R+STRICTED

\ Ug _lReport No. SA - 8a

This report was prepared for use within the Bank and its affiliated organizations.

They do not accept responsibility for its accuracy or completeness. The report may

not be published nor may it be quoted as representing their views.

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OF IRAN

December 31. 1969

South Asia Department

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CURRENCY EQUIVALENTS

1 U.S. dollar = 75.75 riais

1 rial = 0.0132 U.S. dollar

i billion rials = 13.2 million U.S. dollars

TABLE OF CONTENTS

Page No.

BASIC DATA

SUMMARY AND CONCLUSIONS i iv

I. THE SETTIM AND THE STRATEGY OF DEVELOPMNT 1

A. The Strateav 11. .Population 2C. Industry and Import Substitution 3D. Agriculture 613. Patrnlpum 7

II. RESOURCES FOR DEVELOPMNT 10

A. Current Government Finance 10B 0.-tirnment S -nnt Tiwne+mon+

C. Private Savings and Investment 16D * T1h errall Savings G.ap 18

III. THE BAIANCE OF PAYMENTS 19

A. Imports 19B. Exports 21C. The Overall Balance and Foreign Borrowing 24

IV. REUENT DEVELUPMENT AND RUYEUTS 28

V. CONCUION~u

ANNEXES

I. Statistical TablesII. The Oil Sector in the Balance of Payments

August-September 1969. The members of the Mission were: Jean Baneth,ute l 0 1-cL0 n1i 'LLnUnJ IJCLV, Ut-uneral ouunLLUmiILLOU, ajv U.l y ±o A' Jc.u

Economist; Emmerich Schebeck, Fiscal Economist; Miss Chandra Singh,General Economist; 'Mss Veronica ReilLy, SeCreteary.

BASIC DATA

Area: 1,648,000 square kilometers

Population:

Total: about 28 million (September 1969 estimate)Estimated birth rate: about 50 per 1,000Estimated death rate: about 20 per 1,000Rate of Growth: above 3 percent per annum

Density: 16.9 per square kilometer140 per square kilometer of araJle land

Gross National Product at Market Prices 1962/63 1968/69

in Is. billion 1959/60 prices 321.2 530.8in Rls. billion at current prices 345.8 612.3

Gross National Product at Factor Cost Sectoral Growth rateDistribution 1962/63

in R1s. billicn, 1959/60 prices 1968/69, % 1968/69

Agriculture 23.7 4.6Min-in n m-n 116 11

Petroleum, contribution to balance 151. 16.0

Domestic operations, N.I.0.C. 2.6 6.1

Construction 6.1 14.6

of which

Administration and Defense 11.4 14.9

Money and Banking March 1969 Average

March 1964-1969

Money Supply 85.6 14.9Time and Savings Deposits UU.14 33.2Bank Credit to Public Sector, net 40.3 47.7Bank Credit to Private Sector y0>..

Prices Average Annual Rate of Change1968/69 1962/63 - 1968/69

Cost of Living Index 3.1 2.2/

Government Operations 1968/69 (at market prices)

vu.Lr.Lounn rL@%L0j n7u eceipJJL7ha/.cl

UUVU~I'IUIii~1.U kULL-1tUIIU L£t UU.J4bU Ja iU J_ ~ LI

Government current expenditure 98.7 16 l4kaurrent surpus ey.oGovernment capital outlays 76.9 12 5of which debt repayment: 12.2 1

External Trade Chage1962/63 -

1968/69 As % of GNP 1968/69(million (at current 196/69 (in % p.a.)dollars) market prices)

Earnings from Petroleum sector 988 12.0 16.0Non-Oil Exports 217 2.6 11.2Merchandise Imports 1,432 17.4 20.8

Composition of Exports 1962/63 1968/69(as percentage of non-oil exports)

Cotton 23.5 19.8Carpets 19.4 27.5Fruits 21.7 13.0Others 35.4 39.7

Balance of Payments (US $ million) 1962/63 1968/69

Earnings from oil sector 407 988Other merchandise exoorts 125 217Merchandise imports -46 -1,432Other current - 63 - 260Net capital inflow: - 8 487Private 2qGovernment 16 372Monetar -299 90

Vnoreigrn Exchn-ao Poszition (TU. $rnillion) MvTre-h I QAR Mnre-h I QI Q

Gold and Foreign exchange held

IMF position

Drawings 31 31

External Public Foreign Debt (US $ million)

Contracted, including undisbursed(March 22, 1969): 2,251.2

Disbursed only: 1/ 1,052.5Debt service ratio: (% earnings from

oil sector and non-oil merchandiseexports)

1968/69 12%1969/70 (rough estimate) 20%

Debt service ratio, includingestimated service on privatedebt:

1969/70 (rough estimate) 25%

1/ According to Plan Organization data

SUMIkRY AND CONCLUSION

1. Well within living memory, !ran was one of the worlds mostbackward countries. Within the past forty years - mostly within thepast fifteen - it has been transformed into a cohesive country, with alarge, dynamic and increasingly modern economy. The basic strategy ofdevelopment applied in recent years aimed at creating a mode m sector -modern in its production methods, its consumption patterns and increas-ingly in its intellectual outlook. Most of the fruits, and the means,of development were given to this sector, which grew fast both in percapita income, and in relative population size. But the rest of thecountry was not wholly neglected; poverty was reduced, health and livingstandards increased and, above all, the old quasi-feudal land tenuresystem was abolished.

2. The evidence of progress is weighty. Over the past six yearsGNP at constant prices grew by eight percent per annum, agricultural pro-duction by almost five percent, savings and investment respectively bytwelve percent and by nineteen percent, earnings from oil by sixteen per-cent, non-oil exports by eleven percent. Of course, the very speed ofthe advance, and the backwardness of the starting point have created prob-lems. Industrialization was promoted by an all-out imort-substitutionpolicy at the final product level, which somewhat neglected efficiency con-niderAtions and centered on import-based production of durable consumergoods. It is now realized that the share of domestic value added inindustry must be raised. that new nativities should be more in line withcomparative advantages, although policies corresponding to these aims arevet to be evolved_ Tn narinniltinr a nw institutional .system must he

built up to replace the old one, and the final fate of the erstwhilesharoprpnnine nPasant.s is yet+to be settld.1 The roln+.inr.hin of moiprn

production methods to natural resources - notably that of mechanized dry--farming to land fe+4lit and erosio and that of pumpirrigo+inn +n

water availability, drainage and salinity - should also be carefullyValuted. The nobnlems and nods of the new lna+ina1 nlicy, whinh

rightly seeks to create poles of development away from Tehran, are yet to bestudied and Settled in suh -iese ilsa rnprain-eeonnLcations, power, education, urbanism.

3. The highly successful development pattern experienced by Irans, "U-c .some xtent, puzzin. ±L~LO W.LUt t.V1Ot:;1OUZj U11C:LU W=J C)UC11LLULUO

of project appraisal are not particularly good, and there is much evidence. many±I prOV~IL1JJjCtUS ar ce b-aSUed 0-1 ±inaU daU SUuLei C-LnU are~ O± Llen

too costly. There seem to be two complementary explanations. Whateverthe iundequacy of individual projects, the overall development strategyseems to have been :roughly correct; major intersectoral imbalances haveUeen avuided. The key explanation, however, i tne fast growth itself,brought about by high investment and the impact of the lrge and fastincrea6Tug .oreign exchange inflow from the oil sector.

- ii -

The abundance of foreign exchange and of fairly easily obtained resourceseliminated many of the problems which frequently reduce productivity in otherdeveloning countries: and the very sneed of the Lrowth reduced the importanceof the defects of individual projects, particularly in infrastructure.

4. The huge oil sector, which grew twice as fast as GNP, stimu-In+.,d revmlanmnn.an+ nr-n +.+h ma + m halnal +n fN nnnnin i+ in +.cormc! nf

budget resources and of foreign exchange. Foreign exchange earningsf-rom t.he oil sorn grewOat n avrage raeo"1neceti+tepssix years. It now contributes almost half of Government revenues, and

tion than six years ago on both these accounts. Despite this fast growth,V ~ ~ ~I±'.LV" ILC 'LV4U U.LJ. ± UVU11LL.; , CU L 1.F.LU 0 L1CLjJK-J U ± UU I U

earnings - while private investment was also outrunning private savings.

zation process, and even more of the overall strategy and of the import-sustiVUton tactics ollowed y Ira owever, the resources gap was

really the dominant phenomenon. Government savings increased until9up/66, ut kepU tUe Same aUsolute value thereafter, thus faling in

terms of their ratio to GNP.

5. The expansion of non-defense expenditures was not much higherthan that of GNP. This was partly achieved thanks to iran's originalexperience in using "Revolutionary Corps", i.e. educated conscriptsduring their military service, to spread required services, such aseducation, health, etc., to rural areas. Despite this recent fastgrowth the level of services provided is still rudimentary in manyfields; for instance, only about half of primary school-age childrenget any schooling at all. Yet if the recent momentum is kept up, thecost of providing new services will rise faster, because contributionof additional personnel by the "Revolutionary Corps" can grow only slowlyin future. Defense expenditures grew much faster than GNP, and atRls. L4 billion in 1968/69 they absorbed about half of current expendi-tures and 7 percent of GNP. 1/ Overall, current Government expendituresgrew at 15 percent per annum over the past six years, and at 20 percentover the past two years.

6. On the side of the private sector, the main impediment tosavings seems to be the inadequacy of financial mechanisms, which donot provide a sufficient remunerative outlet to would-be private savers.The exception is the banking sector, which has grown very fast and at-tracted growing current, savings, and time deposits; not enough, however,to allow private savings to remain quite in step with private investment,so that in recent years the private sector added its own savings gap tothat of the Government.

- 111 -

7. The excess savings which emerged during the recession years

1964/65. The phenomenon itself is, of course, highly desirable: Iranne~u Ldp U~±. U ~ .J. .L ±~ULdU ,Y _e± , dJU 11 UJ_U ±1IJ_ .UJ * JU

speed with which the gap has grown may well be excessive. From about- 7 L. 2 -1±. _ -- r T Zi -- -_ - M- 7 1 - 1_ '- 1C/ 71

Z". UJ.LLLULI _U1 _-J~U Q) ,11 he gap grW LA) IAd _f UL_L_"W1 _L11 -L;U[/UU

and 36 billion in 1968/69. In that year, it financed almost one-thirdof fixed investment; the corresponding net official and monetary capitalinflow, of about $h60 million, financed almost one-third of imports. Inthe current year - despite strong monetary restraints and some budgetarymeasures to redm the gap - the overall deficit is likely to be evenhigher.

8. The Government has succeeded in financing most of the gapthrough foreign borrowing, though last year there also was a large out-flow of monetary reserves. A high proportion of these loans were onrelatively short terms, much of them tied to the purchase of equipmentor military hardware. Debt service rose rapidly, to reach about $280million on Government debt in the current year, in addition to about$60 million service on private debt. The total of these would amountto about 25 percent of expected current earnings from the oil sectorand other merchandise exports.

9. If this progression is kept up, it would soon impose harshstabilization measures which would interrupt, at least temporarily,Iran's fast but so far smooth development. It is urgent that theaverage maturity of new debt should be considerably lengthened. Greateraccess to institutional investors, such as IBRD, may impose a majoreffort in terms of improved project oreparation. Such an effort would,of course, be rewarding in itself and a fortiori if it attracts betterfinancing. This need must be perceived and transmitted throughout theeconomic organization, particularly at the level of the project execu-ting agencies, which do not themselves carry the burden of financing.

10. In the longer run - but not too long - the growth of savings,both public and private, must be stepped up so as to at least keep pacewith the desired growth in investment. On the Government side, a -reatertax effort is probably feasible and may well be desirable. However, itis difficult to see how Government savinp-s could increase substantiallywithout considerable slowdown in the growth of current expenditures.Therefore. the benefits exnected from additional current exnendituresmust be carefully compared with those derived from Government invest-ment. On the side of t.he nrivate sector, it is important tn nrovideremunerative financial supports to private savings by allowing them

n be channled in+.n invetme+n+ in the modern n+rr eit.her directy1vthrough an invigorated share market and long-term fixed interest secur-i.i a r- inAir+.ly% +h nmirAh -nnnninl inq+i+n+A ny) c!,ir-h nc TMTVAT T+

is also important to keep the growth of investment expenditures to a

- iv -

rate consonant with national savings and the prudently acceptable netresources inflow. This should preferably be a long-run feature ofpolicy, for short term adjustments of the investment program to avoidimpending financial crises are not conducive to the best selections ofinvestment projects.

11. Iran will clearly continue to need, and will be able to use,large net capital inflows. Of course, the amount of the inflow neededcannot be determined objectively; but the amount that can be prudently borrowedis a direct function of success in carrying out the policies just out-lined. If most of the new borrowing continues to have short terms similar toloans currently obtained, the limits fixed by prudence may already havebeen reached, or even exceeded. If, on the other hand, the terms of newloans lengthen substantially, and if improved revenue and expenditurepolicies bring clearly in sight the approximate stabilization of thesavings gap, then further expansion should be feasible at a reasonablerate. The prudently acceptable amount, on average terms which can bereasonably expected with a major effort to mobilize institutional cap-ital, should probably be not less than 20 percent, and not more than30 Dercent of fixed investment: say a net inflow of : Atnt ]inl iil lnn hn

$500 million, corresponding very roughly to $600 million to $800 milliongross borrowing. Tt is obvious, vet noteworthv that thr smaller theexpected flow of oil revenues, the smaller the amount that can prudentlyhborrowed now but tiE grater the urgency of deyalopine other pro-

duction and export earnings. There is no escaping the horns of thisil bu ne must note that lengthening the mturity of new borroa-ing is equally beneficial in both cases.

O'UAVM7V T

THE SETTING AND THE STRATEGY OF DEVELOPMENT

I. rreparations are under way Lor celeUrating the c.,0Uanniversary of Iranian Monarchy. In no other country, with thepossible exception of China, does the Nation-State nave such an Oldcontinuous tradition. Yet the State itself was often overthrown, byforeign invasions or internal anarchy, and its last rennaissance is lessthan fifty years old. At the time, despite its long national culturaltradition, Iran was in many ways one of the world's most backwardcountries. In fact, it is hardly an exaggeratinn to say that except for therecent beginnings of petroleum production, it was in a worse economicposition than centuries ago; and with the exception of a few militaryunits, it had no State apparatus of any sort. Programs aiming atunifying and modernizing the country and developing its economy werelaunched in the late nineteen-twenties and thirties. They weremainly financed through tax revenues, assisted by the then relativelymodest flow of oil royalties. Interrupted by the war, the developmentprogram could be resumed in earnest only after the settlement of theoil nationalization crisis in 1954. The vast public sector investmentprogram that was then undertaken also stimrulated private investment,while demand for imported consumer goods also rose greatly. Around1960 the boom took excessive proportions and created severe balanceof payments strains. A strict stabilization program was then imple-mented, which cut back investment and rapidly re-established equili-brium. Though the program caused investment to fall sharply, it seemsto have done no mor' than slow Hnwn the arwth of GNP slightive

2. Since about 1962/63 Iran has been making very rapid progressover a broad front. Real national income increased by about 8 percentannually. Most indicators of growth grew as fast or faster still. In-dustrial production increased at an average annual rate of 12 percent,a,ricultural production at 4.6 percent. savings and investment reseec-tively at about 12 percent and 19 percent, oil revenues at 16 percent,non-oil Pxnort. qt. 11 nPrent_ 1/

-A- ~ Pre)hnh-Nr h-K nc.qtinii.c rip-ian- f1P.v_1r)TmP.n. 'hq.q t.qkp.n MAin1v

the form of the creation and growth of a modern sector whose patternsof onnnmption stAndards of livin, and niriin.inn technians apprachthose of developed countries. Per capita incomes in this sector, alreadyver hi eh rl a+ti4 r +n +Iin nwoana T"anian lovlr I 'ann+imlincrion.

but the breadth of the sector, as measured by the number of people partic-

evenly the fruits and the financial means of development, by slowly lift-rises UCI% LO %. P U w, U.L -±LV "Ir UA Uiv J. r j PCL.L V modest.

rises were modest.

Rather, average income and productivity moved through the swift trans-fer of a small but growing number of people from the traditional tothe modern sector. This entailed what, in some sense, is an unequalincome distribution, in which most new wealth was accruing to thewealthy sector; yet, as more people move swiftly from the ranks ofthe poor to the ranks of the well-to-do, the ratio of rich to poor -or at least, of the middle class to the poor - is fast growing.

4. In the early sixties "modern sector" was almost synonymouswith Tehran. That is where most modern industry was established, wherea large service sector grew, where practically all corporations - eventhose which operate at the other end of the country - still have theirheadquarters. Iran's largest commercial bank, which has a dense country-wide network, makes more than 70 percent of its loans to Tehran province.However, locational policy underwent a sharp change in more recent years.This was prompted by the realization that the marginal social cost offurther Rrowth of Tehran would soon rise sharply - essentially becauseof the problems of water supply - and by the desire to spread wider,geoeraohicallv. the process of development. The new policy has two as-pects; the establishment of new plants within a radius of 120 kilometersfrom Tehran is forbidden, and the ban is now fairly strictly enforced.The Government has, for its part, established large new public sector firmsfar from Tehran in Tabri.- Tsrhan Ark Ahun, -e nn it. nnt.ivilvand successfully uses the licensing mechanism and its cooperation with+.hP Tndutrial and Mining Development Bank of Tiran (as sell an srial

tax concessions) to attract private firms towards these new poles ofdevelopmen A the _ same ime, th land reform has also acceleratedthe creation of a modern agricultural sector. Most industrial firms

'~~~' ~ Q LLL% %.1 _L AI J.A..J±iL . U.L.L- L. LV 1.J.t. i±1.V 41V'JL~JU J Q J V'. 4

production; the geographic pattern of future development is not yetcl.earl±y visileU±. T L ~~L~ IIJ±d _* 4-_3U uii 1J.1_ LLeIIU4

fully, because they will determine the needs of investment policy,VI. O4.h~p'J. U, jUV,VUL,AJj. 11UCLJiU, C" -.11.J UU0 u27

itself.

5. Though the basic strategy emphasizes the role of the modernsector, thu rest of tne country was not neglecUeU. in thU bpacU Ul afew years, the land tenure system has been radically reformed. Thesuape of hue fuTure 1n-btituLonal setup has not yet emergeU Out tis clear that the old semi-feudal ralationship of sharecropping peasantsUo Large, often abSentee lanAowners, has definitely ended. Majorliteracy, health, and more recently, family planning campaigns havealso been undertaken.

Population

6. iran's population is about 28 million and is increasing atan annual rate of more than 3 percent. The birth rate is estimated at

about 50 per thousand; despite great improvements in health standards,the death rate, estimated at about 20 per 1,UUU is stilL hign, especiallythe infant mortality rate, estimated at about 130 per 1,000 births (160in rural and 100 in urban areas). Given the emphasis on improving healthstandards, especially in rural areas, and the expected continued rise inincomes, the death rate will continue to fall. There is,as yet, noparallel fall in the birth rate, and population growth is still accelerating.Yet it does not, for the time being, create acute pressure, essentiallybecause the growth of income has far out-stripped population growth. Itis therefore all the more noteworthy that the Goverment has realized thata reduction of the birth rate well below its current level is desirable.It is motivated above all by the desire to improve the quality of individ-ual lives, but also by the economic cost involved in the present highdependency burden; and by the realization that even if fertility fellrapidly, Iran's population would still surpass fifty million before theend of the century, and certain natural resources, notably water anddrainage, might become a serious limiting factor by then.

7. The family planning proaram. launched officially in 1967, isstill modest in financial terms, though its impact is greater thansucested by the level of exnenditure. for it relies heavily on theexisting health networks, and on the use of various "RevolutionaryCorns" - Health Corns and Ttpracy Cornq. made un of educated conscriotsperforming their military service, and the recently established Women' snnnP Demand for services - mainly the frep nrvision of nills 'Ind in-

sertion of IUD's - is high, though it may in part represent a switchoverf.r 3i-nm+-ne.nq1 -ro1n1ct_~ o -- -i lim+.n ,mrn+- cn-Prfqli-ir-h nn P.+jimqtr-.1

400,000 are performed each year. Evaluation, planning, and basic researchsilneed to be graly-b_- ~i ~~ - +r - r,- --

will require increased resources. However, the Family Planning Admini-stration. S1,MMUS , strAld-, rn ~-f,'. f n-P +'I,nnl TImo on~l- -f-

culties faced by the program, and seems to be prepared to tackle them with-117 nvrnilIah-0 o mormnC

Indu+tr and T-+ubs+i4

modern sector, necessarily involved fast growing imports. As long as

it consumes and the modern production goods it uses must unavoidablyS Mt-- - __4.4 - 4 _ U - ,- I~ 1-u.1-

AuLxTeV a. il-11ort content 1u~1. IJLLO LULU _LO -.VUdtL).Lj U~~ UL,

of course the weight of the modern sector in the economy is growing.,nnj, imipursE have been increaing aUout twAce as fast as overaLLincome, by about 16 percent annually, in the past six years. However,within the basic strategy, alternative tactics of development might navebeen possible. The tactics actually followed consisted of stimulating

mainly the production of final industrial consumer goods of the moderntype - cars, radios and electrical appliances are the outstanding casesin point - by the provision of extremely high effective protection fromimports. 1/ Import of many final products was banned, and others weresubjected to high customs duties, while duties on imports of capitalgoods and current inputs remained relatively low. This combinationensured that most new industries producing modern consumer goods werevery profitable, even if their costs were relatively high. Costs wereindeed often quite high, all the more so that even in cases where thedomestic market will long remain well below the optimal size of oneplant, several plants were encouraged to set up and compete.

9. The highly protected final stages of production were alsooften technically simpler than more basic operations. It is, therefore,not surprising that most new industries concentrated on the final stagesof production. This, by itself, need not be a cause for concern. However,the final products thus produced were entirely destined for the domesticmarket, and they required heavy imports of producer goods. Thus, asIran develoned a arowini industrial nroduction notential. it also builtup rapidly growing requirements for producer good imports. From 1962/63 to1968/69 value added in indntry at. constant prices rrew at a comnoundannual rate of about 12 percent. During the same period, imports ofintermnediiP annrl.q I'm inrbnpat-r ar% -qt.nn qrnnnn1 rn+.P mf qhini- 20 ner-

cent, total imports of capital goods at more than 25 percent, and importsof caita..l goodnAfo i ndry eveatrn faste l TTh wIl a lilen nrpr inmanufacturing increased by about 30 billion rials in current prices, im-

-n rt ovf -1; -4-~ ~ 4 ~ .. , 4-1~* - o-,~A (rl - 4 ,A1s4w -A,' v'.i. cflnfg+ i

by about 31 and 14 billion rials, and total imports of capital goods by"V U.U . W.A.-1J± .L.L4a.LQ*.

.L\.JD.L: 11 lJUe dI± UJIU L ~UUL ULU ,UL U.±LJ UCd4' 1)LCLUU, 11i Uil 1i

that the amount of final goods available increased more than the amountofL im1ports. inl other.L terms,Z anll ce~u proportLOLlin ofEUJ.ULl the vAlue ofLL:' -the modern goods consumed in Iran was produced in Iran; but as the share

umouer-n goods in -V-U-rZ ver0l numi,Ipiuln wUU increUdug, tAne ±dq l UU u.L -Ll1PVL-UO

to total income was increasing too. The economy as a whole was becomingincreasingly dependent on imports. Furtnermore, tns depenaence is dif-ferent in kind from that existing a few years ago. A sharp restriction

1/ These new industries were also promoted hy the Goverhmcnt's liconsingand protection policy. They were in many ways a logical continuationof the first round of industrialization, which had consisted of thecreation of more essential industries, such as textiles, sugar andcement, by Reza Shah's Government in the 1930's.

of imports would affect not only the consumption of the rich and theincomes o' a few importers, ou tne iucomen s othe who poulatioof the modern sector. Moreover, much of the new industrial potentialhat IVelauvely high costs, Dor because of the normaL proUems of'infant industrialization and the frequently small size of plants.rrom the point of view of exports, they also nave a locational dis-advantage, inasmuch as most of the new industries were set up near Tehran,far from the sea ana from sources of current inputs. Therefore, indus-tries set up in the past five or six years cannot easily supply morethan a token part of their import needs by exporting. Thus, importrequirements have been very substantially built up without a significantcompensating buildup of exchange earnings outside the oil sector, Eventhough oil exports have been booming, the balance of payments is exper-iencing difficulties today; these could become acute if the growth ofoil revenues slowed down. The dimensions of the potential problem areby no means clear yet, because many new industrial projects are stillin the process of being completed, and their impact is still to be felt.

11. The Government has already taken some steps towards dealingwith this problem and is contemplating others. The public sector hasstarted investing in export-oriented production. There are five largeprojects oriented in this sense: three petrochemical plants, an aluminumsmelter and a gas pipeline; they will become operational within the nextthree years - from 1970 to 1973. Though a larger share of their productionthan had first been thought is likely to be absorbed by the domesticmarket, their contribution to exports is bound to be significant. Anotherrelatively new development is involvement in deeper levels of the pro-duction process. Here again, the public sector is taking an importantrole by establishing an integrated steel plant. two machine tool factoriesand a tractor factory. The private sector is also encouraged to go inthis direction.

12. However. existing instruments for proper economic and technicalevaluation of projects in the public sector are still inadequate and in-dustrial nolicv towards the orivate sector - in particular. nrotectionpolicy - has not yet been really geared to implementing the more sophis-tinated aims that arp now nronound f As onn moves away from simTnl.across the board import substitution, it will be increasingly desirableton mae Ll-informePd choies. betwee n poss.ible alternat.ives,_ andi tondevelop the proper policy framework for implementing them. Theseripf'inoitznnipst bei-+ c rretxed sqPeedily_ before- new. inetetwreundertaken which commit Iran to more uneconomical lines of production.There is therefore need for acompel-nsi.- ev-aUio of' the

costs, potential and inter-sectoral linkages of industry, of the naturalmesource ase Wnd o oa t;ote lin. +k -A _P +1To

measures most apt to promote development along desirable lines. Though

of the need itself, and its general nature, seem to be well understood

13. Agriculture is still the largest single sector of the iranianeconomy. After 1963, the old system of land tenure, based on exploita-tion by small-scale peasant zharecroppers and ownersnip oy large-scaLe,often absentee landlords, was radically reformed. Thus the primaryprecondition of progress, the suppression of the old structures, nasbeen accomplished with remarkable speed. However, the process of changeis still going on. The new institutional structures of agriculture havenot yet been evolved and it is not yet clear what role will be allottedto the erstwhile sharecropper in rural Iran.

14. The land reform aimed at suppressing the quasi-feudal, share-cropping relationship that characterized most of Iran's agriculture.Lands directly exploited by the owner, with mechanized aids and wagelabor, were exempted from its provisions. Thus the land reform helpedto speed up the creation of a modern agricultural sector. It is notpossible to say how large this sector is, nor is it really possible todefine it, as the boundary between "modern" and "traditional" units isnot really sharp in agriculture. Nevertheless, it is clear that therole of the modern sector has grown considerably. It takes the formof large units engaged in mechanized dry-farming; of units engaged incommercial cultivation of cotton, fruit and vegetables on irrigatedland; of the growing use of tractors and pumps; and of increasinginteraction between agriculture and user industries, primarily s,ga.This radical transformation of an increasing portion of the agriculturalsector raises a series of questions relating to the institutional frame-work now being evolved and to the nhvsical imnact of the soreadine of newtechniques, notably that of mechanized dry-farming on soil conditionsand that of pump irrigation on water availability.

15. In the past five or six vears. none of these nossible sourcesof future problems prevented growth. Value added in agriculture increasedat the monund rnt. of in.ust under E4 nPrant P in-t 1960- A fn-w mainrcommodities recorded very rapid progress - the production of sugarbeets,prew nt the nompoind ran of' 19 n.rnPnt in +.h nant six vas.. th±t offwheat and barley at more than 6 percent and more than 8 percent respec-tivP1v +.hat of raw ntton at almo)t pnrcent dpite a inndue to insect infestation in 1966. Despite growing consumption, wheatnn n imnrivr+.a wo m in r111 v n+.n1"nl amm-ra ornv+-.1 Q nwro=nt.

annually. Progress was not uniform; in keeping with the overall patternof T"nn4n" Aer + mnlah ^-P J+ comm +o avt nnon+ovA r nn nPr Pann

relatively large-scale modern units. It is too early to say whether- , ----- n

4- 4.--; -- -; - - -nn,,n ,.P- .+-- -- P 4 -k- - - 1 , -- 1 sen

for, as already noted, the institutional reorganization of the sectoris still proceeding.

16. Yet the large patches of relatively slow progressdeserve being investigated. This is particularly true of livestock raising,traditionally an important activity in Iran, on which a large part of the

population depends for its livelihood. The production of animal productshas not even kept up with the rise in Iran's population, let alone withthe rise in demand stimulated by growing incomes. This is well shown byprice trends within the remarkably stable overall price level. While thecost of living index stood at 120.7 in August 1969 (1959/60 = 100), theprice index of meat, poultry and fish stood at 179.2, by far the highestincrease for anv category. This is not purely an economic problem, it i!also a social one, whose solution requires the gradual integration ofthe livestock-raising Population into the modern sector. At present,the fate of this population - much of which was traditionally nomadicor semi-nomadic - is all the more oreoccunvine because the extensionof dry-farming is limiting the availability of pasture grounds.

Petroleum

17. The petroleum sector is, in more senses than one, the mostimnort.ant for Trnn's development. The bh n. l vlue of its contrihu-tion to national income is second only to agriculture. Last year, itacounted for almnt 18 nPrcent. of (NP 1/ earned aot l 0 Prten+. fnt

current foreign exchange receipts and was the direct source of abouthln - -r +hn~ - ma- -~ I n f' Y^-v r cN-".~nman+. - Pli+. i-rnn-"v+n?1 +Ainiialih +JiPrhalf _ chuneant _meof g ov.-nmen+. -n- -m-tat tnc --hov

be, these figures still understate the sector's real importance, which

oil companies increased fivefold from 1950 to 1961 (after having dis-ap J '4ring.LL Ulle yeiars o.L t11= J1C.ULV110_LLzat)U.LUI Li L0.LC1, _iL .L )..L L/Z

1954); and they increased almost as fast, at an annual rate of moreWILC.US .. L~

4 J U .4%J1 L/LI ./WI. L V 4. - _ VWI4Li LSS /Li Vw. ""V-LitC 9.44.

million. This amount is supplemented by substantial (though on theW±iUJ..Le, Sj_ L± I L -LOca" JA I I ULLL"L± UL._41jdLL~

_LU. 111us, Ui1t _"'CULLdil t1 UVI1CJIIY UL)t- LUt;:U -L-L UII U L41IC U t;1j.: LU.L

a huge source of foreign exchange, which expanded faster than nationalJicomei1, inueed laser Uan all but one WLUaEr anu poweI*j 01 us majorcomponents, and which at the same time constituted the major and most

1/ Share of the petroleum sector in GNP at factor cost, at 1959/60 prices.The share in GNP at current market prices was l percent. This, how-ever, is an underestimate. If internal taxes on petroleum productswere included, as well as the customs duties levied on the part ofimports financed by the oil sector's earnings, its share in GNP atcurrent market prices would be about 17 percent.

dynami.c source of Government revenue. It is, of course, almost self-evident that Iran's current levels of private and public consumptionand investment depend on the continued receipt of high oil revenues;but it is also important to understand that the growth of nationalproduct and investment was promoted not only by the size of the oilrevenues, but by their extreme dynamism: the economy included a largesector which grew very fast, exogenously - that is, without requiringany investment or other effort from the rest of the economy - and whichgenerated foreign exchange, thus financing the needs it helped to create.There is no sign yet that this dependence on the growth of petroleumincome has been reduced. Iran aims at promoting the growth of petroleumexports further by developing new oilfields and finding newmarkets abroad, notably in Eastern Europe and India. Non-Consortiumexports in fact amounted to 7.2 million tons in 1968. There may beconsiderable long-run potential in this direction. However, for thetime being, oil exports are still virtually synonymous with the Con-sortium, which accounted for 94.6 percent of the volume of exports in1968, as against 96.0 percent in 1965.

- 9 -

Table 1

GNP AND IIS COMPON]WTS

(in billions of rials, 1959 prices)

Share ofloA vIne - Averageadded in GNP annual growth rate

1962/63 1963/64 1964/65 1965/66 1966/67 1967/68 1968/69 (at factor cost) 1962/63 - 1968/69

Agriculture 88.3 89.9 92.2 99.0 102.7 110.9 116.4 23.7 4.6

Industry and mining 29.5 32.1 36.2 10.2 44.6 50.3 57.3 11.6 11.6

Petroleum: (net Balance ofPayments receipts fromoil sector) 30.5 35.1 5.451/ 44.2 56.9 61.9 74.1 15.1 16.0

NIOC 8.8 7.8 7.5 12.6 7.2 14.1 12.6 2.6 6..

Others (including errorsand omissions) 145.3 153.4 179.9 L137.1 185.9 209.4 231.6 47.1 8.0

GNP at factor cost 302.4 318.3 358. 81/ 383.1 397.3 1446.6 492.0 100.0 8.5

GNP at market price 321.2 339.0 379.31/ 408.9 h27.1 181.3 530.8 107.9 8.5

Non-oil GNP at market price 281.9 296.1 317.3 352.1 363.0 405.3 h4.1 7.5

GNP at current marketprices 349.2 370.3 4o8.81/ - 69.5 489.1 553.9 618. 10.0

1/ Includes oil bonus of R1s 10.5 billion.

Source: Bank Markazi, Iran; and Annex I, Table 2.1

- 10 -

CHAPTER II

RESOURCES FOR DEVELOP-IVENT

Current Government Finance

19. Despite the dynamism of major productive sectors, Iran's finan-cial position has deteriorated in recent years. A large part of thisdifficulty is due to the fact that public administration was quiteunderdeveloped until recently. The general effort at transforming Iraninto a modern, developed country included the desire to rapidly build upGovernment services. In addition, Defense and Security also absorbedincreasing current expenditures: Rls. 16 billion, or about 5 percent ofGNP in 1962/63, rising to Rls. 44 billion, or about 7 percent of GNP in1968/69. 1/ In addition, there are also development expenditures expli-citly attributed to defense; these amounted to Rls. 3.7 billion in 1968/69(for items such as housing, etc.) and there may be other investment de-cided on the basis of military considerations.

20. Other current expenditures increased less fast, though stillfaster than GNP, in which their share increased from about 9 percent in1962/63 to about 10 percent in 1968/69. One must note, however, that suchrelative stability was allowed only by the very fast increase in GNPitself. There are :ndications that these expenditures may have to increaserelatively faster in future. Despite their recent increase, services inmany fields are still quite rudimentary. For instance, little more thanhalf of the primary school-age nopulation does actually get any schooling,though this must be compared to a literacy rate of less than 20 percent in-19 6 2/ One could noint at manv other fields - notablv communications.secondary and higher education, public health and sanitation, and even,nerhans above ail, general pibfli c administration, whpre srrie qtilllag well behind needs. Yet the recent increase in public services wasactuallv much faster than the increase in excpenditures, thankq to Tran'soriginal experience since 1963 in using educated conscripts as teachers,health workers and extension agents.

21. These IRevo lu-tionay Coyrps" - Literacy Corps, Heal+l Corps,Development Corps, and more recently, on similar lines, the Women'sCorps - allowed a rapid build-up of services at relatively Iow budgeta-rcost. They made a very important contribution to Iran's development by

v,nc,ew vr -lc Na a +,avanG , 4.-c A- T-.rvr. 4, 1 4 cspred new serices even to the r bte unrJ yi dL J A. .o wev er uJ.Cl, tli is

largely a once and for all addition in the sense that, now that the system

-I/- These figures do not include defense expenditures financed by foreign

borrowing, but include service on such loans.

2/ Literacy rate: 35% of population 10 years and over (1968)

- 11 -

has been well introduced and extended, in future the numbers of personnel.it provides will grow only slowly. Therefore, maintaining the momentumof the past few years in these fields would involve a steep increase inthe costs of additional services. Furthermore, though the "RevolutionaryCorps" render extremely valuable services, they obviously have limita-tions. They can supply only relatively young, inexperienced, temporarystaff; and of course, they do not obviate the need for material supplies.The financial needs of administration are also enhanced by the relativelyhigh and rising incomes and opportunities provided by the modern produc-tive sectors. The quality and volume of public services could obviouslynot be maintained. let alone increased. if the sap between private in-comes and civil service pay rates increased continually.

22. Yet the fiscal system has not yet been built up to the pointrequired by these growin- needs. It is true that between 1962/63 and1968/69 fiscal revenues grew at the average rate of 16 percent, thuskeening un with the arnwth of niurrent exnenditures (indeed. exceedinothem slightly in the early years). However, this was due essentially tothe greab+.huoyncy NP nil qavenna, whose share increased from 12 npercent

of current revenue in 1962/63 to just below 50 percent in 1965/66, 1/and about -nopercent in At8/A9- Tmnrt taves - whose 198/69 share in

revenue was about 20 percent - also grew at a rate of about 16 percent,but snch gro.u+h was possible on-ly hecause imn"+o s rew fPaer+ - at anannual rate of almost 21 percent. The rate of growth of imports well

by the fast growth of foreign borrowing. The payments deficit canJLV il _Q 110 ~ ., U 11CI-IUV--.L LL- UUL , CILLLU l 6-I L JWJ U1 %J. L.Il u. U UV'-_d

decelerate unless the structure of the tariff is reformed, for imports0±.L relulveXly 11t:::ZL Y baxeU IuuIliit LC.U U Z _uu L1.UCtDt: _Lz) Gllcli Uiu)%: O-L

intermediates and capital goods. Taxes on petroleum products cons-vioure Une onLy ouner ayiamdc indirecr, tax elementdthuu nU lne y u -zstill small. The yield of Government monopolies and enterprises - stillca, imprbn elemenuIj. nouICiI lon U U %u .~ - hasd beeni 'Oe'-l Q_Lrr.LZ1 rcentii

years, largely on account of the Tobacco Monopoly whose 1962/63 budgetcontUriUtions11, at MlLj 4- .".-LIn, wasU hlfL. te sizet of_ Ustoms1 reve-nues, but which fell in the mid-1960's and just regained the 4.6 billionLevel in o966/69Y. Though direct taxes were quite buoyant since 19Y,reflecting efforts at building up the assessment and collection apparatusan, more recently, the enactment of a new direct tax law, they are stlrelatively small: about 11 percent of total revenues, orof non-oil national income in 1968/69.

23. The Third Plan law allocated to the Plan Organization a share ofoil revenues, which was to increase from 65 percent to 80 percent at the

Not including R1s. 10.5 billion out of the once and for all bonus receivedin 1964/65 and entered into the budget in 1965/66.

2/ The temporary fall in this item partly reflected a revision in budgetaryaccounting practices.

Table 2

SUMMARI U LENTRAL UUVERPFNTP U AIUONS

(in billions of Iranian rials)

Pireluinry oungevActuals Estimates

1963/6b 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70

-.Curet Rnu 'CO 90.0n O ~ O' ~ O1.. ~UI.J t'lU itVClltit UU.U UU.) JUeU 7U.U AUUs?..LLUe) .L_Je_

Oil Revenue (27.7) (36.4) (50.0) (U7.8) (5h.0) (61.8) (80.2)Non-oil Revenue (33.1) (31.9) (LO.0) (50.8) (5h.7) (66.5) (75.7)

C. -U n l ,".1.F" o Uo t u .- _.__'_c__o o_n___oAn___A_ 11 ..2

of which, defence & security (17.0) (19.1) (2h.0) (27.2) (35.7) (L3.9) (51.5)

3. Surplus or Current Operations 11.3 13.3 30.1 1/ 29.7 1/ 28.1 29.6 41.7

b. Capital Expenditure 17.6 25.9 39.4 b1.3 58.1 76.9 96.2

investment Expenditure (1b.6) (22.3) (37.1) (37.8) (53.1) (6h.7) (8b.6)Debt Repayment 2/ (3.0) (3.6) (2.3) (3.5) (.7) (12.2) (11.6)

5. Over-all Deficit 6.3 12.6 9.3 11.6 30.0 47.3 5Li.5

. inancing of Deficit 6.2 11.1 8.6 11.5 30.0 L5.8 53.3

Bankinv System 5.1 8.3 5.1 .O 12. 1q.3 12.0Treasury Bill< 1.1 2.0 2.0 5.h 7.1 A.4 16.0Foreign Loarn 3/ - 0.8 2.3 L.7 10.1 21.2 25.3utner nesore's - - -1.0 -. 0 - 0.0 -

Deficit to be financed - - - - - - 1.2

RROS AND OMYISSION 0.1 1.5 0.7 0.1 - 1.5 -

1/ See footnote 1, Table 3, p. 1 4 .

2/ Includes amortization of principal on foreign and domestic debt.

3/ Net tovernment borrowing shown in the balance of payments data is different from net governmenLborrowing given in the public sector accounts. The difference may be explained by the fact thatneither military expenditure nor the borrowing to finance this expenditure is fully recorded inthe public sector accounts.

Source: Bank Markazi, Iran

- 13 -

end of the period. This latter percentage was retained for the FourthPlan, which began in. 1968/69. This earmarking constituted considerablemoral pressure to reduce the deficit of the Treasury-General's budget,though in fact the proportion of oil revenues actually used to financecurrent expenditures was higher than had been planned. In the aggregate,Government savings increased from Rls. 9.9 billion in 1962/63 to R1s. 13billion in 1964/65. and to R1s. 30.1 billion in 1965/66. 1/ Thereafter,Government savings remained roughly unchanged in absolute value, whichof course means that they declined relative to GNP.

2h. There is clearly both tho npn( and tjifn rnnm fr)r a ?rvater tax effort.-The basis of a dynamic direct tax system appears to have been well laid,though the advantages and costs of the numerous concessions and tax in-centives granted to corporations must be carefully re-examined. It isin +.h, fipl onf indirovt i-.nv.q+ion +.En+-i. hp nrP.nt. -st.m i!s most, clearlydeficient; and not only new taxes, but a whole new administrative,ase sm n and c-01-E-Ct-01nsTil T-i -i +.nr I-p t r -n.1-d T r-,P.-Tr-

this does not imply that the share of tax revenue in national income can,n ch1~-A h-Nn avnoc7raA nn"Anf i+lv* n +no+ +Iha .- r ho n r-in ha hiii1+.

up without delay. If public savings are to increase, the growrth of

course, there may be good reasons for increasing current expenditures,kU . ILL 11J-~L UL. V. C±LA" 4Lk11-11LL-UC. .9 DJUUI L 1 U0 . L J4C6 0 V1 0 V ;.L " J C- I I WV

But the gains, developmental and other, from these expenditures have toLJ ~ yUIIJd U VtL dJ~.LULy V-W1 U11t U4J. .. Pt-k .UVU LJ--LU. LLUO .L -LAiV U1111, L.SAJ

in the long run, the growth of public savings is a major determinant ofthe feasible growth of public investient.

overnment Savings and investment

25. In the past six years, however, Government investment wasincreasing much faster than Government savings: from R1s. 15.7 billionin 1>0efo to nis. ?.Y oillion in iyoooy, an annual growth rate o-L25 percent. As is to some extent the case with all large investmentprograms, some of this investment effort was not optimally applied. Z/

Too many projects were undertaken too hastily, on the basis of inadequatestudies, and carried out at excessive cost. This may be particularlytrue of some of the very large projects undertaken towards the end of the

1/ The discussion is limited to savings and investment of Governmentproper, as shown in the budget. It is exceedingly difficult toevaluate the retained savings of other public sector entities.

2/ The composition of the investment program has been examined in pastPqnl,--r nny-+.q if. im.cz-ql.qr qhman4 in Annpniv T-q'hlp J

Table 3

FIXED CAPITAL FORMATION AND ITS FINANCING(Rias bilion currevwfl.nt'ic)

1962/63 1963/64 1964/65 1965/66 1966/67 1967/68 1968/69

Government FixedTnve stmen+ (f7 1. 2 937 .1 -378 C,3 1. 6. 7

Govr ne vig Jj . 2 *M ýc )1..Y2 -4jf"- iL'J. e r nrc- 4- c _) -- 5 *. nI n- 1 . n 9 )n '-"n Y,

U1. v U LVUJ, _7 a V/ 1C- 0 7 C- u J. m

-6.7 -3.3 15 -17.5 -8.1 -25.3 -35.1

Private FixedInvestment 30.6 26.8 46.6 48.9 52.5 53.9 66.5

Private Savings 37.9 34.1 54.9 59.4 51.h 62.4 64.7

7~ 7~ ~ .¯ ~~~ 8-

Total Savings Gap:(- indicates gap) 0.6 4.0 9.8 -7.0 -9.2 -16.8 -36.9

Financed by Net Capital

Gvernment .2 -2.9 -2.4 2.3 . 15.9 28.2

Private 0.4 U.3 u.3 U.( 1.4 1.4 1.9'

Monetary -2.2 -1.h -7.7 4.0 1.6 -0.5 6.8

A +to+tal of ~p D 1 2 ilon was received frm foreign oil [ofpanies 4n 1I

1964/65; out of this total, RIs. 10.5 billion were entered into theGovernment Udget oly the fllwig year. The ~ igre sT P of t h+ alhave been adjusted to include this bonus with Governent savings in1 ds)so of S.L7'L41 M..

For discussion of Source and methodoloogy, see footnote on page 15.

- 15 -

Third Plan. However, it is also quite conceivable that the deficienciesof these projects attracted particular attention because of their largeindividual sizes, and are, by and large, not really greater than those ofmany less conspicuous projects. These defects were in part due to theweakness of the organic relationship between the various economic agenciesof Government, in particular between the Plan Organization and the projectexecuting agencies.

26. Yet the economw grew rapidly, and even non-oil GNP increased atan annual rate of about 7.5 percent. No major shortages or excess capaci-ties seem to have affected this growth. This would seem to indicate that,whatever the defects of individual projects, the overall strategy waswell conceived and the sectoral distribution of investment roughly cor-responded to needs. The capital-output ratio, for whatever such measuresare worth. seems to give a similar indication. Over the nast six vearsthe ratio of total fixed investment to income growth in the non-oil sectorannearR to have bAn between 2. and I. The high growth rate in turnhelped to boost the benefits derived from infrastructure projects and to

Source and methodology of Table 3:

Government fixed investment derived from Budget data.

Private fixed investment at current prices estimated by ini_at-1n BaLk Markz-i Se rie s of p1irivate inesAeta c + on. Stnt r c S.r Vv+xA;In

price in2_1or obtained by dividing the above current price Government.LIV1U1V1I 0uLii-Luu I.J.Y uiv:; JJUL constant~L pr L/i~ . i ce series.

Total scavings estimiated by deduct_ig netu ULucaitLinflow, asindicated in Balance of Payments, from the total investment figures.

Gve rT en savings- derivred frmbdeLiue; rvt aig bainedby difference.

Investment and savings figures are all exclusive of inventoryaccumulation.

Private savings also exclude utilization and repayment of suppliercredits and illegal capital exports. Movements in these elements mayexplain the apparent fluctuations in private savings. In particular, theirapparent stagnation in 1968/69 may in fact cover a simultaneous increasein savings and inventory build-ups.

As the Budget does not include military expenditures financedby foreign borrowing, while it includes service on such loans, Governmentsavings are overestimated by the difference of these flows. Conversely,private savings are underestimated. The data on net capital inflows aretaken from the balance of payments.

- 16 -

minimize the impact of particular deficiencies. However, Government mobil-ization of rqmour--.q for develnpnment nold not fnlleoT.T t.hp nianp of invest-

ment. In the 1955-1960 period, overall Government expenditures had farexceedAd rPveniiesq Theo resuilting infl MAonry +.InMC nsM and al - nceP ef'payments crisis forced the Government to cut dowm investment expenditures and

fe-ir Pora ime t.hre ar-r.T+. nf t.fii-meav.nf+ T i c 1hiq eh

program reached its maximum effectiveness around 1962-1963. GovernmentreTvne f - u%tnnCed ,n*k-,ii4- 7JR ---- --f P ,-4tvcc,, ~ A

and about 95 percent in 1963/64; Government savings were then covering,L ~ ~ - '~J .) j ~ VUL'UI CL I (f jj L 'oUA VJ.J '\Vv ±I.I Ilu .L± UIkJL/

1968/69, by contrast, only about 78 percent of overall expenditures were

by savings.

Private Savings and Investment

27. Despite the deficiencies of the data, it is clear that a similarpUenomenon was occurring in Ute private sector. UroUs fixeu captUal for-

mation in the private sector is estimated to have increased from aboutrIs. 31 billion in 1962/63 to about Ris. 01 billion in l96o/69. Duringthe same period, private savings increased from about Rls. 36 billion toabout Ris. >> biUion. In other terms, while in lyo private savings coveredpart of the Government's resource gap, in two out of the three most recentyears, the private sector also contributed to the resources gap. Tnis isnot to say that private savings remained stagnant. Even according to thelowest estimates they increased at an annual rate of about 9 percent (atcurrent prices) between 1962/63 and 1968/69. However, this was slower ;hanthe growth of investment, slower than the growth of money incomes, and onlya little faster than the growth of private income. This appears a prio:.surprising, in view of the high proportion of incremental income accruingto the modern sector, which is relatively well-off. But the rapid growthof modern production and consumption patterns have not yet been matchedby the development of modern financial mechanisms. In fact, part of whathas developed is geared to facilitating dissaving rather than saving:consumer credit plays a growing part in financing automobile and appliancepurchases (and of course both savings and loans finance unproductivehousing).

28. There is virtually no market for medium- and long-term fixedinterest securities. There is a stock market, but it is quite inactivebecause even when businesses adopt the corporate form, they generallyremain quite closely held. Thus, there is little opportunity for privatesavers in the fast-growing new middle class to participate directly in theprofits of the modern sector, either through equity ownership or throughattractive fixed-interest loans. Financial intermediaries have eitherremained undeveloped, as is the case for life insurance; those which arevery active, above all INDBI. rely on Government for their local funds anddo not provide an outlet for private savings. Only the banking system

- 17 -

has developed rapidly The number of bank branches increased by 15Upercent between 1963 and 1967 and the countryside is now coveredwith an increasingly dense banking network. As this is the only meansavailable to many, a high proportion of private savings takes the formof money and of savings and fixed deposits: one-quarter to one-thirdof private savings took these forms in most recent years, and more than40 percent in 1968/69. The money supply (including quasi-money) roseat an average annual rate of 16.5 percent, more than half as much againas the rate of increase of money incomes.

Table 4

PRIVATE SAVINGS AND PRIVATE MONEY HOLDINGS

1962/61 1963/6h 196L/6 1965/66 1966/67 1967/68 1963/69

A.. Private Savings 37-9 __)_ -1. 59O4 62 Qq_J, A. 64.,7

'R Tntcreqaq, in private+.holdings of moneyand qasnoi-moner 12.4 12. 10. 132) 1 9 91 A 7 7of which:

Money 4.0 5.0 4.9 6.4 6.5 10.3 6.5nuasimone . 7. 5.9 6. 8. A P7 13.31 1

n -' 4, -. ) 4L_ A -In- )4 fo e r .C d0ec .J/faU_LU V_L DO UU V~4Q)/0

29. The remarKable stabilty of prices until las year inuicates UnaUthe public was willing to increase its monetary holdings as fast as thesupply was increasing. The average cost of living index for 19ot/o stoodonly at 118.9 (1959/60 = 100), having increased by only 2.2 percent inthe three years 19>/oo to 1o7/oo. Though the index gives inadequateweight to modern industrial products, there is a wide consensus that priceswere quite stable until about the summer of 1968, when inflationarypressures did appear; from Esfand (February/March) 1968 to Esfand 1969,the cost of living index rose by 3 percent. While in most countriesthis would not be noteworthy, in Iran it was considered to be an alarmingdeparture from the accustomed stability. At a time of good harvests,

- 18 -

increasing industrial production and continued relatively liberal importpolicy, this rise was taken to be a sign that, despite the relative switchfrom money to non-sight deposits induced by rising interest rates, theeconomy was not willing to raise its holdings of money and quasi-money atthe rate imposed by the growing financing needs of the public and privatesectors. The real counterpart of these monetary events was, of course,the increasing excess of investments over desired real savings. In 1968/65,the capital inflow, despite its record size, was not enough to close thegap, and prices also had to rise.

The Overall Saving,aLGap

30. Although the year to year data are subject to very considerableerror- the general +.rnd i.- nea. Bot.h nriva+.P and nnbli invetmentincreased repidly after the years 1963-1965. In both sectors, savingsmord moro OnTlyT A avvinct ann wmilld Thrp nnnvind in O1J/AC/ but

for the R1s. 10.5 billion oil bonus received in that year. The gap didapnrr ,n i16IA[f/A mor- hn"obedi-h follwin T.r^ ir nv n"d mo:-ethan doubled again in the following year, to reach Rls. 36.9 billion in

The savings gap - which is naturally reflected in the balance of paymentssItUtion - WaCS alSO equal tO about one-t51h-1rduo 01 rhads i.ports in L

1968/69. Of course, it is highly desirable that Iran should have someapital impors b 1u te speeU with whch Che gap grew was aLarming.

- 19-

CHAPTER III

THE BALANCE OF PAMENTS

Imports

31. The growing requirements of the modern sector for importedraw materials and intermediate products, the growing private and, even g.zeat-er, public :3ector demand for imtported capital goods, and sizable military im-ports, combined to cause merchandise imports to grow at an average rateof more than 20 percent, from $461 million in 1962/63 to $1,432 millionin 1968/69. 1/ In fact, this average understates the recent trend;there was almost no increase in 1963/64; and the following years recordedincreases of 40 percent, 20 percent, 10 percent, 28 percent and 23 per-cent respectively. Finished civilian consumer goods played a very minorpart in this growth, thanks to the increase in wheat and sugar productionand to the growth of well protected import substitution industries.The impact of the latter can be illustrated by the case of automobiles.There has been a rapid expansion in the use of cars in Iran. Imports offully assembled cars have fluctuated around the annual value of $20 millionfor many years. Imorts of parts to be assembled in Iran, which werenegligible six years ago, amounted to $50 million in 1968/69. Similarphenomena occurred in other imnortant fields. thouph renortedlv not forimports of armament. These are said to be substantial, though it is notclear ho thv are reflent.e in imnnrt stnasti- Tmnn-rts of' investmentgoods also increased markedly, at an average annual rate of 24 percent.This high rate of ineae=. in invem+.men+. nn imnr+. is the re.fl+. nf the

fast growth of investment combined with an apparent increase in its importcontent, linked to the growir7ngv importance of thea Moder"nsetr

32 a The nr procs ofr i ndrli zat + Tii wh ich ha son stro"ngl a Iffectedf r

the composition and volume of imports, may now undergo a change in content,if' the iutr1itonprocess deepens, and anincre-4- propotion" ni

the value added of some final goods is contributed by domestic production,~ ~J. ~UALOl)J~ L116 gl w l I.11WU 1 11 1 UX-3111ul c u CUMLLdL %CLVLUUCXL GOI S 11. P01 USIkI V JV .

slo! do-n. Thcse tendencies would he further reinf.mrced if the ecomy alsobecomes more 3xport-orientQa. WNhetmr these tendncies do in fact ma-terialize 7ill depond on the orientation actually ta.en by industrial policies.

1/ Balance of Payments figure, adjusted to include certain Governmentimports not included in Customs data.

Tatle 5

CODPC TJON OF' IMPCRTS

($ million)

Avera ge orowth TShare

1963/6L 196L/65 1965/66 1966/'67 1967/68 1968/69 1963/64-1968/69 1968/69

Capital goods lo.h 162.4 223.0 260.7 329.3 376.3 29% 26.2

for industry & mines (5L.O) (72.8) (132.1) (160.1) (230.2) (239.1) (34%) (16.7)

for agriculture (23.7) (41.9) (35.1) (36.7) (27.6) (33.6) ( 7.1%) ( 2.3)

other (26.7) (47.7) (55.8) (63,.9) (71.5) (103.8) (32%) ( 7.2)

Intermediate oods 285.1 L08.0 518.2 558.2 711.0 856.5 25.0% 59.8

for industry & mines (221.h) (317.1) (>10.1) (LLL.5) (5L5.3) (6L1.7) (23.8%) (44.8)

for construction (3L.8) (58.8) (69.2) (7h.7) (120.8) (17.0) (33.5%) (10.3)

other (28.4) (31.3) (38.9) (39.0) (44.9) (67.8) (17.6%) ( 4.7)

Consumer goods 121.0 171.9 157.2 1h4.8 150.0 156.4 4.7% 10.9

Balance of Payments

adjustment 1/ -41.5 -71.3 --91.4 -55.7 -21.3 42.8

Total 2/ 472 671 807 908 1,161 1,432 25, 100

1/ Mainly addition of certain government im-ports not reported in trade returns and subtraction of importsby foreign-owned oil companies.

2/ Totals may not add up becausp ni' rounding

Source: Bank Markazi and Foreign Trade Statistics.

,y1

As for the volume of imports, the desirable deepening of the industriali-zauuiji-u~ 4-d~ e U11VUU .. lJ-V± ,iLJLji d UIJFV1.L U W1 1

national income increases. But, of course, the future path of imports(and of exports) also depends on the evolution 01 the resources gap.

c.xportas

33. The oil sector, already examined in Chapter I, of course domi-nates the export field. Foreign exchange earnings from the oil sector 1/increased at an average rate of about 16 percent in the past six years.The imminent decline of this rate has often been predicted, though notyet realized. in fact, the dependence of Iranis oil exports (or or tose6of any other individual country) on world demand is indirect and limited.Most of the operating companies have many sources of supply - differentones for different companies - and decisions as to which source is toexpand at what rate are part of an exceedingly complex process, in whichgeographic location, magnitude of reserves, quality of crude, cost ofproduction, and sheer bargaining all play a part.. This report makes noattempt at predicting the outcome of that process.

34. Iran's non-oil exports are neither negligible nor stagnant.On a per capita basis, they are larger than those of, say, Pakistan.They grew at. an average rate of more than 11 percent over the past sixyears, much faster than the overall exports of underdeveloped countries.In fact, the growth rate would have been even higher but for a temporarysetback suffered in 1966/67, largely because of insect infestation ofthe cotton crop. As shown in Table 6, carpets have accounted for 46 per-cent of total export, growth, cotton for 16 percent and a variety of otheragricultural products for 21 percent. The growth of agricultural exportsseems to be primarily related to the growth of production. However, forsome individual items the bilateral trade arrangements existing betweenIran and most East European countries may have been important, at leastin helping to secure relatively good prices. In the last year or two,there also appeared signs that the quality of some traditional agricul-tural exDorts - notably dry fruit - has at last beeun to imorove. thushelping to secure better prices in the West. In the next few years, asthe modern acricultural sector exoands. conditions for the further frowth.of agricultural exports should be even better, provided inflationary pres-sUres are kent undr control and nries remain comnatitive. Tn the longerrun, the continued growth of these exports will of course depend on thenath of nrnduction and thrRform. indirectlv, on the r,onititon of th

institutional and technical questions which Chapter I briefly mentioned.

On the treatment of the oil sector in the Balance of Payments andrelated discussion, see Appendix I.

Table 6

TON-OIL IX?'RTS

($ millior)

Average Growth Share1962/63 1963/66 1966/65 1965/66 1966/67 1967/68 1968/69 1962/63-1968/69 in 1968/69

- PercentageIgPrcent_Cotton 26.8 37.6 36.9 50.1 28.8 37.9 L2.9 8.63 19.8.

Fresh K dried f ruits 26.8 19.2 19.8 23.0 19.9 21.6 28.3 2.2 13.0Hides, leather & their proihc ts 5.9 9.7 12.9 10.1 16.6 11.9 13.7 15.0 6.9

Caviar 2.9 2.6 3.L 3.7 3.8 6.1 6.5 7.6 2.1

Othe r agricultural products 16.1 19.0 22.9 27.1 27.1 31.7 38.1 25.5 17.6

Mineral products (ores, salt, 7.2 8.7 13.7 15.7 1L .3 10.6 12.3 9.2 5.7sulphur )

Carpets 22.1 26.6 36.L LE.L 62.5 69.6 59.6 18.0 27.5Clothing (hosiery, shccs, other) .6 .3 .L .3 2.5 6.1 7.2 62.0 3.3Other exports 8.5 6.7 8.7 5. L1.2 8.7 10 .3 3.2 4.7

Total 116.1 128.2 153.2 180.8 157.5 181.8 216.9 11.3

1/ Individual Droducts which contributed less than 1/2% to 1965/69 non-oil exnorts are included with "othe r exportsll.

Scuce- Bank Mgrkai Iran., Based on customs data.

- 23 -

35. The carpet industry appears vigorous despite its old age andonuht to ontinu its substantial contribution to export growth: overalldemand for floor coverings has kept increasing in Europe and America, andnt. a ertain innme level oriental tqrnets and "wall to wall" may well be

complementary, rather than competing products. However, the relativelyIow nrine of Tranian rnents dAerndn on the low uaes still naid to workers.

a sizeable proportion of whom are still children. In the long run, ifTran cnntinus +o devopn at the rneean+ to +his is hound tn change,

and at least the medium quality carpets may well lose their competitive

carpets. It may be, however, that by that time there will be sufficientdeand UL for& the finest 4rg to aLLowcniud rwhotevleocarpet exports.

36. Other labor-intensive industries, notably leather-processinganu shoesj aWIL u UUdJ JJL4stJV±- __ ___ L -- __ __- -- I --- A.

but in the longer run, their possibilities will depend on policy factorssuch as those mentiOned in Chapter I. This is even more true o uz:, newerindustries as have been recently set up in Iran with the primary aim ofimport substitution. Overall prospects for continued growth of theset:adition<l .:on-oil exp)oz4s u.re distinGt:ly :good the; ca. .e e:cpeacveato perlorm as -ell or better than over t1e past six rears. iowever,further acceleration and a broadening of the export base are of coursedesirable. A very active export promotion policy should be devised, andapplied within the framework of rationalized import-substitution, indust:rialand agricultural development policies.

37. Several large-scale export-oriented projects were started inthe latter part of the Third Plan: three petrochemical projects, analuminum plant and a pipeline for gas exports to the USSR. The latteris somewhat behind schedule (and has, incidentally cost much more thanoriginally projected), but it is nevertheless likely to contribute annuallyabout $50 million to exports towards the end of the Plan period, around1972/73. However, the contribution from the other projects will be rela-tively small in the next few years. The growth of domestic demand forpetrochemicals, of fertilizer demand in particular, has outrun expectations,and a larger than expected share of new production will be absorbed inIran. Some of the projects have also run into considerable delays. Fur-thermore, the prices of some major petrochemical products, notably sulfurand ammonia, are likely to be much lower than expected at the time of theprojects' inception., Overall, these petrochemical projects are not likelyto contribute to exports in the current year, and very little in 1970/71.Thereafter their contribution should become substantial, but still remainvery much below the original expectation - say about $60 million in 1972/73.

1/ Instead of the Plan figure of 280 millinn.

- L4

The Overall Balance and Foreign Borrowing

38. The economic content of several items of the Balance of Paymentsis not too well known. These items are consolidated in line D of theBalance of Payments summary presented in Table 7. In 1968/69, the increasein this negative item accounted for half the total payments deficit; yetthe greater part of the increase is only explained by a swing in "errorsand omissions" from +9 to -137 million dollars. For proper foreign ex-change management, a major effort at improving Balance of Payments datais desirable. 1/

39. A noteworthy feature of the Balance of Payments is that thegrowing deficit corresponding to the savings gap described in ChapterII has resulted from the risin-; excess of the rate of gro_rth ofimports over the rate of growth of exports. Furthermore, unlikemost less fortunate countries whose exports depend on a wide spectrum ofeconomic activity, Iran's major source of foreign exchange earnings in-creases exogenously, unaffected by domestic economic policy; booming, oreven excessive domestic demand would not measurably slow down the growtl.of foreign exchange earnings. In most recent years, this growth in earningshas been as great, and often greater, than the previous year's paymentsgap; slowing down import growth by one year only would have eliminated thegap altogether. Thus, in the early 1960's, it took less than two yearsto move from dangerous deficit to comfortable surplus. This is not tosay that Iran should have followed such a policy, but only to indicatethat if past trends of earnings continued, the balance of payments problemwould not be as large as it looks when a given year is examined in iso-lation. Conversely, one must also note that if the growth of foreignexchange earnings, in particular of oil revenues, were to slow down - apossibility which cannot be ruled out - extremely harsh measures would bereauired to reduce the diseauilibrium - all the more so that Iran hasalready drawn down its foreign exchange reserves, and expanded its foreignborrowing, so that neither of these means would be availaole to cushiona sudden slow-down in the rise of earnings.

4o. The Balance of Payments disequilibrium and corresponding savingsgan were financed mainly by medium-term foreign borrowing and. in recentyears, by a drawdown of net monetary reserves. Published Balance of Pay-mnts data on nrivate qe-t.r hnrrn-rin are kncwn tn be innomnplete andnotably exclude supplier credits. Public sector debt data are much better,t,houg,h it. isq not. clearnwhethr t.heyi arep fuilly conmpehensczive. Tn 19(0/0-4and 1963/64, the Government and monetary sector together were still improving

1/ The first line of effort should aim at reconciling Balance of Paymentsn,, ynn~--nrrAn+n

- 25 -

Table 7

BALANCE OF PAYMENTS SUMMARY

1962/63 1963/64 196L/65 1965/66 1966/67 1967/68 1968/69

A. Net receipts from oil sector 407 h68 726 589 759 825 988

B. Other merchandise exports 125 138 153 181 157 182 217

C. Merchandise imports -461 -72 -671 -807 -908 -1,169 -1,32

D. Transfers, services and -63 -82 -77 -55 -130 -60 -260capital n.i.e*

Deficit or surplus (.- indicates 8 $2 131 -92 -122 -222 -487deficit)

E. Private 5 4 4 9 18 18 25

F. Government .16 -38 -32 30 83 210 372

of which(receipt) (67) (13) (37) (86) (124) (266) (475)(repayment of principal) (-51) (-51) (-69) (-56) (-41) (-56) (-103)

G. Monetary (net change in reserves) -29 -18 -103 53 21 -6 90

* (Tncludes errors and omissions).

Source: Bank Markazi and IMF.

- 26 -

their net foreign asset position, by $56 million in the latter year. In thefollowing year, the corresponding figure was $135 million, but Iran had justreceived a once and for all bonus of $180 million for agreements concludedwith various oil companies; but for this bonus, net borrowing requirementswould have amounted to $L5 million. In 1965/66. there was a net inflow ofofficial and monetary capital of $83 million, increasing to $104 million in1966/67, $20L million in 1967/68 and $h62 million in 1968/69. In the currentyear, the corresponding net inflow may well amount to something like $600 mil-lion. Clearly. such a nrnoression nannnt be kent in fnr long. This is iarticu-larly true in view of the heavy reliance on relatively short-term credits, thedegree of whinh is ill1sit.rated1 hv what we know of the terms of loans nnn-

tracted last year by the Government. As shown in Table 8, 82 percent ofnePw bo r ring asn for- less than 10-7 yers,-. nneien± fn-e, A x7r.s

or less.

Table 8

SUMMARY OF TERMS OF GOVERNMENT FOREIGN DEBT CONTRACTED IN 1968/69*

1aI ULU! UY

5.01 8.01 More=ss thian to to than5 Years 8 Years 10.7 Years 10.7 Years Total

Loan Amount 49.6 133.0 72.1 55.9 310.6

Percentage 16 43 23 18 100

* Coverage of loans contracted is incomplete; terms of other loans are notknown.

Source: Plan Organization. Figures relate to disbursed debt only, includ-ing, in principle, debt of Plan Organization, debt guaranteed byPlan Organization, and debt of other Ministries and Public SectorAgencies.

4l. As the step-up of borrowing is relatively recent, it cannot besaid that the amount of debt outstanding, $2.25 billion (including about $1.1billion disbursed) on March 22, 1969, is dangerously high. But debt servicerose much faster in recent years than the amount outsta-ding. More than halfof the outstanding is still in the form of Governrnnt to Govcrrnment andinstitutional loans; but new loans contracted in the past tiwo years wereprovided mainly by private sources. largely supliers of eauipment. Thenominal interest rates on these loans are often quite low (though more

- 27 -

may be concealed in the supply price). However, short maturities add todebt service even faster than high interest rates. Service on Governmentdebt rose rapidly, from a low of $55 million in 1966/67 to $139, millionin 1968/69 and an estimated $280 million in the current year.& o Ui"

should be added about $60 to $70 million service on private debt. This isequivalent to about 25 percent of expected current earnings from the petro-leum sector and other merchandise exports. 2/

42. The point to bear in mind is that import needs, including needsfor raw materials and other current inputs, are increasing, and foreignexchange management would become exceedingly difficult if these had to befinanced out of new loans. In other terms, it is important that foreignexchange available after payment for debt service should increase in stepwith needs. In the current year, earnings from the petroleum sector maywell increase by $200-$250 million, but about v 70 million of this willconsist of advance payments by the Consortium. Non-oil exports are alsoexpected to do well, and may well increase by ovor 15 porc'Kit say $30million. Goverrment debt service is projected to increase by about $140million, thus leavini only a $20 to 270 million increase in non-borrowedresources after debt service, plus $70 million advance on oil revenues.A substantial Dortion of the remainder will be absorbed by erowina servicepayments on private debt. Thus, even in a. year where current earnings areexpanding fast. relatively little remains to meet increased current importneeds.

43. The problem should not be considered in terms of Iran's abilitytA- qprinp t,hp- lpbt it haq q1rrnd .qmHv thpt npnrnot h PP.r-iuF;lyquestioned. However, unless the expansion of the service burden is sloweddow.n- there" mniy not. remanin enough1- f ree fo-reign exchlinag ton sat,isfy ror.needs for current imports; and in the aggregate, if it is desired to mair.-

ta n Q~- 7,nnT-1n n= r . nnni +.n J nI r yr p .r '~ Tn-e nr.i r T%ir A yrr +.n "izi +r.

wholly unmanageable levels. This would hold even if the grorth rate of

which must at least be taken into account. There is as yet no need totikin term of rmd_ing the v_lum _~ ne ___un, but mer --- th----

show that their expansion must be slowed down. Even more important, and"o fr e ,nr n. Ji s. -o modify, -4 he~ t- . P v .L Lrt1n nf V .Ln s , .an inreaSe ra 'A-.

cally the share of longer-term development loans, and reduce that of shortaniu O,.i. Uen± ex-ooni±ve Su ~ -U iJ.- _L0 LiUUIA-5.L ± ~ U UL1Vr1G -

the purpose of which is to expedite the development program - may in factUt;_Lay _LL, U'Y dIea.-Uln-, a, CL-is± KLith 0u dLI-bOLU LIjJJJ idl~ Z;CE_L)±! CL,UL1

measures.

W/ Plin Organiz':tions a:stimate-7 o! de-bt service as :f larch 31, 1969 amountedto $268 million. An additional .)10-12 million is the estimated repaymentson loans totallin_ ."100 million contr;.c Ued cince iiarch 1969.

2/ Hot including an expected adva&nc, iayment from the Oil Consortium.

- 28 -

CHAPTER IV

REPUT DE7RT.nPMNTAND PRSPECTP S

44. For Iran's productive sectors, 1968/69 was a normal year, that

including agriculture, grew by at least 5 percent. However, the divergencebetween Jinestment and savngs and beme cu, nt foein -iw1-g

earnings and expenditures, took truly alarming proportions. Despite record

to increase their utilization of domestic monetary financing. The expansionP' 4-I. U- -1 -- -1OL Vil mone±~y sujp±y, iUc_lu-2-1 - LqUei-II11t y, WILU11± ±11 P.L_t:_ULA.0 ,YtUO lt

been roughly limited to what the economy was voluntarily prepared to hold,lar exceedteu that amount in 1968/69. Hence, a large out1low U mUntuaryreserves which Iran could ill afford, and also some rise in prices.

45. The deteriorating Balance of Payments situation constituted themain preoccupation of economic policy. Attempts were made at agreeing onhigher petroleum exports (and the related revenues) with the oil companies.in the monetary field, the Central Bank took a series of measures inNovember 1968. Legal reserve requirements of commercial banks were raised(from 15 to 18 percent on demand deposits and from 10 to 12 percent onnon-sight deposits). The discount rate was raised from 5 to 7 percent, thoughthie s-ecial rate or short run epo1' credits remained at 3 )Cccent. iAt thesame time, the interest rate on fixed deposits was raised by one point. InAugust 1969, the Central Bank discount rate was again raised by one pointand the rates on fixed deposits by 1.5 points;reserve requirements werealso increased. These measures were not mainly concerned with limitingprivate investment; it was thought, probably rightly, that investment inthe modern sector is so profitable that a 2 to 3 point rise in the costof borrowing would not affect it substantially. Furthermore, the hugeGovernment borrowing ensured that the commercial banks had excess liquiditydespite the rise in reserve requirements. Nevertheless, there are indizcations that the growth of private investment - particularly construction -and of private borrowing slowed down somewhat in the last quarter of theIranian year 1968/69, though perhaps this is in part due to an acute worldscarcity of steel construction materials.

46. The main aim of the monetary measures was to encourage privatesavings, in the shape of non-sight deposits. These did indeed increaseby 30 percent in 1968/69, with most of the growth occuring in the secondhalf of the year, and again by 5.9 percent (corresponding to an annual rateof 26 percent) in the first quarter of the current year (March 21 - June 20,1969). Much of this steep rise constitutes a switch from one type offinancial holdings. money. to another. rather than an actual increase insavings. Nevertheless, in the longer run, in the virtual absence of other

- 29 -

vehicles of financial savings, it is very inPortant that fixed depositsbe reasonably attractive, and the recent measures are an important stepin that direction. Furthermore, though the return on fixed depositsremained higher in Z4urope than in Iran (3 to 12 months Eurodollar depositsbore about 10 percent interest in August), the rise in interest ratesmay have marginally lowered the encouragement to capital exports.

47. On the side of Government, the new policy - implemented withthe help of the new team installed at the head of the Plan Organizationin late 1968 and 1969 - consisted of an attempt at bringing under controlthe increase in Government expenditures. The impact of the new policy isnot immediately apparent from the available indicators. The currentstrenuous efforts at cutting down the expansion of Government expenditures,notably on development projects, are more than balanced by a burgeoning ofnew projects in various stages of approval, and by cost overruns; thetotal expenditure needed for approved projects would therefore be far inexcess of the Budget figure. Current efforts aim at bringing the revisedprojection of expenditures down to a level not far in excess of the Budget.This is broupht out in the following table:

Table 9

Revised Estimatesof Development Expenditures

in Plan Oranization Rudent for1969/70

krials 0illion)

Additi_ona l Overallrequests from cuts by Revised

Actual Budget Kinistries and Plan Ourga- Development1968/69 1969/70 other Agencies nization Budget

Investment 64.71 84.62 24.24 12.72 96.14Expenditures

Recurrent Develop-ment Expenditures 10.08 11.41 11.41

74.79 96.03 107.55

Source: Appendix tables.

It is too early to say how successful these efforts are globally. It iseven more difficult to evaluate their impact on the quality of investmentprojects, from the point of view of economic returns, technical adequacyand price of equipment. The chances for success in all these fields are

clearly related to the division of responsibility between the various

other groups concerned with project execution. This is also true fore.L±trv be Lncrea,e UOVernmen11U baVin1g - Uy b.LUWJ1ig UUW O1n rWit uE U1-

rent expenditures or increasing revenues - which are of course equallyiMportant for the solution Of financia diLfficulties. The implementtionof difficult financial policies generally require a clear division ofresponsibilities and a strong central financial authority, and wnile tneletter of the law may attribute such authority to some organization, noneseems to possess it in fact.

48. The third main line of policy aimed at further increasing foreignborrowing. Increasingly, foreign financing is sought to cover not onlyimported equipment, (including armaments) but also local expenditures oninvestment projects. The Government, as well as the private sector, seemto have met with considerable success in borrowing abroad. This of coursehelps to relieve immediate balance of payments pressures. However, thelonger-term financial implications of the current borrowing program couldbe extremely serious. Whether the overall volume of current and plannedfuture borrowing is excessive of course depends on the terms of the loans.Most new loans were tied to imports of equipment for projects and militaryhardware, and were on relatively hard terms. Iran has also obtained untiedloans from financial institutions. These include the private placement ofDL 80 million 10-year 7.25 percent Deutsche Mark bonds, a $50 millionstandby credit from German banks obtained in the current fiscal year,(this has not yet been used) and an $80 million 5-year credit arranged inAugust 1969 by an international banking consortium, at an interest rateof about 11 percent 1/ (not including short-term credits arranged by theCentral Bank). A high proportion of Iran's recent borrowing seems to havebeen on relatively short term. The soaring debt service resulting fromall the borrowings has not yet reached an unbearable level, but may welldo so rapidly if the terms of future borrowing are not carefully watched,and if the increase in borrowing is not, at the very least, slowed down.

49. All in all. this series of measures has probably succeeded inavoiding an imnediate crisis, though this still depends on two majorexogenous factors: the amount of oil revenues to be received next year,and payments for military imports. In any case, the situation remainsDrecarious. Foreign exchanpe reserves. enuivalent to less than two months' 2/imports, allow little room for maneuver. Borrowing has already beencarried to considerable extent- and thmnwh there still remnins some 1 atitude

in line with changes in the rate on 6-month Eurodollar deposits.

2/ One month if the currency backing is deducted.

- 31- -

for further expanding the annual volume of net capital inflow, it must bEutilized with caution even if the terms of borrowing are rapidly improved.Yet Government and private expenditures, on consumption and on investment,still tend to grow faster than revenues, and the institutional deficiencieswhich reinforced these tendencies still prevail, and their correction, ifit is to be achieved without undesirable reduction of the investment effort,will take time. It is all the more important that the recent effortsshould be pursued and deepened.

- 32 -

CHAPTER V

CONCLUSION

50. Iran has made remarkable progress towards becoming a developedcountry. Production has been growing fast in most fields, and hugeresources have been invested to lay the basis of future growth. Alarge and growing modern sector has been created - modern in its methodsof production, in its ways and standards of living and, increasingly, inits intellectual outlook. WM-hat was, well within living memory, one ofthe world's most backward countries is in the process of acquiring modernindustries, a transformed agriculture, and modern infrastructure intransportation, power, telecommunications, irrigation. Even outside themodern sector, a radical institutional reform has taken place, levels ofeducation are increasing, living standards have improved, and governmentprograms are helping to spread better health practices and the knowledgeand the means of family planning.

51. Of course. much further nrogress is necessary: desoite tremendousgains, neither the economic infrastructure nor the administration are yetadennate to the needs of a fast develoninf rountrv. The transformation of

agriculture has only begun, and the social problems of modernization arestill unr.onlyipi Tn the industrial ctor, the rve-rnmnt must nursue

further the transformation of industrial policy, from the protection of

industrialization. This is a complex task, and an important one, in whichthe need +o offse+ +em,norr oelr AMilonl+ m+ h balannn,edl n'7 i0n+the danger of setting up permanently or, at least, for a long time, inefficientinduFtries. Thc:r' is no easy sal+io to +hi probl En+ n+ 1000+

the avoidance of extremely high levels of effective protection wouldenee +ha+ evxceso-v.ely -i-no+17r nio+n1rnc2 ny%p nY rn!mm++rr1 UnTc-rvup- i+,

is necessary to go well beyond such general statements, and this willreonire much further o+dy o Iran-5o'nam odi +er enmn,a+o 1 ad-

vantages and export prospects. Such studies - and the general needs of

integration of the various administrations involved in economic policy.

52. Administrative tradition is very young in Iran, and the admin-.J.. ~ ~ ~ ~ ~ ~ ~ ~ .LV CZ.-".L V L±~ ULA~ ~~0JL~ .L\4 .J. U ,LA z.A,L44..U

is still changing frequently. Nevertheless, the extreme subdivision ofadinstatv reposiilt in the ecnmcfleld- seems to be anendur-ine,

characteristic. This is not a matter to be settled through revised retu-Lations e cou6 e 1In CUL DU UOnU witin Im U rIWorfUVU1 L 11 alUa-

practices were revised. Unfortunately, however their functions andorganizational linkages may be defined in principle, each Uinistry andpublic sector agency has a tendency to act as if it were fully autonomous;

- 33 -

anr int.inrint.inn h-v nth,r nriPq inn tn bhP re.qpnted and resisted.

This makes it very difficult to elaborate and carry out properly coordi-tin+.id mvrrnll irono nliticzo* i+. nln +fnnd1.q +.e 1n I-mr thp rinali tv of

investment, by preventing the spread of coordinated and consistent projectevalution p-rcices. ' Pin ^-Yrn"nl 1 1^ ^- nrlyi niAm +-n+iinm nho.qjnn -I.Pnrls

to make for lax fiscal discipline; the very idea of regular budgeting is

reinforces the tendency, shown by many agencies, to arrange directly for

consequences. It is true that the letter of the law allows only the PlanVi~d.L-GU J&UVLij ii"- QIVIIUrcJ" DaUM.k, d.LJU LML U_L.~ JU.L VILQU UU %1VA1 LI.LLL'

external loans; but in fact, financial discipline is not strongly enforcedand many agencies sUm to conduct ueIr own Uinancial negoUations witUforeign suppliers.

53. Hitherto, since the 1959-60 crisis, the ill-coordinated admini-strative structure and lax financial discipline have created only relativelyminor problems, owing to the rapidly growing oil revenues and the prevaiLingoverall economic buoyancy. Nevertheless, the financial situation now callsfor corrective measures, which cannot be pursued with adequate attentionto real national priorities unless the activities of all administrationsare systematically coordinated. There is therefore urgent need for im-proving administrative coordination and fiscal discipline, all the more sothat economic policy should be to some extent prepared for the eventualityof a slackening of oil revenues, which would reinforce the urgency anddifficulty of carrying out stricter financial policies.

54. The financial difficulties have appeared despite a savings per-formance which is quite creditable by itself. However, it is not commensu-rate with the pace of development Iran aims to achieve. On the side ofthe private sector, the problem consists mainly in establishing modernfinancial mechanisms,commensurate with the size)income level and rate ofgrowth of the modern sector. The Government's problem stands on twofeet; savings are the difference of current revenues and expenditures.The tax base of current revenues can, and should be increased, above allby the creation of an indirect tax system no longer relying exclusivelyon customs duties. However, taxes cannot be extended indefinitely, andat some point the economic cost of increasing the tax yield would outweighthe benefits foregone by slowing down the expansion of current expenditure.The advantages and drawbacks of slowing down the growth of current expen-ditures must therefore also be carefully weighed. It is important thatthis examination should be comprehensive and extend to all current expen-ditures, including defense.

55. In the past two years the savings gap could be bridged only byborrowinE techniques. continued reliance on which could endanger the smoothpursuit of development. In the short run - indeed, immediately - thecomnosition of newT borrowina must be modified so as to IPnothpn it. nvPrPrP

- 34 -

maturity and reduce the rate of increase of debt service in the comingvpar. to a mannaehl level Thp limits of Trantp Apht qprvicing abilitywould be fast met if borrowing continued to expand on average presentterms, w.h4ich car n nnnisni rin)%+ on v".

4 e-a ^)-I J 4 - 9) r.io--n. or

more, and in a very few years net borrowing would have to be reduced inorder to a-toi4 An-n-- poo4,ve gro?wt+1 ori '-+ n". A-1,+ andA Anh+ C'-ri-n

Unless internal resource mobilization efforts are particbrly successful,VILCJ ~UI J.LILU.. gAjotLAbL of nonoi exportsJ pat'c lryr~U~9 JL L SIZ-ep CUMU V11VC.ZJLSOL"CU 04-

bution of the oil sector grows much faster than can now be expected, theneve±upe:n-LU pJogm=ouu LJOU]LU U e b:UUbJ.y lluru by It"nle urutval Lura.L.any us

net capital inflo7- ahich would be the unavoidable consequence of continuedlarge use of short-maturity loans.

iran snoula tnererore make a major effort to moDiize capia,on more suitable, longer terms. This would require an effort, in the sensethat institutional lenders such as the IMtD, which are the best source ofsuch capital, require more thorough technical preparation and economicjustification of investment projects than is at present the practice inIran. Such improvements would be rewarding by themselves; they would bedoubly worthwhile if they also attract better financing. However, thisneed must also be perceived bj the project executing agencies, who do notthemselves carry the burden of financing, yet must make the effort ofpreparing projects suitable for institutional lending.

57. In the longer, though not a very long, run, the need for externalcapital inflows will have to be stabilized as a proportion of income and offoreign exchange earnings. The growth of the gap between savings andinvestment will sooner or later, but conceivably quite soon, have to behalted, either b- increasina the growth of savings or, if need be. b:Ychecking the growth of investment. How large the gap can remain, howmuch Iran can prudentlr borrow. depends on the average terms of the loans.on the likely future evolution of the savings gap and on the expected pathof foreipn exchanqe earnings from the oil sector and from other exports.These are not known in advance with any precision, and they can be stronglyinfluenced by noliev measures Broad indrments have to be made on thebasis of past experience and rough,expectations. On the basis of suchiudyments, it uTld q.-n thnt. rantivl shrt. term hnrroiAn hy Tran has;already reached the limits of prudence. It will require considerable effortin nrnmn+.inY thip mn-v-T+.h nf Qn%4n(7 in iner-AinnP thP offiirPncy of investment

and in securing higher foreign exchange earnings from the oil sector as wellnq f'-rnm ^i-+.cv OVnn4 **^ Vt n +he.v~ ---- 1ii 4rf i i-~mil-r ip ~ dwto a range of $400 to $500 million during the next five years. The grossinflTy.- ?Vuld be n lane+ $23O m4"114 nae sA n,*.l A k,n.av 'ran,r ah

higher, unless an immediate campaign to secure better terms is undertakennd.V isL 4' VIM . OUU%1Z .L.L

STATISTICAL TAELES

AreaA Population, mployment

1.1 Area1.2 Population1.3 Employment

National Accounts

2.1 GNP and Its Components

Balance of Payments

3.1 Balance of Payments3.2 Composition of Non-Oil Exports3.3 Composition of Imports3.4 Direction of Trade: Non-Oil Exports3.5 Direction of Trade: Imports

External Debt

4.1 External Public Debt Outstanding, September 19684.2 Government Debt Service Projections, September 1968L.3 Government Debt Service Projections, March 19694.4 Disbursements on Foreign Loans4.5 Terms of Debts Contracted in 1968/69

Fiscal Data

4.1 Contrnl Cv1nmxnfnt Crrnnt Exnpnditures

2 Summary of Government Revenue-1 R-GnrnnmentEvmni+mres fr National Afenn and Spcuritv

5.h Distribution of Government Development ExpendituresRaicdETn+.mats of onverncrnt Devnlnment Rnpnditures for 1969/70

6.2 Causes of Change in Money Supply

8.1 Petroleum Statistics

Prices

9.1 Price Indexes: Annual Averages9.2 Monthly Cost of Living index9.3 Monthly 1-holesale Price Index

Table 1.1

LAND AREA

Square MillionA.1-ornetuers net~cIares

Total 1,648,000 165

of which:(i) Mountains and deserts 50,000 o5(ii) Suitable for agriculture 400,000 40

(iii) Area under cultivation 71,000 7(iv) Area temporarily fallow 120,000 12(v) Balance 209,000 21

Source: Fourth National Development Plan 1968-72

Table 1.2

POPULATION BY AGE GROUP AND SEX

(thousand of persons)

Active 1/ Inactive Total

Male 6 ,85 6,397 12,982

Under 10 - 4,436 4,436

10-1. 571 1,023 1,594

15-64 53773 664 6,437

65 and over 241 274 515

Female 1,000 11,097 12,097

Under 10 - 4,107 4,107

10-14 202 1,221 1,423

15-64 777 5,337 6,114

65 and over 21 432 453

Sub-total Settled Population 7,585 17,494 25,079

Unsettled Population n.a. n.a. 244

Total Poppltion 25.323

of which Male (13,110)Female (12,213)

Mean Average 22.2 yearMedian Age 16.9 year

1/ Eloved or seekine work.

Source: Table 3. IBRD Report Dl7A-1a. February 25. 1969.

IMDTr)InTUMrr QrTArTT(Z r)LI MtLIV ArmTTVTI-'L'DTT ArTrrr1\T

"-IA AN.h.J U'J.AAV .L LI .L XL. V JL'.J %aI. .11 iJ.W. .fl J V 4.L J. %J4 . %LhL .L WIM~

NOVEMBER 1966

Thousands ofPersons Percent

Agriculture, Forestry, Hunting and Fishing 3,168 41.8

Mining and Quarrying 26 0.3

Manufacturing 1,268 16.7

Construction 510 6.7

Electricity, Gas, Water and Sanitary Services 53 0.7

Commerce 552 7.3

Transport, Storage and Communications 224 3.0

Services 930 12.3

Others 128 1.7

Sub-total Employed 62859 90.5

Unemployed 2/ 726 9.5

M .L--I A -. L.! --- .* -. L.! CIO r, n^^r ^.Loudj. ftL;U.Vt-_Q VOLLI.Ul ~I U.

1/ See Table 1.2 for definition of Active Population.

2/ Includes 42,000 persons temporarily unemployed.

Source: Table 4, IBRD Report EMA-3a, February 25, 1969.

GNP AND ITS COMPONENTS

(in billions of rials, 1959 prices)

Share of (2)1968 value - Averageadded in GNP annual growth rate

1962/63 196,3/64 1964/65 1965/66 1966/67 1967/68 1968/69 (at factor cost) 1962/63 - 1968/69

Agriculture 88.3 89.9 92.2 99.0 102.7 110.9 116.4 23.7 1.6

Petroleum (net Balance ofP aymEi;nts rOeceip.otfroIm

Balance of -ayments oil (3)sector) 30.5 35.1 54.5 44.2 56.9 61.9 74.1 15.1 16.o

;;Ioc 8.8 7.8 7.5 12.6 7.2 14.1 12.6 2.6 6.1

Construction 13.5 15.2 16. 19. 20. 25. 3 -- -0.1 6.1 l.

Water and Power 2.2 i.l 5.0 5.7 7.7 9.6 11.3 2.3 32.0

Others 125.4 132.1 143.2 160.1 170.8 191.1 209.4 42.6 8.9

Transport andCommunications (26.0) (26.7) (27.3) (27.8) (28.5) (35.5) (37.8) (7.7) 6.5

Banking and Insurance ( 7.4) ( 7.5) ( 9.1) (10.3) (11.6) (13.7) (15.5) (3.1) 13.2

Wholesale and retailtrade (32.7) (34.2) (35.9) (39-1) (ho.0) (h5.0) (48.8) (9.9) 6.9

Ownership of dwellings (19.7) (20.7) (21.9) (23.7) (25.3) (26.9) (28.) (5.8) 8.4

Publi:2 administrat:Lonand defense (2h.h) (27.1) (32.2) (41.2) (L6.0) (L8.7) (56.0) (11.h) 11.9

Private services (15.2) (15.9) (16.8) (18.0) (19.4) (21.3) (22.9) (4.7) 7.5

Statis-ical errors 4.0 2.0 3 1.4 -12.9 -16.8 -19.2 -4.0

0. N. P. at factor cost) 302.h 318.3 358.8 181.1 197.1 hb6.6 h92.0 100.i1 8.5

Indirect taxes () 18.8 20.7 20.5 25.8 29.8 34.7 3 7.9 12.5

G. N. P. at market price 321.2 339.0 379.3(5) 408.9 427.1 481.3 530.8 107.9 8.5

Non-oil G.MP (810) (2o6.1) (217 3 2o' 11 1A1 n 4 0n15 11..(7 ff)

GNP at current marketprices 34;I. o 6. 1-C). en 167-7 49.4

(1) Statis-tical----r-*Incudes

(a) Statistical errors as in Naticnal Income Accounts of Iran, Bank Markazi estimate.(u veb factor income from abroad not due to petroleum sector.

(2) Contributions are computed on basis of GNP at factor costs. Entries do not add to 100.0 because of rounding.

(3) Includes oil bonus.

(it) including returns from monopolies when justified.

(5) Including oil bonus payments.

Source: Bank Markazi Iran (March 1969)

Table 3.1

T;AN. RAT.AWIW M PAVMhPqr

1962/63 1963/64 1964/65 1965/66 1966/67 1967/68 1968/69

A. Net Receipts Oil Sector 407 468 726 589 759 825 988

B. Net Goods and Services (-373) (-383) (-578) (-655) (-78h) (-1,06h) (-1,38)

Non-Oil Exports f.o.b. 125 138 153 181 157 182 217Imports c.i.f. -461 -1472 -671 -807 -908 -1.171 -lh25Services (net) - 37 - h9 - 60 - 29 - 33 (- 75) (- 1140)of which:

Travel (net) (-25) (-32) (- 34) (-32) (-25) (- 2h) (- 27)Investment Incame (net) (- 12) (- 12) (- 16) (- 9) (- 8) (- 19) (- 29)Gov't. n.i.e. (net) (- 9) (- 17) (- 23) (- 11) (- 28) (- 44) (- 92)Other services (net) ( 9) ( 12) ( 13) ( 23) ( 28) ( 12) ( 8)

C. Transfer Payments 21 24 9 13 10 8 20

ITAL

D. Private, excl. oil 5 4 4 9 18 18 25

E. Government 16 -38 -32 30 83 210 372

Disbursement of loans and credits ( 63) ( 19) 34) ( 8 ( 130) ( 265) ( 75)r-ncipal Repaymemnts (- 51) - 1) (- 69) (- 56) (- bl) (- 56) (- 103)Other ( 4) (- 6) ( 3) ( 3) - 6) ( 1) ( 0)

F. Monetary -29 -18 -103 53 21 - 6 90

G. Net Errors and Omissions - h7 - 57 - 26 - 39 -107 9 - 137

1/ Including $140 million once and for all bonus payment.

Source: Bank Markazi and IMF

Table 3.2

COMITION C NON-OIL ZORTStthouiaM at )

1963/64 1964/65 1965/66 1966/67 1967/68 1968/69

Agriculture and Forestry 26,555 26,169 29,332 33,850 35,000 43,532

T4..,-.,4. D..A4-. .A

Fishing 8,104 10,812 10,618 8,429 5,918 .3,529

ining 5,763 9,456 11,4 31 10,254 8,oU6 9,117

Food 8,586 13,226 1,083 9,704 16,005 20.681

Beverages 9 2 - - 3 10

Tobacc;o 191 153 94 151 613 307

Textiles 64,527 71,474 95,64 71,692 87,852 103,381

ClothLng 329 420 284 1,417 3,975 5,759

Wood and furniture 120 245 1,853 171 1,000 10h

Hides and leather 9,576 12,926 10,130 14,407 11.916 13,649

Paper and Print 26 1,227 79 70 158 434

tubber 65 352 98 1,102 2,255 1,h75

,hemicals 2,640 4,028 4,618 4,028 6,594 10,417

Ron-metal minrals CR 1 ,7006 1 9o3 1 Ap.,

Metallurgy 39 23 29 19 119 109

metal 623 546 510 8 936 2,028

Machinery iu 377 139 80 137 343

Motor Vehicles 103 74 66 103 54 1,012

Others 93 42 67 80 83 138

Totall STnU A41 1Wa2.s 3.2 TC2 12 . RAn ?AT 1&7 C) 1 21 , ,401 t

Source: Foreign Trade Statistics of Iran.

Table 3.3

C01SITION OF IMPORTS(mi1lime of )

1962/63 1963/66 1966/65 1965/66 1966/67 1967/68 1968/69

Machinery and Componenta 98.7 79.8 118.8 186.5 218.3 286.0 J2,h

Iron, cast iron, steel 77.9 70.5 95.3 131.2 166.0 226.6 252.7

Chbem:als and pharmacutLcals 50.2 66.7 62.5 70.4 82.5 86.6 115.3

Machinery and electrical appliances, articles 39.9 30.6 39.8 53.7 66.0 82.9 109.9for electro-technical use and their parts

Silks, artificial silks and fabrics 35.9 31.6 38.3 6h.6 50.5 56.5 6.-

Aut,omobiles, chassis and parts 3.8 6.6 16.6 17.3 1q.8 3.6 0i.,

Paper. cardboard and related products 13.8 16.5 18.6 20.7 23.0 25.6 33.1dcol, hap, hair an,. their related textiles 20.1 20.1 25.2 32.9 30.9 36.1 3.3

lubber and rubber products 21.3 21.0 20.2 26.3 27.7 21.7 27.F

-ats, fluid oil and their derivatione L1.9 11.6 18.3 27.5 29.1 27.n 26.,

Tanning and dyeing extracts, dfestuff and polish 9.8 11.3 1.7 16.1 15.5 118.6 207

Coacho, cusses, tankers, lorries and vannettee 6.1 2.9 7.5 7.9 11.1 16.3 17.6

Passenger and sports cars 6.9 12.7 22.2 18.1 22.7 20.3 20.1

Detached parts and accessories for motor vehicles 9.0 7.5 8.8 11.3 12.0 14.j 18.6

Tractors 6.2 5.2 13.3 16.6 13.1 16.5 16.8

Copper 5.9 6.5 6.9 5.3 6.6 16.9 16..Alumintum 3.3 3.2 6.5 6.0 7.9 11.6 13.h

Wood and its products 5.5 3.6 5.1 7.1 9.1 9.2 13.

Nickel. lead,zinc, tin and other base materials 5.6 6.1 7.1 8.0 10.6 1.2 131

Live an'mals and animal prodocts 6.6 5.3 8.3 9.3 10.7 9.1, 11.7

Tea 9.8 10.0 9.9 16.9 11.1 8.9 10.7

Glass and glassare 6.5 6.6 6.3 5.2 5.L 8.o 10.2

Sugar 16.9 16.8 59.1 26.3 17.3 12.6 8 0Fert.lirer 3.9 6.6 4.1 5.5 7.3 9.7 1.5

Whea - 15.7 11.6 60.9 63.0 17.0 LL 7.

Mineral ores 9.6 5.1 6.6 6.7 7.3 9.3 12.1

Ceramic products .3 6.0 6.9 6.2 6.2 7.0 1.1

lax, hiemp, jute and other vegetable textile 1.0 1.5 1.9 3.2 6.1 5.3 5.1materials

Hides and leather ..2 3.0 2.5 1.9 2.2 2.9 1.1

Books and printed materials 2.2 6.6 3.6 1.9 6.3 3.1 1.1

Pearls, precious stones and metals and wares - 0.1 2.1 0.1 1.6 1'.9 2.?and their products

Others 6b.9 53.1 56.6 76.8 73.0 82.6 101V6

Total 567.6 513.5 762.3 898.5 961.7 1190.1 1 19 7

1/ Not adjusted for imports not reported in the trade returns and subtraction of inprts by foreign-owned oil companies.

qoure, Foreign Prad MSti r o,- r ---.

M- X A1t "L - XT^ T *r T, VI ML.MZU.UI Ur nIULVi; AIu-V"I ZArWLIO~ L1

(millions of dollars)

1965/66 1966/67 1967/68 1963/69

U.S.S.R. 17 18 30 40

West Germany 26 22 27 32

United States 20 22 21

United Kingdom l 10 10 8

Kuwait 14 12 10 8*

Iraq 3 4 9 6*

Switzerland 6 7 8 7*

Caechoslovakia 9 6 7 8

Others 72 57 61 $5

Total 181 158 182 217

1/ Excludes oil and hydrocarbon solvents extracted therefrom.

* Indicates data for first 10 months adjusted to annual basis.

Source: Foreign Trade Statistics

Table 35$

DIRECTION OF TRADE, IMPORTS(millions of dollars)

1965/66 1966/67 1967/68 1968/69

West Germany 184 210 279 298

United States 158 194 215 224

United Kingdom 117 124 141 181

Japan 73 74 93 133

France 42 39 65 B8

Italy 42 49 61 S4

Netherlands 28 31 49 .0

U.S.S.R. 17 29 34 45

Others 226 231 268 2.89

Total 887 982 1,206 1,339

Source: Foreign Trade Statistics

Table 4.1

IRAN - kxTENAL PUBLIC DEBT 1/ 2/AS OF SEPTEMBER 1966

(t.nousanus o. fj

Disbursed IncludingOnly Undisbursed

I. Private Sources

Suppliers: 1?8,819 381,815

Austria 2,650 3,291V anc, e ",jI,? -LU Lu14lue 4

Germany 43,977 99,705T+alr A A) cA c'

Japan 9,590 59,029Npthprl,nds - 1 nAnSweden - 1,327Switzerland L88 2.OnUnited Kingdom 12,940 65,272United States 2,948 7,219Others 885 12,020

Financial Institutions: 11-1.,569 290,978

Austria. 872 5,781France 10,505 40,420Italy 2,558 26,558Uni ted Kingdom 15,977 76,709Unit- States 81,657 141,510

rt,i. Fravately Held Debt 2Lu,300 b2 ,793iI RDr 133,161

T TI T. oan fnom lovernmen U)( 4)), L4I l)) ,I

Germany l1,338 47,375Ja nan - 17 ,MI

Uni ted Kingdom 8,220 9,350UnJi.ted State 270,4.34 417,760USSR 93,984 419,018Bulgaria - 1,371Czechoslovakia 4,8o8 9,591Hungary 538 32,978Poland 3,756 9,699Rumania 31,870 62,611

IV. Total External Public Debt 3/ 829,892 1,932,265

.7 Debt wit1h original or extended maturity of 1 year or more

2/ Excludes unallocated Dort,ion of frame agreements, amounting to,90.5 'il'ion.

3/ As of March 22, 19(69, Total External Public Debt amounted top2.25 billion including $;1.20 billion undisbursed.

5 mrY,,: +taistis qhp F , TIEnJ and Pla- 0--n1-.zt-Jon Iran

Table 4.2

GOVERNMENT DEBT SERVICE PROJECTTON-S(thousands of $)

P A Y M E N T

Debt Amortization Interest Total

1968/69 1,820,456 99,272 41643 1401914

1969/70 1,767,925 148,593 51,494 200,087

1970/71 1,619,332 189,355 59,761 249,116

1971/72 1,429,977 199,738 56,102 255,840

1972/73 1,230,238 197,387 49,691 247,077

1973/74 1,032,852 100,115 41,711 221,826

1974/75 852,737 172,837 33,958 206,795

L975/76 679,900 154,437 26,579 181,016

1976/77 525,463 12h,769 19,931 144,701

1977/78 400,094 85,923 15,112 101,035

1978/79 314,771 69,321 11,825 81,146

WM7c 'A0 245,450 55,378 9,153 64,330

3O/b1 190,072 47,486 7,155 54,641

1981/82 142,586 39,388 5,490 44,877

1982/83 103,198 27,603 4,194 31,798

1/ Based on debt contracted to September 22, 1968 and excludes $112 millioncontracted uider arrangements not fully diaclosed, of which:

Suppliers Credits 76

Government 32

Source: Statistics Dept., IBRD

Table 4.3

GOVERNMENT DEBT SERVICE PROJECTIONSAS OF MARCH 22, 1969 l/

(thousands of 5)

Year Amortization Interest Total

1969/70 203,721 64,408 268,109

1970/71 237,168 71,536 308,604

1971/72 256,399 68,422 324,821

1972/73 258,696 60,503 319,199

1973/74 241,850 51,243 293,202

1971/75 226,878 39,950 266,828

1975/76 200,415 29,963 230,378

1976/77 158,989 21,195 180,175

1977/78 110,061 14,486 124,547

1978/79 68,906 10,225 79,131

1979/80 34,210 8,047 42,267

1980/81 - 1990/91 153,839 31,956 187,474

1/ Estimate of total outstanding debt in these years were notavailable to the mission.

Source: Plan Organization

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Table 4.5

IRAN: TERMS OF DEBTS CONTRACTED IN 1968/6ý

(In Thousand U.S. Dollars)

Nature ofCrPiii +.nr Tnfprp.q+. Rutp Mntiiritv in Ypnr.R

T.P q ýq +.1n!2 n ni +7 k o R-i +,n 157 107 +.n

years years years 17.49 Itars 20 years

Suppliers Less than 5% 32326.8 4.,006.3 42092.3cýnn n 9 cý nn n J. iýnn o i ()., nnn. n')thers +,y_~~Total lo,826.8 46,5o6.3 8ý592.3 10,000.0

sim-n1 A 0-"c 1ý + , cý J, Oct 0 7ÅR 0 7 9'2 0 ), -1 749 7

1,11 --- ~ 1 -- 1.1 , j ý - - . / i P--m 9-4Others 36.9682.9Tot--' o ?AR o hu 099 1 1 7ÅR 7

Suppliers 5.5 to 5.9,9% 1,670.9 9p455.1 57,835.8Dh= vik 17 nnn.nLtivum U

Total 1,670.9 9.,455.1 57,835.8 17,000.0

fl ^on 0 n "17n n 13p'Jers U0 -,4.7/v 3-juli Lj-Others 28,89m'T' L 1 n 17'7 n N0 Dn^ ^10 Laj- Cý(fc.v CUIU7U.u

Suppliers 6.5 and above 1,486.2 22,722.8^ýuOLhers 7,0'2ö.lTotal, 1,486.2 30,350.9

r_ TT- n^ 170, 0.Dupp'- ers Uilspecified eu,(UJ_uOthersLotal 20,-81.06

,Suppliers Total 423115.4 46,195.6 67,6o8.o

Others Total 7,500.0 86,811.o 4,500.0 55,890.0

Total 49,615.4 133,006.6 72,1o8.o 55,890.0

11ýin percentage Oýh 437Ö 23% 0% 18%

TOTAL - 3102620.0

1/ Partial coverage. Terms of at least $145 million in contracted debt were notreported in source.

Source: Plan Ort--ariization

Central Government Current Expenditured 1/

(in billion of Rials)

Deal14

m4

nor,,nme

Actuale Estimate1962/63 1963/64 196h/65 1965/66 1966/67 1967/68 1968/69 1969/70

General Services 4.6 5.6 7.2 8.0 7.5 8.9 11.1 11.8

Supreme Leadership 1. 0.6 1.1 1.3 1.5 1.9 2.7 2.5internal Affairs 0.6 0A 0.8 08 0.7 1.0 n.R 0.9Foreigr Affairs O.h 0.6 0.6 0.6 0.7 1.0 1.1 1.3Judiciary Affairs 1.1 1.3 1.5 1.6 2.0 2.1 2.8 3.1Finance Administration 1.1 1.5 2.h 2.5 1.8 2.1 2.3 2.5Others 0.9 0.8 0.8 1.2 0.8 0.8 1.h 1.5

Defense and Security 15.9 17.0 19.1 2b.0 27.2 35.7 43.9 51.5

Defense 1/ 12.1 12.6 13.8 18.1 20.0 27.8 3b.4 41.3Security 3.8 4.4 5.3 5.9 7.2 7.9 9.5 10.2

Social and EconomicSernrices2T/ 19.2 216 2. 2. 8., 3.7.2 ..(

Frincation 10.0 11.0 12.0 13.0 13.8 15.0 16.9 18.2Hygiene and Medical

Care 2.0 3.0 4.6 h.3 4.5 k.8 5.1 5.4Agriculture, Water

and Power 3.0 3.3 3.9 2.8 3.0 3.1 3.9 L.7

Communication 2.5 2.7 2.5 2.7 3.2 3.4 4.6 L.8Others 1.7 1.6 1.3 1.5 3.8 11.9 6.7 7.5

Interest Payments 1.1 1.9 2.7 2.8 2.h 3.7 L.5 4.8

Total 43.9 49.5 5h.9 59.9 68.9 80.6 98.7 ll.2

1/ Includes current and recurrent development expenditure of the OrdinaryBudget and the Plan Organization.

2/ For the years 1962 to 1964 it includes recurrent development expenditureestimated by the Bank mission.

3/ Expenditures for defense financed directly by drawings on external loans areexcluded from current expenditures, however, payment of interest and principalon these loans are included in current expenditures.

4/ Miscellaneous expenditures of the ordinary budget and current expenditures oftne rlan urganizauon.

5/ Includes 0.3 billion rials actual exnPnditmrPq for thp firSt. nhne nf q+nf.Employment Law, which compares with an original appropriation of 2.3 billion.

6/ includes t1 ( ''n rials for State Irae Law

3ource: Budget of'Iran

Table 5.2

Summar of Government Revenue (General Revenue)(In billions of Iranian Ria1)

BudgetEstimate

Fiscal Years ending March 20 1962/6 1963/64 1964/65 1965/66 1966/67 1967/68 2968/69 1969/70

Direct Taxes 5.9 59.2 10 7 7 L6.2

Taxes on Salaries 2.5 3.0 3.1 3.8 h.1- on Govt. Corporations n.a. 1.2 0.9 1.7 1.6 1.9 3.1 3.0- on Private Corporation-. na. - 1. 1A 1. 2.9 3.2- on Agr. Land 0.2 0.2 0.2 0.2 0.2 0.1 0.2Others 2.9 3.3 4.1 3.7 5.7

Indirect Taxes 12.1 15.5 18,1 20.8 26. 3 29.6 6 8

Petroleum and Fael Taxes 2.3 3.5 h.h 4.5 6.5 6.c) 6.8 7.hCustom Duties 8.7 10.1 11.1 13.0 16.2 18.21/ 22.2 28.8Registration Fee on Imports - - - - - 2.2- 3.6 3.9Exchange Differential 0.7 0.8 1.0 1.3 1.3 - - 2 -Others 1.0 1.1 1.6 2.0 2.8 3.2 h.2 4.7-

Revenues from Monopolies and OtherGoverrnent Agencies 7.2 7.3 5.9 6.4 8.7 9. 9.8 10.0

Tobacco Monopoly 4.6 4.6 4,9 3.0 3.1 3.6 4.6 4.7Communication, Radio, and TV 0.7 C.7 0.8 0.9 1.1 1.3 1.4 1.6Profits of Profit-malking and Com-mercial Enterprises 1.9 1.9 0.1 2.2 4.4 4.3 3.7 3.6Others - 0.1 0.1 0.3 0.1 0.1 0.1 0.1

Receipts of GoverjTnent Services 0.6 C.8 1.1 2.4 2. 4 2.6 3.1 3.5

Others 4.o 3.6 1.4 2.1 3.-7 2. 5 3.1 1.2

Sub-Total 29.2 33.1 31.9 40.0 50.3 54.7 66.5 75.7Oil Revenue 2'-7 24 39.53 7.4 54. 60

Oil Bonus Receipt 10.5 0.4

TOTAL 52.9 60. 8 68.3 90.0 98.6 108.71 128.3 155.9

1/ Part exchange differential and. part registrati.on fee.2/ Includes 1.1 billion Rls. for stamp duty in 1968/69 and 1969/70.

SOut'e: Budget of Iran

Tab- 5.3

Preliminary BudgetActua:L Estimate

1962/63 1963/6 - 1964/65 1965/66 1966/67 1967/68 9VU157- IM7"i

Fran Ordinary Budgety 15.9 17.0 19.1 24.0 27.2 35.7 43.9 51.5

In Percent of Current Expenditures 36% (31%) (35%) (40%) (43%) 144%) (45%) (45%)

Fram Development Budget n.a. n.a. n.a. 1.4 1.6 ?.1 3.? 3.6

TOTAL 15.9 17.0 19.1 25.4 213.8 37.8 47.6 55.1

Percentage Increase over previous year 7% ( 7%) (12%) (33%) (13%). (31%) (26%) (16%)

- in percent -

Ratio of total defense expenditures tonon-.oil revenues 48 51 60 64 57 69 72 73

Ratio of total defense expenditures tototal current revenue 26 30 30 28 29 35 37 35

Ratio of total defense expenditures to GNP 4.6 4.6 4.7 5.4 .9 6.8 7.7

1/ Excluding expenditures financed directly by utilization of externalloans, but including payment of principal and interest on such loans.

Source: Budpet of Iran

Table 5.4

DISTRIBUTION OF 0OVERNKM DWDPMT Z DITURW(n billions of kials)

THIRD PLAN FOURTH PLAN

Act.. Wal 4... Expeniturs Aprove Alloclaions Actt,-- i

Approved Actual as percent of Approved in percent of Actuals Budget 1st QuarterAllocations Expenditures Total Expenditures Allocations Total Allocations 1968/69 1969/70 1969/70

Agriculture h 65.00 5.15 6.97 0.68

TrrigatLon 9850 5.11 8.08 0.88

Industry and Mining 29.10 17.06 8.30 99.00 20.60 10.66 21.02 3.86

Power 38.00 6.39 6.56 1.1335.00 32.06 15.70 13.60

Petroleum and Gas J 26.30 1J 71.15 11.38 1.86

Transp.rt -. Com-i-ti..8 ~ 60.00 53.76 26.30 80. 12 20.9012.85 1.69

Telecommunications 20.30 1.13 3.65 -.72

Education 35.00 32.66 2.65 C.3218.00 17.51 8.60 7.70

Culture and Arts 1.80 0.05 0.22 0.,15

Labor and Manpower 3.30 2.80 1.40 - - - --

Health 13.50 13.20 6.60 13.75 2.90 1.02 2.07 0.18

Social Welfare - - - 6.85 1.00 0.28 0.6 0.05

1ural L~vVBoaG enL 9.10 1~ 0.35 0.63U*U7.50 7.20 3.50 3.60

Urban levelopment 7.00 1.69 1.60 0.17

Planning and Statistics 1.60 1.68 0.70 1.00 0.20 0.20 0.36 0.03

Construction and Housing 13.00 12.20 6.00 23.00 4.50 3.51 4.87 D.63

Tourism - - - 3.80 0.80 0.26 0.72 0.06

Reaionzl Developnent - - - 3.60 0.70 0.68 0.77 0.16

Total Investment Ecpenditures 230.00 206.51-/ 100.00 680.00 100.00 66.71 86.62 12.L0

necurrent velupaaent Ependiture6of Third Plan - (23,65) 45.oo 9.00 9.00 -

Recurrent Development Ebcpendituresof Fourth Plan - - 1.08 2.61 -

Total Developnent Expenditures 230.00 206.51 525.00 76.79 96.03 02.60

Source: Financial Reports of the Plan Organization.

Table 5.5Oaro wnlUClTtfI won Cw no nnwOrmouulf, fWum normranamu vowunrrmowe

-- Fal l.96'P70--1(In billion of Rials)

Approved Allocations Additional Requestfor the Develop- from Ministries Plan Organization's Revised Develop-ment Budget and Govt. Oreani- Reduction of Expen- ment Budeet

1969/70 tions ditures 1969,/70

grJ 09.i 1. -2.6 6 ,A0f7

Irrigation 8.08 0.69 -0.6h 8.13

Industry and Mining 21.02 7.13 -6.06 22.09

Power 6.54 1.32 -0.h0 7. 16

Petroleum and Gas 11.38 6.6L -0.L9 17.)3

Transport and Communications 12.85 6.07 -0.79 18.13

Teler,mmunications 3.65 0.25 -0.42 3. L8

-duca,ion 2.55 0.63 -0oy 2.

,ulture and Arts 0.22 - -0.07 0.15

Health 2.07 - -0.05 2.02

Social. Welfare 0.6h - -0.15 0.A9

Rural Develonment 0.53 -.09 inn

Urban Development 1.40 - -0.16 1.211

?lanning and 6tatisti..s U.3 -- 0.36

Construction and Housing 4.87 -0.10 1.77

Tcurism 0.72 - -0.10 0.62

Regional Development 0.77 - - 0.77

TOTAL INVESTM4ENT EXPENDITURES 84.62 2h.2LI 12.72 96.1

Pacr-ret TDevel-w..ent FYv.penditures i the ThirdPlan 9.00 9. 00

Recurrent Development Ex-penditures of the FourthPlan 2.41 2.L.t

TOTAL DEVELOPMNT EXPENDITURES 96.03 107.15

Source: Plan Organization

Table 6.1

MONETI SWVEM(billions0ofrris)

GROWT-H RATE

1963/66 1964/65 1965/66 1966/67 1967/68 1968/69 1967/68 -168/69

(1) F-in Ameets (not) 20.1 275 23.0 20.5 18.4 11.5 -37.5

(2) Credit to Public Sector 33.3 39.6 45.6 51.6 71.3 88.8 24.5

Treasury (17.1) (19.6) (21.4) (20.6) (24.6) (29.3) 19.1

Plan Organizaticn ( 9.4) (14.1) (19.4) (25.9) (39.1) (45.7) 16.9

Other Government ( 6.8) ( 5.9) ( 4.&) (5.1) ( 7.6) (13.6) 78.9

(3) Credit to Private Sector 72.9 88.1 102.2 121.1 142.3 165.9 16.6

Assets - Tiabilities 126.3 1!5.2 170.8 193.2 232.0 266.2 16.7

(4) Koney 49.0 53.9 60.3 66.8 77.1 85.6 11.0

(5) Quasi-Ioney 32..5 38.4 b5.2 53.9 67.2 86.4 28.6

(6) Public Sector Deposita 21. 35.5 28.2 32.0 39.1 40.5 3.6

Treasury ( 3.5) ( 1.8) ( 3.1) ( 3.9) ( 4.7) ( 4.3) - 8.5

Plan Organization ( 4.3) (LL.4) ( 6.8) ( 7.0) ( 9.0) ( 9.5) 5.6

Other Government (13.6) (29.3) (18.3) (21.1) (25.4) (26.7) 5.1

(7) Capital Accounts 21.9 21.5 28.8 30.9 33.4 35.6 6.6

(8) Importers Deposits - 2.6 4.8 7.1 9.5 7.3 -23.2

(9) Others 1.5 0.3 3.5 2.5 5.7 10.8 89.5

Source: Bank Markazi

Table 6.2

CAUSES OF CHANGE IN MWET AfPPLY

CHANGE IN BILLIONS OF RIALS CHANGE If PERCEN T

1963/64 196/65 1965/66 1966/67 1967/68 1968/69 196L/65 1965/66 1966/67 1967/68 1968/69Increase in --

Money Supply !.2 4.9 6.4 6.5 10.3 8.5 10.0 21.9 10.8 15.4 11.0

Quasi-Mcney 7 5.9 6.8 8.7 13.3 19.2 18.2 17.7 19.2 24.6 28.6

Due to

Foreign Assete 2.6 7.4 - 4.5 - 2.5 - 2.1 6.9 36.8 -16.4 -11.9 -10.2 -37.5

Banks Credits to Private Sector 11. 4 15.2 114.1 19.0 21.2 23.6 20.9 16.0 18.5 17.5 16.6

Net Debt of* Public Sector .9 - 7.8 13.3 2.2 12.6 16.1 -47.0 35.7 - .3 16.o 20.9

(a) Banking Systms Credits to ( 6.3) ( 6.3) ( 6.0) ( 6.0) (19.7) (17.5) (18.9) (15.2) (13.2) (38.2) (24.5)Public Sector

-(b) Public Sectors Deposits ( 5.4) (14.1) (-7.3) ( 3.8) ( 7.1) 1.4) (65.9) (-20.5) (13.5) (22.2) ( 3.6)

Other - 2.0 - 4.0 - 9 . 71/ - 3. - 1.1

1/ Includes Rls. 4.2 billion increase in bank's capital account

2/ Includes R1B. 1.3 billion agricultural bonds

Source: Bank Markazi (see previous table)

Tah1e 6 3

NET BANK CLAIMS ON THE PUBLIC SECTOR

Treasury, net 13.6 17.8 18.3 16.7 19.9 25.0

ry, _. _nA91 ý >

Bankclaims 17.1 19.6 21.h 20.6 2h.6 29.3

De,zposit 3. 1.8 3 ýip.1 3.9 0.,7 ).3

Plan Organization, net 5.1 9.7 12.6 18.9 30.1 35.7

Bank clim 9.h 1h.1 .19.h 259 391 4.2-~ 1, -.iil. -i -i n~i C

Deposit C'a2J-I-7.3 4 L4.h 6L. 7. 9.9.

Other Government Agencies, net - 6.8 -23.4 -13.5 -16.0 -17.8 -12.7

- ø -,n1Q1ý -1 -: .0rBanik claimLS U.U 5.9 L4.8 5.U.6.

Deposits 13.6 29.3 u.3 21.1 2. 26u.3

1/ ±IIcLudeb LiLJ oIu

Source: -ans M.ar

Tbie 7.1

FRODUCTION OF SUECTED AGRICULTURAL i'TEMS(000 tons)

lo3/A /A h/C lOM/AAA 19AA/A7 9A7/AA OAR/AO

Wheat 3,000 2,600 3,000 3,190 3,000 4,00

Barley 740 718 935 1,080 1,035 1,204

Rice (in the husk) 860 800 845 875 930 975

Raw Cotton 345 363 420 339 405 435

Sugar Beet 1,191 1,028 1,411 2,282 2,857 3,403

Tea (green) 50 42 50 59 63 79

Source: Ministry of Agriculture and F.A.0..

Value Added by Sector(millions of Rials, 1959/60 prices)

1963/64 1964/65 1965/66 1966/67 1967/68 1L968/69

Farming 52,662 51,916 58,174 60,577 67,529 72,300

Livestock Breeding 36,441 38,831 39,659 40,914 42,354 42,900

Forestry 508 1,081 871 980 676 900

Fishing and Hunting 282 331 316 279 294 300

89,893 92,159 99,020 102,750 110,853 116,400

Source: Bank Markazi

Tabhle 81

PETROLEUM STATISTICS

1962/63 1963/64 1964/65 1965/66 1966/67 1967/68 1968/69

(millions of barrels)

Net crude oil production 481.3 538.0 618.6 694.6 771.3 97.6 1,041.5

of which: Consortium (474.7) (527.2) (605.9) (659.9) (736.2) (900.3) (989.6)

Crude oil Exports 340.8 393.6 470.1 535.0 619.9 785.4 861.6

Oil Products Exports 109.6 111.4 100.6 101.7 102.4 103.8 107.0

(millions of U.S. $)

Value of Exports1/ 902.1 942.5 999.6 1,138.6 1,298.6 1,477.5 1,718.6

Government Revenues 342.2 388.0 479.9 514.1 599.1 741.7 824.0

Profit Rerittances- 348.7 400.5 351.3 404.1 470.9 541.2 649.7

1/ Accounting value based on posted prices as recorded in the balance of payments.

Source: Bank Markazi

Table 9.1

PRICE INDE (1959=100)

ANNUAL AVERAGE

Wholesale Price 1962/63 1963/64 1966/65 1965/66 1966/67 1967/68 1968/69

Oeneral Index 103.6 104.0 109.6 110.6 11l.nl 110.2 U0.9Home-produced and consumed 104.3 103.3 112.1 113.7 111.7 131.6 112.8goods

Imported Goods 106.9 110.0 110,5 111.0 112.0 113.4 112.7Exported Gooda 98.1 99.6 101.6 101.3 102.5 102.7 103.5Foods 106.8 106.9 115.6 116.6 115.6 1a5.9 115.6Building Materials 86.7 86.3 91.6 91.8 92.2 9,6.5 95.0Fuels excluding petroleum 113.1 117.5 124.6 127.9 129.1 135.5 145.8

Cost of

General Index 110.6 111.7 116.7 117.0 117.9 118.9 120.7Foods 114.2 116.5 126.0 126.9 125.8 126.4 127.7Rent 108.7 106.8 105.6 104.9 105.6 1C6.5 108.5Clothing 108.0 108.2 111.1 111.1 111.7 111.3 111.7Fuel, Electricity, Water 108.5 11.7 118.7 113.3 112.1 114.0 119.2and Ice

Transportation 1014.7 103.0 106.0 106.4 107.6 109.4 311.8Medical Care 110.6 111.0 115.1 116.1 117.3 120.8 124.8

Source: Bank Markazi

Table 9.2

MONTHLY COST OF LIVING INDEX

1963/64 1964/65 1965/66 1966/67 1967/68 1968/69

April-/ 113.7 117.6 121.8 120.1 123.6 122.6

May 114.2 118.9 121.7 119.8 122.2 122.0

June 111.6 11.5 118.9 117.1 119.8 119.9

July 109.9 113.1 115.3 115.6 117.1 118.4

August 108.5 111.9 113.5 114.5 115.8 117.7

September 107.9 112.0 113.3 114.2 115.4 117.3

October 108.3 112.8 113.8 114.7 115.6 117.8

November 109.4 115.1 113.8 115.9 116.4 119.0

December 110.8 118.9 115.5 118.4 118.1 120.9

January 113.2 120.9 117.5 120.4 119.9 122.9

February 116.8 121.8 119.0 121.6 121.3 124.3

Maru. 116.4 121.4 119.3 122.6 121.9 125.8

Change from +2.4% +4.37 -1.7% +2.7% - .6% +.2%year-end toyear-end

1/ Months correspond to closest Iranian month, i.e. April representstime from March 21 to April 20.

Source: Bank Markazi

Table 9.3

MONTTLV THOT.EATE PRTr1 T?,TPY

(199/60=100)

1963/64 1964/65 1965/66 1966/67 1967/68 1968/69

Aprill/ 106.0 108.4 113.4 112.1 113.1 112.1

May 105.7 108.9 113.6 112.1 111.8 111.4

June o.3 107.4 111.0 109.9 111.2 110.8

July 102.2 106.2 109.6 108.0 109.0 109.9

August, 101.2 106.1 108.6 107.1 107.6 109.6

September 101.5 106.3 108.6 107.4 107.6 109.-4

October 102.2 107.8 109.0 108.0 108.1 109.6

November 102.3 111.1 108.8 109.5 109.0 110.0

December 103.3 113.7 110.2 110.4 110.0 111.3

January o.4 113.4 111.1 111.4 111.1 111.7

Febriary 107.1 113.5 111.7 111.6 111.7 112.2

March 107.5 112.9 111.8 112.1 112.0 113.2

Change from +1.),' +5.0% -1.0% + .3% - .1% +.12%year-end toyear end

1/ Months correspond to closest Iranian month, i.e., April representsture: from Marc2l to Ar 20.

Source: Bank Marka~zi

ANNEX II

n,rn-.,,-111n,~nh riz _nP11kU ka z , A.WIA 1 0

There are several ways of presenting the oil sector in the Balanceof Payments., One can record the stated value of oil exports in the Balanceof Payments, and include the repatriated profits of oil companies as acapital outflow. Imports of goods and services or the oil sector must also beincluded, as well as the outflow of investment. Alternatively, one canconsider the oil sector as a non-national entity, and include in the balanceof Payments only royalty and tax payments to the Government, and purchasesof local currency for expenditures in Iran. The relationship of the twopresentations is illustrated below:

Table 1

DERIVATION OF NET FOREIGN EXCHANGE RECEIPTS FROM THE OIL SECTOR

1968/69

Value of Oil Exports at posted prices 1,718.6

- Imports of merchandise byv oil sector - 91.0

- Imports of services by oil sector - 27.8

+ Direct investment inflow into oil sector. net 37.7

- Investment income of Consortium and other oilcompanies - 649.7

= Net receipts from oil sector 987.8

There are several arguments in favor of using the net figure - thecourse adopted in this report and by the IMF. Oil is largely an enclave sectorin the Iranian economy; its exports and payments are largely independent fromIranian economic policy. Conversely, the value of oil exports and productionare quite irrelevant to the management of Iran's foreign exchange problemsand income; what counts is the sector's disbursements in Iran which are theonly verifiable data. The value of exports is a purely notional figure basedon posted prices which have long been much higher than actual prices.Investment income of the oil companies is also a notional figure. For thesame reason, the report also used the "net receipts" concept to measure thecontribution of the oil sector to GNP: the value of Droduction. sometimesused in GDP calculations, is a notional and overstated figure.