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Iran
The Post-1979 Period
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 . 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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