Planning and Macroeconomic Stabilization

This paper presents an account of the main economic developments in the Iranian economy over the period of the First Five-Year Economic, Social and Cultural Development Plan (1989/90-1993/94) of the Islamic Republic, provides an overall evaluation and examines the objectives and economic rationales behind the Second Five-Year Economic, Social and Cultural Development Plan (covering the period 1995/96-1999/2000) which has been recently approved by the Majlis (The Consultative Assembly of the Islamic Republic). The emphasis of the paper will be on the government's stabilization and liberalization programs, rather than the structural details of the plans. The paper argues that after many years of revolutionary upheaval and war, the First Five-Year Plan provided Mr. Rafsanjani's government with an important opportunity for regeneration of Iran's war-damaged and ailing economy. It also provided the government with a reasonably cohesive framework for the formulation and implementation of badly needed reforms of the trade and foreign exchange systems. The Plan's growth objectives were, however, rather ambitious and attempts at achieving them have led to substantial balance of payments deficits and, given Iran's unfavorable international position, have created serious external financing difficulties for the government. These developments have been further exacerbated by hasty and badly-timed moves towards unification of the exchange rate. In consequence, the pace of economic growth has slowed down considerably, inflation has reached new heights and is still rising and the economy is facing the daunting task of servicing and repaying large foreign debts. Faced with these difficulties, over the past year important steps have been taken by the government to stabilize the economy and alleviate the country's external financing difficulties. Foreign debts are being extended and in some cases even repaid. Foreign exchange expenditures are being reduced, foreign exchange receipts are increasing, and public expenditures are being moderated. It is, however, important to note that these policies, while essential for the stabilization of the economy, are likely to be at the expense of the real economy, and could lead to substantial loss of production and increased unemployment without necessarily resulting in a reduction of the inflation. It is therefore important that such stabilization policies are also accompanied by strict control of private and public sector credits. The control of the foreign exchange transactions, without an effective control of government expenditures and private sector credits are also likely to lead to a further widening of the gaps that exist among the various exchange rates that are currently in effect in Iran. Unless further steps are taken by the government to stabilize the money and foreign exchange markets, there is a real possibility that the structural reforms and liberalization policies of the past six years may come to a halt or even be reversed. But it seems highly unlikely that a return to the centralized and inward-looking economic policies of the 1980's will provide the answer to Iran's mounting economic problems.

* Abstract prepared by the author

M. Hashem Pesaran
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