffs, and in just five years, it reduced the import of cloth by 35%. The Ottomans have an abundant labor force and can fully follow suit."

The Ottoman Empire currently has only 42 textile factories, half of which rely on imported British machinery, and the workforce consists mostly of artisans, making it difficult to expand production capacity in the short term. Meanwhile, military spending, government salaries, and other expenses need to be paid immediately, and future construction will also require substantial funds. The Ottoman Empire was truly broke.

"I know. But the current situation doesn't allow for taking things slowly. I need better help!"

Nasserdin sent a telegram; he needed someone he could completely trust to help him. Destination: South America.

(End of this chapter)