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WEEKLY NEWSLETTER
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Iran
Index
The disparity between the economic promises of the shah's
regime and the results as perceived by the majority of Iran's
citizens contributed to a revolutionary climate in the late 1970s.
When the revolutionary regime came to power in 1979 (on the heels
of the economic downturn of the late 1970s), it claimed that
modernization and Westernization had nothing to offer Iran, as the
recession had made evident. Islam, not economic planning, was cited
as the basis for correcting the perceived ills of Iranian society
stemming from the alleged excesses of the shah. The regime came to
power criticizing Mohammad Reza Shah's failed agricultural policies
and promising self-sufficiency and economic independence. The
government adopted an emphasis on agriculture as the foundation of
its program. To consolidate power quickly among the rural poor, the
Khomeini regime capitalized on popular resentment of the shah for
having largely ignored the agricultural sector.
All six of the development plans designed under the shah aimed
at economic development; the Sixth Development Plan, intended for
1978-83, was never implemented because the Revolution occurred in
early 1979. The First Development Plan of the Islamic Republic
(1983-88) proclaimed that its goals were to establish Iran's
economic independence through self-sufficiency in foodstuffs and to
reduce the country's dependence on oil exports.
The first "republican" plan focused on five points: expanding
education, representing the interests of the mostazafin (the
disinherited), achieving economic independence, diversifying the
economy to lessen the dependence on oil and gas exports, and
developing agriculture. The development plan did not include a
factor for defense expenditures. Criticism of this plan resulted in
its revision in 1984, although the changes were not approved by the
Majlis until January 1986. The revision included an increase in the
investment in agriculture (from 15.5 to 16.7 percent of the
national budget) and a smaller investment in non-oil industry (the
share fell to 52 percent). Projected oil revenues in this version
of the plan were based on the lower oil price prevailing in 1985.
The budget for the first republican plan was US$166 billion,
but the allocation of funds was delayed because of political and
economic pressures. The political pressures came from newly
empowered groups and individuals interested in using the social
disruption caused by the Revolution to create their own financial
empires, free of state control. The war with Iraq also affected
funding for the first republican plan. Oil revenue shortfalls
caused the first republican plan to be revised again in early 1987.
The shortfalls, in combination with the expenses associated with
the Iran-Iraq War, resulted in nearly half the budget being
allocated to military goods. Imports of consumer products were cut
in half, and projects under the development plan were given low
priority
(see
fig. 6). Austerity measures and increased
unemployment resulted.
Gauging the relationship between government economic policy and
actual operation of the economy subsequent to the Revolution of
1979 is difficult because official economic policy has been
obscured by religious and ideological themes. Iran's financial
system began adhering to Islamic principles after the Revolution,
a process that accelerated in the 1980s. Although the Planning and
Budget Organization prepared budgets, in coordination with several
other ministries, the Majlis, the majority of whose members were
Muslim religious leaders, was responsible for ratification
(see The Majlis
, ch. 4).
The budget presented a financial outline within which outlays
were planned for military purposes, education, and other government
activities. There was an increasing discrepancy between budget
estimates for the war and actual costs. Whereas the government
claimed in 1982 that 13 percent of the total budget was spent on
defense, independent analysts claimed that the figure rose from
11.5 percent of the budget in 1979 to 46.9 percent in 1982. However
unreliable the Iranian claims about defense spending, one thing was
increasingly clear: the Iranian government dedicated virtually all
foreign exchange resources, including both advance drawings on
revenues and uncollectible receivables (which were counted as
assets) to prosecution of the war.
Inflation was a serious issue in the mid-1980s. The increase in
prices, which was beyond the control of the monetary authorities
and the Central Bank--founded originally in 1960 as Bank Markazi
Iran and renamed Central Bank (Bank Markazi) of the Islamic
Republic of Iran in December 1983--began in the 1970s with the
rapid rise in oil revenues and equally rapid increases in
government expenditures. The latter had a multiplier effect on the
money supply and added to the demand for goods and services,
thereby inducing price rises. The monetary authorities attempted to
minimize the multiplier effect by increasing the cost of borrowing
and tightening credit. Imports increased as a result of lower
duties, relaxed quotas, and an increase in government purchases of
foreign goods. Bottlenecks at the ports and elsewhere in the
transportation system limited the capacity of imports to satisfy
demand, however.
Efforts to reduce inflation date to 1973, when a serious price
control program was initiated. The government took additional
measures to curb inflation in May 1980 by linking the rial to the
Special Drawing Rights
(SDRs--see Glossary)
of the International
Monetary Fund (IMF) instead of the United States dollar and by
encouraging investment in the private sector and growth in non-oil
industries. In addition, subsidies on basic goods were increased to
keep their prices down. Nevertheless, a 30- percent inflation rate
persisted, a black market rate on the United States dollar
flourished, and foreign exchange controls continued.
Inflation was continually understated by the government. The
government asserted that the inflation rate had fallen from 32.5
percent in FY 1980 to 17 percent in FY 1983 and to 5.5 percent in
FY 1985; independent analysts, however, claimed that a more
accurate inflation rate for 1985 was 50 percent. As essential goods
grew scarcer in the wartime economy, import controls fed inflation.
Prices of basic foodstuffs and consumer goods increased faster than
the Central Bank admitted. The increasing cost of rental property
in urban areas and continued subsidies for consumers on basic foods
reflected a serious inflationary problem in the mid-1980s.
To the surprise of many, the Majlis increased the FY 1986
budget in March 1986, even though oil revenues were projected
downward. The increase went mainly to finance military spending and
the steel and nuclear industries. The rising costs of the war,
coupled with falling oil prices in 1986, led to the use of non-oil
exports to generate revenue because oil income was no longer a
guaranteed source of foreign currency
(see Non-Oil Exports
, this
ch.). To finance short-term debts, Iran drained its small reserve
of foreign currency by allowing advance drawing on revenues.
The FY 1987 budget also reflected the priority of the war
effort. The government again promised to curb inflation, to
continue to subsidize basic foodstuffs, and to make available to
the import sector a revolving fund of US$7 billion, presumably for
consumer use.
Data as of December 1987
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