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2005/04/04
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Economy’s Twists and Turns
Land of Wonders But no Tourists
By Ali Momenlou

Economy’s Twists and Turns
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With the breakout of the Iran-Iraq War in 1980 and intensification of economic sanctions against Iran, oil production and export dropped drastically.
The oil shock of the 1970s that resulted in a drastic price hike, the opening of the economy after the 1980-88 Iraqi imposed war and implementation of expansionary policies during the post-war ’construction era’ followed by the practice of a closed economy and contractive policies in the ensuing period, can perhaps be cited as the most important features of contemporary Iranian economy.
In 1974, simultaneous with the more than twofold oil price hike and at a time when Iran with a daily production of 6 million barrels accounted for 10.6 percent of the world crude output, state revenues increased significantly.
The record-breaking increase resulted in an outstanding surplus of $8.2 billion in hard currency earnings that enabled the country not only to pay all its foreign debts before they were due, but also to place large sums of money at the disposal of countries facing economic problems either directly or through international monetary agencies.
In an effort to inject the new cash into the domestic economy, government’s budget was amended in 1974 and doubled. With the sudden increase of current and development expenditures and rise in the amount of loans and bank credits for the private sector, the volume of liquidity surged, registering a 61 percent rise.
In 1976 and parallel with an increase of 10.2 percent in crude production at high prices, hard currency revenues obtained from oil and natural gas exports amounted to $24.17 billion, a record figure in the country’s oil revenues, generating a per capita oil income of $717.2 for every Iranian.
In 1977, an unbalanced market supply and demand sent inflation rate to 24.9 percent, the highest in the pre-revolution period.
Between 1973 and 1977, Iran registered an average growth rate of 7.4 percent and the per capita income in 1976 reached its highest level. The unemployment rate was registered at 2.9 percent, the lowest in the history of the country.
During the same period, the average growth rate of investment was 22.9 percent and the ratio of investment to gross domestic product (GDP) reached a record 34.4 percent. While the average inflation rate was 16.7 percent, the average rate of hard currency was only 1.2 percent.
Although Iran was experiencing rapid growth, even prior to the oil shock of 1974, the country enjoyed one of the highest per capita incomes and export revenues due to its economic stability.
In 1974 Iran’s per capita income was twice as much as that of Turkey and South Korea. Had the country continued its economic growth with its pre-shock rates (annual per capita rate of 5.6 percent), it could have achieved a per capita income of twice more than that of South Korea and four times more than that of Turkey in 1992 (end of 1st phase of the construction era in the country), in other words, $15,412 (at 1985 rates) which could have exceeded France’s per capita income of $13,925 in that year.

Nationalization
A national desire for establishment of social justice, elimination of income discrimination and filling the yawning gap between the rich and the poor were among main reasons behind the 1979 Islamic Revolution’s victory.
Despite the rapid economic growth during the 1970s that registered an increase of 37 percent in 1972-76, the Gini Coefficient (index of income inequality) in 1977 reached 0.5 percent, the highest rate of class divisions in Iranian history.
Nationalization of the entire economy was among the very first steps of the post-revolutionary government. In a matter of few months, 28 private banks that held 43.9 percent of the total assets of all the Iranian banks in their possession were nationalized by the government. The car-making, copper, steel and aluminum industries as well as the assets of 51 capitalists and major industrialists and their next of kin were also declared nationalized by the government.
Despite a decline in production, oil and gas revenues increased considerably, amounting to $24.97 billion. With the breakout of the Iran-Iraq War in 1980 and intensification of economic sanctions against Iran, oil production and export dropped drastically.
Oil exports reduced from 2.867 million barrels per day in 1979 to 911,000 barrels that constituted about one-third of the oil exports in 1979 and one-sixth in 1976. With the reduction of crude oil exports, Iran’s oil revenues in that year dropped to $11.6 billion, less than half of the amount in 1980.
The government for the first time was faced with $4.5 billion foreign debts. Because of the drastic drop in oil revenues and the damage sustained due to the war, per capital income reduced by 18 percent, the lowest in the country’s history.

Brief Recovery
In 1982 and 1983 and with a renewed oil price hike, the Iranian economy slightly recovered. Government revenues increased to $21 billion and improvement of trade balance resulted in a 15 percent reduction in the open market hard currency rates in 1983.
A rise in government revenues pushed down the inflation rate to as low as 6.4 percent in 1985. However increase in oil revenues did not last long and in 1986 state income again decreased to $6.2 billion, lowest in 12 years.
From 1986 up to end of the war, the government suffered a trade deficit and the reduction in hard currency revenues affected the government’s budget to the extent that in the last year of the war half of the government’s budget was faced with a deficit and inflation rate was close to 29 percent.
All through the year, the government managed to meet market demand through import of essential goods and rationing a wide range of basic commodities.
However, due to a drastic fall in national revenues and allocation of a major portion of the budget to war expenditures, investment funds were cut down drastically and the private sector almost totally withdrew from the economy.
In 1988, the last year of the war, the per capita income of every individual Iranian in rial was half of the figure for 1977 and in dollar was one-fourth of it. The annual amount of total investment reduced to one-third, investments in machinery to one-fourth and in building construction to one-third of the corresponding figures for 1977. The unemployment rate increased from 2.9 percent to 15.8 percent by the end of that year.

Economic Planning
In the aftermath of the war and formulation of the national First Five-Year Economic Development Plan (1990-1995), government took a series of measures to give production and investments new impetus. Just at the same time, global oil prices rose due to the outbreak of the Persian Gulf War and oil revenues increased from $9.6 billion in 1988 to $12.37 billion in 1989 and $17.9 billion in 1990. Increase in oil revenues and billions of dollars of foreign loans enabled the government to open the doors of the economy to the outside world and increase the volume of imports.
Increase in imports was such that in the period 1989-1992 the government was faced with a balance of trade deficit that amounted to $11.4 billion in 1991. The total volume of imports in this period amounted to $100 billion that was determining for an economy with average annual oil revenues of $15 billion.
In the second term of Akbar Hashemi Rafsanjani’s presidency (1992-1996), effects of the policies implemented in his first term in office (1989-1992) came to the surface. The volume of foreign debts reached the level of $23 billion in 1994, the highest in the history of the country. The hard currency rate in 1995 (end of economic adjustment policies) registered an increase of 2.5 times as compared with 1992.
With implementation of expansionary policies and increase in the bulk of liquidity, Iran’s economy was faced with a new rate of inflation, soaring as high as 49.3 percent in 1995 from 35.1 percent in 1994 and 22.8 percent in 1993.
Meanwhile, the per capita income declined from 4.4 percent in 1992 to 3.4 percent in 1993 and close to zero in 1994. But, with the rise in oil revenues in 1995 and 1996, economic growth improved slightly and inflation rate was controlled to some extent. Through imposition of severe restriction on imports, the government managed to repay part of its foreign financial commitments.

Foreign Debts
President Mohammad Khatami inherited a government with $16.5 billion in foreign debts and 65 trillion rials in domestic undertakings (debts of government and state-run companies to the banking system). Government’s foreign debts were above the average oil and gas revenues and domestic liabilities were above the annual earnings of the government in rial.
With the slump in price of oil in 1997, government oil revenues dropped by 20 percent at a time when imports were restricted in an effort to provide the required facilities for the repayment of its foreign debts. This was a prelude to the gradual reduction in investments, mainly in the construction and machinery sectors.
Under such circumstances, the Iranian economy practically entered into a state of recession and as a result the economic growth rate fell from 4.7 percent in 1996 to 3.1 in 1997 and a year later the situation deteriorated even more. The oil price slumped to as low as $9 per barrel, the lowest in a decade.
The government’s total foreign debts exceeded from $12.1 billion in 1997 to $14 billion in 1998. This forced the government to reduce its hard currency reserves by $1.57 billion while it had already deducted the reserves by $3.7 billion in 1997 due to the slump in oil price. Furthermore, investments dropped by 6.2 percent that further aggravated economic recession.
Reduced oil prices and balance of trade deficit pushed hard currency rates in the open market to as high as 35 percent in 1998 or about twice as much as the inflation rate of 18.1 percent for the same year.
The oil price made a sudden jump in the latest quarter of 1999 and touched the ceiling of $30 per barrel. The oil price hike enabled the government to repay $3.7 billion of its foreign debts, thus lowering its debts to $10.3 billion. Trade experienced a positive balance of $6.215 billion.
However, the widespread drought in the agriculture sector and increase in the price of foodstuffs forced the government to allocate more hard currency for imports. But government revenues increased by 72 percent and expenditure went up by only 34.2 percent. This drastically reduced the deficit in 1999 to as low as one-sixth of the figure for 1998. The most interesting point was that in the last quarter of 1999, government budget in the light of its currency reserves registered a surplus of $566.1 billion.
Budget deficit in the past years was mainly redressed through borrowing from the Central Bank that consequently increased the liquidity. As the budget deficit reduced in 1999, inflation rate took a downward trend in 2000 and fell to as low as 13.7 percent in August.
Oil price hike in the year 2000 secured oil revenues of $12.101 billion in the period between March and September, twice as much for the same period in 1999. Iran’s trade balance reached $6.215 billion within this six month period that was even higher than the figure for the entire 1999. Increase in hard currency revenues pushed down its rate in the open market from the average 8,657 rials for each dollar in 1999 to 8,235 rials in the period July-September, 2000. This enabled the government to amend its currency policy and to this end the rate of 3,000 rials for each dollar was cancelled and there remained only the two rates of 1,750 rials for the import of essential goods and the rate for the Letters of Credits in the banking system.
A simple comparison between economic indices during 1993-1996 and 1997-2000 reveals that while the average growth rate of production is almost the same in both the periods, the average inflation rate has reduced from 32.2 percent in the former period to 17.6 percent in the latter.
This policy has more than anything else been indebted to the policies enforced for the control of liquidity that has been successful in reducing the liquidity growth rate from 34.2 percent to 18.9 percent during Khatami’s administration.
Khatami’s government has been also successful in harnessing the currency rate and in the repayment of foreign debts. As a result of implementation of policies in the latter period, the average 28.6 percent growth rate of hard currency dropped to 16.6 percent.
In addition, government’s debts shrunk from $16.7 billion in 1996 to $8.85 billion in early 2001.
Major challenges prevail still as unemployment and a runaway inflation continue to haunt the nation.
Beginning March 21, 2000 (the start of Iranian fiscal year) the government set up a Foreign Exchange Reserve Fund to deposit exceed proceeds from the export of oil above the budgeted figures. In 2000-01 fiscal budget was formulated on the basis of 15.7 billion barrel of crude oil while the actual price of crude oil exported from Iran from March 2000-March 2001 was about $25.3 billion per barrel. In the same period and for the first time since 1979, the government repaid 2300 billion rials of its outstanding debt to the banking system. Although the average crude oil prices in the first three quarters of the fiscal year March 2001-March 2002 were 9.6 percent lower than the average price in the preceding year, the government continued to increase the deposits in the Foreign Exchange Reserve Fund by earnings in excess of a $16 billion of crude oil exports.
Due to restrictive trade policies in place between 1994 and 2001, tighter expenditures by the government, and in certain years higher oil prices, Iran achieved a cumulative trade surplus of $48.0 billion between March 1994 and December 2002.
The projection for Iran’s GDP growth in the course of the Third Five-Year Development Plan (March 2000-March 2005) stands at an annual average of 6 percent.
The structural reforms in Iran are continuing on a broad front. In accordance with the stipulations of the third plan a new privatization body has been set up in the Ministry of Finance. The objective is to detach the privatization effort from the line agencies thereby moving ahead on a more objective and accelerated basis.
Currently out of 1039 public sector enterprises only 217 are to remain with the government, 87 are to be liquidated, and 735 are slated for privatization. The government sold 2,040 billion rials (about 0.5 percent of GDP) equivalent of shares of public sector enterprises in the Tehran Stock Exchange during the first half of the current year. In the financial sector, the government has licensed 5 private financial institutions, and three of them have already been promoted to bank status following a capital increase from equivalent of $4 million to $25.0 million. In addition, parliament has approved a gradual reduction of obligatory credit allocation measures that normally directed the resources of the banking sector to relatively less productive investments, mainly by public sector enterprises.
Government-owned banks still dominate the financial sector in Iran and steps are underway to generally accord greater discretion to the management of the banks and allow new measures aimed at improving the internal incentives of these institutions to operate in accordance with parameters of a market economy.

Land of Wonders But no Tourists
By Ali Momenlou
Available figures show that the tourism industry accounts for a major source of income in 83 countries. In a country like Spain tourism is the top source of income. In fact, about 125 million people all over the world are active in the tourism sector.
Although Iran is among top 10 countries in terms of tourist attractions, it is ranked 89th in terms of tourism income and 72nd in terms of tourist attractions. It is predicted that tourism will become the top global industry by 2010 and account for 700 billion dollars of revenues per annum.
The question is what will Iran’s share from the tourism industry be amidst all of this?
Iran with its ancient civilization has been characterized as the ’land of wonders’ by many globetrotters who have visited it throughout history. People who tour Iran are fascinated by the vast green areas in the Caspian area and the evergreen waters of the Persian Gulf in addition to diverse flora and fauna, climatic conditions, tribal life and historic relics. However, despite all these divine blessings, Iran has not reached the position that it deserves in the tourism industry. Perhaps, the main shortfall is that the place of tourism has not been clearly defined in the state of economy. This is something that other countries and even Arab states have addressed. It is no wonder that Dubai is currently viewed among the top four tourist destinations of the world.
Experts believe that Iran’s oil-dominated economic system prevented it from surpassing Arabs in terms of appealing to tourists.
Given that in the near future globalization will become the dominant economic trend, it is obvious that the people in charge of tourism industry expect the foreign policy apparatus to use the cordial bonds with other countries for further promoting tourism. Weak advertising, unstable regional conditions, the endless anti-Iran propaganda and absence of efficient planning schemes in the tourism sector have all hindered growth of tourism. But do these justify that a country like Iran, with its top tourist attractions, has not been able to use its existing potentials and capabilities effectively? Isn’t it more appropriate that the people in charge revise their attitudes? Given the rapid pace of technological advances, should we again and again resort to trial and error approach?
The tourism sector is one way or other linked to 100 other sectors. Over five new job opportunities are created when one foreign tourist visits the country. But where does tourism stand in terms of curbing the unemployment rate?
Although there is talk that during the fourth development plan (2005-10), some 2.5 million globetrotters will be enabled to visit Iran, we cannot deny that tourism has been neglected in the past couple of decades.
It would be a good start to facilitate banking loans for renovating tourism resorts and accommodation nationwide and also encourage the private sector to become more active in the tourism sector. Further, it is crucial to devise efficient plans to attract tourists and also train competent people to work at tour and travel agencies.