File COPY Public Disclosure Authorized

R E S T R I C T E D

R e p o r t N 0. A.S. 55-a FiLE COPY Public Disclosure Authorized

This report was. prepared for use within the Bank. In making it availlable to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein.

INTERNATIONAL, BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized

ECONOMIC DEVELOPMENT OF IRAN Public Disclosure Authorized

January 3, 1957 Public Disclosure Authorized

Department of Technical Operations and Department of Operations, Asia and Middle East EXCHANGE RATES

Official Rate

1 US dollar 5 32.25 rials I rial 5 .031 US dollars 1,000,0Q rials * 31,000 US dollars

Effective Rate

I US dollar 75 rials 1 rial 5 .0133 US dollars i.o00.O00 rials 5 13,333 US dollars TABLE OF CONTENTS

MAP OF IRAN

BASIC STATIS.TICS e,eoocc.e eg.c ec.ece.... . msee

SUThARY AM1 CONCLUSIONS e.ecc ..e..c...*.ee .....*e...... eS 1

GENERAL eecec.ceceeee.cg.cc.ee.ccecee...... e, 3 Agriculture **.ooee.e.Celo.. tccc cv le ccc 3 Other Natural Resources ee eececceee 4 Industry cecc@ee ccee..ce ee5e.c .cgec S Transportation and Communications .... c 6

SECONDSEVEN-YEAR DEVELOPEENT PLAN .. . O . . 7 Irrigation and Multi-Purpose Projects ...... 7 Agricultural Projects *e *ecgec.c se ec.ee..ceeo. 9 Urban Development Projects 10'Leccc.gecccgceee Roads a ooe eeeloec.eeegcec. Railroads ecu Lige*gctgOhC*eOg*Ceeececeg.tceoeeeOgec. Ports .. .. .cegcee..e.cc :1i Airports g e.e ...... c .. ae. 12 Telecommunications ***oe*.c.e...c.... ee*cc**'ecocooeeee .12 Industrial Projects ...... edGe c13 General Observations acgoeecee .cee gcgc.ecec 13

FINANCGIIG THE PLAN .eofaecgccecelmc.ceceegceccccccgc. eececg 15 -Estmated Oil Revenues Accruing to Iran ... ,.o..e.... 15 Allocation of Oil Revenues to Plan Organization ceacceecce 17 The Financing Problem *4 ee .gecceee e c *@cc 18

THE FINANCIAL POSITION OF IRAN eeccg...... ceggeee 21 Finaancial Developments 1951/52 to 1955/56 ...... 21 The Budget Problem e.e.c... ace.. eccee^cc..ee..ic-a 23 Limits on CreditExpansion c.egcc*Xc.eegc.gcg..eceeee.c 26

EXTERNAL FINANCE .. c...... c...... g.... e cc .. 28 bources of Foreign Exchange Income . .cec.. 28 External Debt S c@... c. .. emcc cc cc... c...... 29 Foreign Exchange Prospects cceccccccccececcegcccccc.ccccce 29 TABLE OF CONTENTS (conttd)

Paje

STATISTICAL APPE;NIX Tables 32 1 - Estirriated Land Utilization in Iran *...... 2 -Estirnated Agricultural Production ...... 33 3 - Estirmated Annual Mineral Production and Exports ...... 34 4 - Principal Industrial Products ...... 35 5 - Programmed Expenditures under Second Seven-Year Plan as of Aiigust 1956 * @0 eeu.*e 0* * **0 * 36 6 - Internal Debt and Treasury Cash Position ...... 39 7 - Movements in Exchange Rate ...... 00...... 0...... h 8 - Price Indices ...... 4...... 1,...,h1 9 - Money Supply ...... ,.242...... 10 - Factors Affecting the Money Supply ...... 143 I1 - Financing the Over-all Government Requirements 0...... 144 12 - General Budget of Iran ...... , ... 145 13 - Foreign Exchange Assets ...... *...... 147 14 - Foreign Exchange Transactions . 148 15 - Foreign Trade by Countries ...... 49 16 - External Debt - Government and Government Guaranteed &..e 50 17 - Estiniated Foreign Debt Service ...... e 52 18 - Imports - c.i.f. *.....eg*...... * 53 19 - Exports - f.o.b. ..e.eb.o.. e..o....,...... e.... 54 I RAN

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ROADS 'Abbos Asphalt Metalled ------lgeh Dry weother . . .J...... ( RAILROADS g - .--- - StonRLrd gouge Narrow gouge --'--/ | = ..--- r Uncompleted - INTERNATIONAL __ ,: BOUNDARIES 0 100 200 30() 400 KM

NOVEMBER 1956 IBRD-295 BASIC STATISTICS

1. Area - ]64 million hectares - 628,000 sq. miles. Cropland - 10.4% (about 1/4 of which is the average area cropped). 2. Population - 20 to 21 million (estimate). 3. Government Finance:

(Millions of Rials)

1954/55 1955156 1956/57 (est.) General Budget

Expenditure 10,906 13,987 18,722 Receipts 7,063 11,227 14,666 Deficit 3,80 2,760 4,056 4. Internal Public Debt: (Millions of Rials) As of' March 20 1955 1956

Gross debt 17,417 18,134 Government deposits 3,462 4,141 Net indebtedness 137, 13,993

5. Foreign Exchange Reserves:

June 20, 1955 4217.0 million equivalent June 20, 1956 $217.5 million equivalent 6. Balance of Payments: (Millions of Dollars Equivalent)

1955156 1956/57 (est.)

Foreign exchange expenditures 250.2 346.5 Foreign exchange receipts except foreign aid and oil revenues 116.4 95-0 137.8 75I;7 Oil receipts 92.1 156. Foreign aid 51.9 42.5

Net deficit (-) or surplus (+) on current account +10.2 -53.0 - ii -

7. External Public Debt (June 30, 1956): $240 million equivalent (est.).

8. Foreign Trade (commercial transactions excluding oil):

(Mfillions of Dollars)

1953/54 1954/55 1955/56 Imports (c.i.f.) 166.5 232.0 285.1 Exports (f.oob.) 93.7 120.2 105.2 Deficit 72.8 111.5 179.9

Note on Iranian Fiscal Years

The Iranian calendar year, which corresponds to the fiscal. year of the Iranian Government, runs from March 21 to March 20. For example, the year 1.955/56 covers the period March 21, 1955 through March 20, 1956. ECO]WNITIC DEVELOPMENT OF IRAN

SU7'4NRY ANT) CONCLUSIONS

1. The economic and technical IMIission to Iran in A.ugust and Suptember 1956 undertook a review of: (a) some of the major projects of the Second Seven- Year Development Plan; (b) the underlying financial support for the Plan; (c) the inflationary impact of the Plan on the economry; and (d) the general budget position.

2. The Economy. Iran is a country of large area relative to population but of relatively small income per capita because of the low percentage of potential resources that are utilized productively. This is particularly- true of agricultural lands. Less than one-tenth of the potential farm land is being actively cultivated. More irrigation and a better use of available water appear to be the greatest need. Except for oil, other natural resources are little exploited and their extent is not well known. Little industrial development has occurred, apart from the production of cement, other buiLd- ing materials, sugar and textiles. Production costs in industry are gen.- erally high and competition with imported goods is difficult.

3. Oil production virtually stopped with the nationalization of the oil industry in mid-1951 and remained very low until Iran and the new National Irarnian Oil Company entered into an Agreement with a Consortium of foreign oil companies in October 1954 for the production, refining and export of oil. Since that time, production has risen rapidly. Iranian oil revenues, though not the volume of output, are now well above the pre-1951 levels. Given relatively stable economic and political conditions, crude production in the area assigned to the Consortium may reasonably be expected to increase at the rate of 10% per year, at least during the remaining six years of -the Second Seven-Year Plan.

4. During the stoppage of the oil income, Iran's internal and externa:L finances were under severe strain. Government debt to the Central Bank increased substantially, foreign exchange reserves fell and short-term external debt rose sharply, despite the timely receipt of sizeable U.S. foreign aid in 1953 and 1954. Prices rose and the exchange rate depreciated. The external position of the country improved with the resumption of oil receipts on a substantial scale in 1955/56 but the general (non-development) budget has been balanced only with the help of foreign aid and the allocation of a significant portion of the oil revenues. The oil revenues and foreign aid have financed an increasing volume of commercial imports which have offset the inflationary effects which would otherwise have been generated by Government expenditures. Commercial imports have been encouraged by a liberal import policy and by the appreciation of the exchange rate. A relatively stable price situation has emerged; prices of imported goods have fallen while prices of domestically produced goods have shown some increase.

5. Actions to Achieve Economic Development. The Oil Agreement with the ConsortTiTum and the Second Seven-Year Development Plan Law of Fobnmry 27,. 1956 provided the source of funds and the administrative specifications for Iran's economic development. The Oil Agreement provided that Iran should receive roughly 50M of the net returns from crude oil production. The Plan Law allocated a substantial portion of Iran's share to economic development, increasing to a possible 80% for tne 4 years of the Plan period after March 20, 1958; it also assigned the implementation of the program to the Plan Organization, and established the year-by-year and sector-by-sector explendi- ture pattern. Over the seven years from September 21, 1955 to September 20, 1962, the Plan Organization is expected to receive a little over $1,000 million equivalent. About 25% of this is allocated for agriculture, irrigation and major power projects, 37% for transport,) 14% for industry and 24% for social services. The emphasis on large irrigation and power projects, transportation and social services is likely to result in some time lag before substantial increases in national output are realized.

6. The Plan Organization is energetically endeavoring to carry out the Second Seven-Year Plan. The extensive use of engineering consultants for major projects should contribute greatly to the technical implementation of the Plan. The Bank Mission did not undertake to appraise all aspects of the Plan but did observe that some projects were being undertaken without adequate cost-benefit studies and without proper coordination with other projects. Also, the Plan Organization itself is not adequately organizad or staffed at present to discharge its heavy responsibilities speedily and efficiently. Many of the difficulties appear to arise from an endeavor to accelerate development works too rapidly.

7. The oil revenues allooatedto the Plan Organization for financing its development projects appear to be adeauate over the Seven-Year Plan period as a whole. Expenditures are so scheduled, however, that deficits are being incurred in the early years while surpluses will accumulate in the later years. The Plan Organization nas agreed with the bank on the level of expenditures through March 20, 1958 and it now appears that the deficit in the early years will be of manageable proportions.

8. Conclusions. There are reasonable prospects that the development programcaTn be carried out without jeopardizing the financial stability of the country and that credit obtained to finance the Plan deficit in the early years of the Plan period can be repaid out of surpluses arising in the later years of the period. Vigorous and prompt action will be necessary, however, to balance the general (non-development) budget of the country if pressure to divert oil revenues from the Plan Organization or to borrow excessively from the Centiral Bank is to be obviated. The fact that the Eank Melli, which f unutlOns ar 4hz chief commercial bank as well as the central bank, operates under policies and regulations which tend to prevent excessive credit creation to both the publ1z and private sectors, is an important safeguard against inflation. Another element inhibiting inflation is thte fact that part of the general budget revenues are received in foreign exchange, and that the Plan Organization receives all of its revenues in foreign exchange while spending less than half abroad. Foreigh exchange thus becomes available to pay for commercial imports required to offset the income-creating local expenditures of the Government. I. GENERAL

9. The area of Iran is estimated at approximately 628,000 square miles (164 million hectares), about one-half of which is non-arable desert or mountainous., The population is estirmated at about 21 million and agriculture provides the principal source of livelihood for about 75% of the people, including semi-nomadic tribes which make up perhaps 15% of the populatiorn. Probably 10% of the totalpopulation is supported by trade, 10% by industry and handicrafts, and 5% by employment in government and the professions.

10. The Lack of reliable data makes detailed analysis of the Iranian economy very difficult. No accurate or complete nationalincome data are available but, on the basis of rough estirmiates for certain sectors, it appears that the arn-nual per capita income does not exceed $75. Standards of health, education and other social services are low, though they vary sharply from place to place anid among income classes. Wealth, which is largely represeented by the ownership of land and real estate, is highly concentrated and the middle class, consisting mostly of the merchants and traders, is relatively small. In terrms of income, the industrial workers are believed to be somewhat better off -than farm workers, even though their average wage probably is equivalent Go only $0.50 to $0.80 per day.

11. Agriculture. In terms of contribution to Iranls incomie, agricultLre is probably about three times as important as crude oilproduction. This ratio will change as oil output increases but agriculture will probably hold its primary position. The total value of agricultural output has been roughly estimated by the Government at about Rls. 61,000 million, of which about Rls. 39,000 million come from crops and forests, and slightly over Rls. 22,000 million from animalproducts. From 35 to 50 million hectares of land are considered to be potentially arable but only about 4.5 miLlion produce crops in any given year, indicating a cultivated area per capita of only a little over half an acre. In addition to the potential but uncultivated farm land, 10 million hectares are meadow or pasture land and about 19 million are in forest (see Table 1). Of the cultivated land, 30% to 40% get;s some degree of irrigation, though generally even irrigated land is not adequately watered.

12. A widie variation of climatic conditions and particularly rainfall (ranging from over 1,000 mm. a year along the Caspian to 100 mm. and even less in the central-eastern area) makes for a great variety of crops. However, wheat occupies about half the cultivated area, and together with barley, rice and cotton accounts for nearly 80%. Sugar beets, pulses, fruits and vegetables, tea and tobacco are other significant crops (see Table 2). The animal population seems to be growing more rapidly than the production of field crops but overgrazing, particularly by the flocks of nomadic tribes, subjects much of the semi-arid central and southern parts of the country to excessive erosion.

13. Agricultural production appears to be keeping pace with growth of population (about 30% in the last 17 years) and, from the standpoint of food, Iran is largely self-sufficient. Important exceptions are sugar and tea which make up about 16% of imports. A.bout 90% of the farm production is used internally, although the 10% tlhat is exported represents over 80% of Iran's exports other than oil. Raw cotton, fruit, wool and rice, in raridly descending order, are the principal agriculturalexports.

14. IWith the possible exception of wheat and sugar beets, there is no national market for agricultural products; a large number of local markets persist as a result of transport difficulties, the considerable distances involved, and the local restrictions on the movement of goods. Wheat has a limited na-tional market because of the Governmernt's collection and price control program directed towards cheapening food costs, particularly in the Tehran area, and the national market for sugar beets is also partly the result of governiLental actioni.

15- Only about one-fourth of the land in farms is cropped in a given year; thus, the growth potential would appear to be very large, especially since only a small portion of the potenitially arable land is now in farils. The principal steDswhich need to be Waken to bring about a fuller utili.zation of land and better yields are to (1) extend irrigation and make better use of available water; (2) improve thle farm tenure system which reduces incentive on the part of the cultivator (only 40% of the farmers own land and 1% of the landiowners own 56%o of the land); (3) provide more adequate transport and marketing facilities; (4) improve farming methods and encourage the use of fertilizer and machinery; and (5)provide farm credit at reasonable rates.

16. Other Natural Resources. The only other natural resource being ex- ploited7Finquantity is petroleum. Oil reserves, which are not yet adequately appraised, are roughly estimated at over 4,000 million metric tons, or over 100 times the production expected next year. Although about 99% of al]. crude now produced comes from the areabeing worked by the foreign oil Consortium in south-western Iran, a new field of promising, but as yet undeternmined, size has been brought in at Qum, 124 kilometers south of Tehran. If very preliminary production estimates are borne out, thiis fielcl may produce crude worth $40 to $50 million annually. The petroleum from this source, for a time at least, will presumably be exported as crude since the National Iranian Oil Company has only limited refining capacity outside Abadan. Transportation to the Persian Gulf ports will present a problem unless the pipeline under construction to bring refined products from Abadan to Tehran shiould be used instead to carry crude to the Persial Gulf for export.

17. Natural gas, available in very large quantities (estimated at 450 irillion cubic feet daily) from oil production, is now largely a wasted asset. A small amount is used for thermal power and plans have been made to use some for ce!ment, and possibly fertilizer, production if the necessary pipe- lines are constructed and the latter industry is expanded.

18. Although Iran hasa wide var:iety of minerals, reserves are unknown for the most part. Coal, copper, iaanganese, chroindte, lead, zinc, red iron oxide, sulphur, arsenic, potash and borax are now produced in small quantities - 5 -

(see Table 3). Coal reserves are estimated at from 10 to 40 million tons but the industry is in a weak competitive position with oil. Iron ore is also available (reserves are estimated at 25 million tons) and the Government is now considering the economics of establishing a steel plant. Iron 6xide, manganese, lead, zinc, sulphur and chromite are exported but all in very, small amounlts.

19. Iran has extensive forests comprising about 45 million hectares, or 12% of the total land area. The hardwood forests near the Caspian Sea are potentially capable of supporting an export industry in lumber as well as local wood--processing industries. However, probably not more than 5% of the timber cut annually is used for industrial purposes and valuable timber is used uneconomically for charcoal and village fuel whereas the relatively- cheap oil products could be used if better distribution facilities and cil- burning equiprnent were available.

20. Industry. Modern industrial development in Iran began in the reign of Reza ShTih Fahlevi in the late 1920's. From 1930 to 1940, protective tariffs andl government investments were used to stimulate the sugar, textile, cement, chermical, match, glass, brick-making, tobacco, and food-processing industries. During the war not only was industrial expansion halted, including a number of partially completed projects, but upkeep was neglected, some looting occurred, and a rapid deterioration took place in industrial plant and equipment. Since 1950 investment has been undertaken again, particularly in the textile and cement industries.

21. About 150,000 or more persons are at present said to be engaged in Iranian industry, other than handicrafts, and perhaps 80,000 of these are employed outside the oil industry. Iran supplies about 60% of domestic consumption in cement and glass, and around 25% in sugar and cotton cloth (see Table 4). Data on other industries are not readily available and even the above information on the major industries must be regarded as only a very rough estimate.

22. The Government, through the Plan Organization, plays a large part in Iranian industry, controlling over half of the country's factory capacity. It owns and operates the entire sugar industry (consisting of 12 raw sugar factories and a refinery), 5 texti:Le factories, a cement plant, a large brick plant, a copper refinery, plus 20 other enterprises, including tea factories, chemical plants and various food-processing plants. It also has part interest in another cement plant, a textile plant and a glass factory. It appears that in the aggregate the operations of government plants result in a small net profit.

23. It is the policy of the Government to dispose of these industrial properties as private buyers can be found but this must inevitably be a slow process and no transfers have been made so far. In general the amount of private capital and entrepreneurship available for private industrial ventures in Iran appears to be limited. Expectations of return have to be high to induce such investment from local sources, the capital market is not developed, and in spite of certain legislative measures aimed at encouraging - 6 -

private investment, there is considerable evidence of friction between established business interests and the Government. I',eanwhile, the Plan Organization intends to expand its activities in cement, sugar, and a number of other industries. Five newv cement plants are scheduled to start production (during the next two or three years, increasing output capacity to over three times present consumption. An undetermined but perhaps conl- siderable armount of increased conisumption may be expected, of course, as the development program gains momentum. However, even present capacity is not used to an economically desirable extent because of limitations of local markets and, in some cases, inadequate transportation.

2h. The (Governmenat is considering plans to increase production of cottzon textiles from its present level of approximately 60 million meters to about 200 million:, which would be within about 25 rmillion meters of present consumption. Perhaps 60% of this expansion would be in government plants and 40% in private plants. Such an increase in factory textile production would, however, result in some displacement of the hand loom industry, thus creating technological unemployment. It is questionable whether private textile interests have sufficient incentive to expanid at present. Prices have been falling, due to foreign competition, primarily as a result of the liberali- zation of import control in 1955 and the appreciation of the rial. Frequent shutdowns occur and existing capacity is not fully utilized. The CGovernment hopes that t;hese problems can be overcome by more efficient management.

25. Transportation and Communications. Transport and communications are particularly vital to Iran because of the size of the country, the distance of the Persian Gulf ports from the principal agricultural areas in the north and from Tehran, and the general "oasis" nature of much of the economy. The Alborz mountain barrier around the fertile and well-watered Caspian coastal plain and the Zagros Range of west-central Iran, which has to be traversed by the route from Tehran to the Gulf, present formidable obstacles to land transport. The severance of a large part of Iran's trade with Russia that foniierly went via the Caspian ports has also accentuated the transportation problem.

26. The principal comaponents of the present transport system are a north-south railway line from the Gulf ports of Khoramshahr and Bandar Shapur to Tehran, an inter-regional road network estimated at about 25,000 kilometers, about 35,00C) trucks, and a reasonably adequate air network. Because of low fuel and labor costs, transport costs per ton-mile are low, particularly by truck, despite the poor quality of most of the roads. In some instances, transit duties and other levies imposed by municipalities on goods passing through may be as important a barrier to the broadening of the internal market as the lack of transport facilities. Postal and telecommunications facilities exist biit are very slow and equipment generally obsolete. - 7 -

II. SECONTD SEVEN-YFAR DEVELOPMENT PLAN

27. In l9b18 Iran launched a seven-year program for the development of its resources and a corporate body with fiscal independence, the Plan Organization, was set up to plan and generally supervise this program. All of the oil royalties accruing to Iran were to have been used bv the Plan Organization in carrying out the development programs but implementation of the Plan had to be drastically curtailed in 1951 when oil revenues were reducecl to virtually nil folloiTing the nationalization of the oil industry.

28. A Seconld Seven-Year Development Plan extending through September 20, 1962 was enaicted on February 27, 1956. The Plan law provides for the continuation of the Plan Organization and for the division of Iran's portion of oil prof-its betwJeen the National Iranian Oil Company, the Plan Organiza- tion and the Ministry of Finance. The law appropriates Rls. 70,000 mill-ionl ($ 933 million) for the various sectors of the economy and specific projects, including RLs. 17,200 million ($ 229 million) for the completion of programs initiated in the first Seven-Year Plan. However, the Plan Organization acting alone or in conjunction with the Joint Plan Commiittee of Parliament, is given considerable flexibility in adjusting the amount to be allocated to any specific project or sector of the economy, and is also authorized to increase the total expenditure to a maximum of Rls. 84h,000 million (0 1,120 mi:Llion).

29. As of August 1956 the Plan Organization had made the followJing allocations:

Amount (Ln Millions (In Millions of Rials ) of $ ) % of Total Agriculture., irrigation and multi-purpose 19,635 262 24 Transportation and communications 30,166 402 38 Industry 11,378 152 14 Social deveLopment 19,252 256 24

Total 80,h31 1,072

A breakdown of these allocations to specific projects, and the estimated year by year expenditures for each, is set forth in Table 5. It is expected, however, that the Plan Organization will from time to time adjust the amounts allocated to specific projects.

30. A brief description of the major projects in the agricultural, irrigation, transportation and comnmunications sectors of the Second Seven-Year Plan is set forth below.

31. Irrigation and Miulti-Purpose Projects account for 13% of the pro- grarmmed expenditures under the Plan.. The flow of water in Iran's rivers varies greatly during the year and it is necessary to create regulating -8-

reservoirs by the construction of dams to assure a firm supply of irrigation water during the growing season. The major projects currently included in the Plan are set forth below and are designed to develop Iran's water resources and increase agricultural production. These appear to be techni- cally feasible and potentially useful, but detailed water-use studies have yet to be made, cost-benefit appraisals completed, legal problems in con- nection with water distribution overcome, and managSanent and organization problems related to the carrying out of the projects solved.

(a) Sefid Rud Project. The Sefid Rud River is formed by the con- fluence of the Kizil-Ozan and the Chah Rud Rivers. After passing through a narrow gorge it flows into a fertile area around the town of Resht and dis- charges into the Caspian Sea. A concrete gravity darn will be constructed across the cntrance to the gorge, creating a reservoir with a capacity of 1,500 million cubic meters. The project is designed to irrigate 90,000 hectares of the coastal plains, mainly for the production of rice. A powerhouse with an eventual capacity of 60,000 kw will also be constructed.

French consulting engineers have been retained for the planning and engineering of the project and the supervision of the construction work. A group of French contractors will carry out the construction of the daim. Preliminary construction work on the dam site was started in the beginning of 1956 and five years will be required to complete the darn. 'The cost of the dam and powerhouse is estimnated at Rls. 3,525 million (;47 million).

(b) Karadj Project. The Karadj River rises in the Alborz mountains bordering the Caspian and flows in -to the desert area south of Tehran. A concrete arch dam will be constructed across the river some 23 kilometers north of the tovrn of Karadj. lhe reservoir will have a capacity of 205 million cubic meters. The project includes the construction of a power plant with a generating capacity of 33,000 kw and a 6b kzilometer transmission line connecting the plant with Tehran. The project will increase the supply to Tehran of drinking water, will provide a regular supply of irrigation water to an area of about 8,ooo hectares around the town of Karadj, and will provide an additional supply of electric power to l'ehran.

A French consulting firm and a U.S. finn are at present cooperating in preparing final plans. A U.b. contractor has been given a letter of intent for the construction work. it is estimated that the construction work will re uire about four years to complete and that the project will cost Rls. 3,825 million (451 million).

(c) Saveh and Doroodzan Projects. The Saveh project is located soine lbO kilometers southwest of Tehran and the Doroodzan project some 90 kilomneters north of the city of Shiraz in south Iran. Both projects include the construction of dams to create Et supply of water for irrigation. Add:i- tional benefits will be obtained by the generation of a limited amount of power. Preliminary plans have been prepared on these projects but additional studies are to bc carried out, rnainly of the areas to be irrigated. Con- struction work will not likely beEin before 1958 and wvill require three or four years to complete. The total cost of these two projects is tenta.- tively estimated at Rls. 2,850 million (438 million). 32. Agricultural Projects account for 11%0 of the programmed expenditures under the Plan. The Ministry of Agriculture is responsible for carrying out most of the agricultural sectors of the Plan.

(a) Farm Mechanization. Most of Iran's farmers still work with antiquated implements but an increasing number of people have bought, or want to buy, modern equipment. The liachinery Bongah (somewhat autonomous division) of the Plan Organization has worked out a plan by which these farmers would be able to purchase farm machinery on credit. Private dea'lers would sell and service these machines. It is expected that the loans to the farmers will be administrated by the Agricultural Bank. The Machinery Bongah will check whether the dealers give adequate service, will operate some repair shops, and will operate a few pools of land development machinery. This is a worthwhile project but numerous administrative problems will have to be overcome.

(b) Grain Silos. Since the end of World Wiar II, the Government has built seven large concrete grain silos to store wheat for the cities and the army but only three silos have been equipped with cleaning and transportation machinery. The Plan Organization intends, after receiving advice from a consulting firm, to purchase equipment for the other four silos so that they can be put into operation.

(c) Development of Regions. The Plan provides for thie regional development, (land reclamation, colonization, and road building) of five regions, but the Plan Organization expects to concentrate in the next few years on the Moghan area in the northwest and the Karkheh area in the south where major irrigation works have recently been completed.

(d) Forestry. Provision is rmade for the protection and expansion of Iran's forests and the development of rational exploitation methods. The Forestry Service needs to be strengthened and properly equipped, a forestry school built near the Caspian in the main forest area, and vehicles, saw mills and other equipaent purchased.

(e) Extension and Other Services. An Extension Service was established in 1953 withi the assistance of'the U.S. Operational Mission. The Service is still in the formative stage and it needs equipment and vehicles for its educational and demonstration work. The Service 'is responsible for the distribution of limited quantities of fertiliz'er to farmers who are willing to demonstrate .the advantages of chemical fertilizers.

The Division of Plant Science and Agronomy of the Ministry of Agriculture operates 37 seed-improvement stations and plans to estiablish 35 more. T'he equipment of existing stations is also to be improved. The program has met with considerable success in respect to grains, cotton, and fruit trees but not in respect to sugar beets.

The Office of Pest Control has branches in each province and has been quite successful in fighting locusts and other pests which often inflict; severe damage upon crops. This organization is to be provided with new equipment such as planes, vehicles, and sprayers to maintain and iLaprove its efficiency. -. 10 -

The Division of Animal Husbandry is responsible for the improvement of livestock breeds and has established 20 local stations for this purpose. Artificial insemination has been found to be the most successful means of doing this. In order to improve and expand this wcrk the Division is to procure additional breeding stock and modern equipment.

The Razi Institute and the Veterinary Department are working on the control of livestock diseases. In 1955 they produced 28 million vaccines, gave 20 million vaccinations and 3 million other treatments, buit additional equipment is needed.

33. Urban Development Projects account for 7% of the Plan expenditures programmed7 In order to improve living conditions in provincial towns, it is planned to construct a large number of water supply systems and diesel power plants. The planning and engineering are to be carriod out by thlee groups of consultants - one French, one American and one Genman. Half the cost of each project will be financed by the municipality in which the project t4ill be constructed and the other half will be met by a grant from the Plan Organization. The planning work for the execution of these projects is still in the initial stage and substantial expenditures will not be incurred before the Spring of 1957.

34. Roads account for 20% of the programmed Plan expenditures. The road new-ork of 25,000 km consists of 2,000 km of asphalted roads, 6,000 km of gravel and Macadam roads on stabilized soil, and 17,000 km of unimproved natural earth roads. The program provides for the construction and improvement (10,000 km) of two north-south trunk highways, intenlational road links with Iraq and Turkey, east-west highways along the Caspian, new roads in the south-east, and access and farm-to-market roads. The trunk roads will be asphalted two-lane routes fit for heavy trucks and buses running with full loads. Although the secondary roads are designed to lower standards, they too will be made suitable for year-round truck and bus operation. About half the route length will be engineered and supervised by the 12iinistry of Roads and the other half by foreign consultants engaged by the Plan Organization. All construction is to be done by contractors, mainly local, in accordance with established procedures for road building in Iran and trill be turned over to the l4inistry of Roads for maintenance. Under a $5 million loan from the Export-Import Bank, -the Ministry of Roads will soon retain a team of experts from the U.S. Bureau of Public Roads to help organize a highway department capable of providing proper maintenance for the' entire road network. The remainder of the loan will be used to buy road maintenance equipment.

All the road projects are potentially useful and they will decrease transport costs, principally by reducing vehicle wear-and-tear and fuel consumption. However, the program is ambitious, and it is questionable whether it can be carried out on schedule with the technical and administrative facilities available. Also, there is no calculation, even approximate, of the benefits of new or reconstnrcted roads in relation to costs, and all the main roads have been designed to much the same standards without regard to traffic load or local soils or availability of construction materials. - Jl -

35. Rai:Lroads account for 8% of the programmed Plan expenditures. The Iranian Stte Railways link Tehran with the Persian Gulf, the Caspian Sea, and some nearby regions by a standard-gauge network of approximately 2,4tO0 km. There is also a broad-gauge line, isolated from the rest of the system, which connects Tabriz with the Soviet railway system. The Iranian State Railways are primarily a freight carrier (more than 90% of revenues) ancl the freight is highly specialized - 55% petroleum and 20% imports, all moving north from Persian Gulf ports. Freight traffic has increased 22 times since the war and is still growing but the Abadan-Tehran pipeline being constructed by the National Iranian Oil Compa y (to be completed in 1957/58) will be capable of transporting enough refined fuel to supply the Tehran-Isfahan market and to reduce the Railways' revenues 35%. Some oi the non-petroletum freight may also be captured by trucks as the road network; is extended and improved.

The railway program consists of construction work on about 1,000 km of new lines, track rehabilitation and improvement, the conversion of the main lines to diesel traction, acquisition of new rolling stock, install ation of a modern signalling system on the north-south line, and equipment for the repair shops. The cost of the railway program is estimated at Rls. 8,81A1 million ($1Ll8 million) of which Rls. 2,100 million ($28 million) are to be financed from the Railways' own resources and Rls. 6,741 million ($90 mJl- lion) by the Plan Organization (including a $14 million loan from the Export-Import Bank for locomotives and shop equipment).

The new railway lines will extend the present network to some of the most important agricultural areas in Iran and the acquisition of diesel electric locomotives, other rolling stock and shop equipment is designed to improve the Railways' operating efficiency. The size, scope and timing of the program, however, has generally been formulated without prior studies of cost-benefit ratios. The Railways' ability to finance its portion oi the program is uncertain since the program apparently takes no account of the possible reduction in revenues resulting from the diversion of petroleum traffic from the Railways to the pipeline and other traffic to the truclking system.

Also the proper coordination of road and rail services does not appear to have received sufficient attention. Private truck operators are now performing some services which are often performed by railroads in a well balanced and properly integrated transport system. For example, some bulk commodities destined for export are being hauled by truck over distances ranging from 1,500 km to 2,000 km and some imported goods are being hauLed by truck from the Persian Gulf to Tehran (1,100 km).

36. Ports account for 5% of the programmed Plan expenditures. Bandar Shapur 'andKhoramshahr, ports in close proximity to each other on the Persian Gulf, handle about nine-tenths of Iran's non-petroleum foreign trade. The remainder moves through minor Gulf and Caspian ports. The port developmnent program covers all ports except oil company facilities such as Abadan and Bandar Mashur and is summarized below. - 12 -

(a) Khoramshahr and Bandar Shapur. The capacity of these ports will be doubled and their equipment Podernized. A Danish consulting finn is supervising the construction which has been started. The Khoramshahr and Bandar Shapur ports combined handle currently about one million tons annually and their facilities are inadequate for the growing volume of traffic. Also maintenance has been neglected and goods are not properly stored. The Government is considering transferring the operation of the ports from the Custors Service to a specialized body within the Ministry of Transport.

(b) Other Persian Gulf Ports are to be improved and some new oneS constructed. A Dutch firm has beer engaged to design and supervise this work which is still in the survey stage.

(c) Pahlevi, the largest of the Caspian ports, is to be rehabilitated. A Danish consulting firm has been engaged to design and supervise -this work on which a preliminary survey has been commenced.

(d) Other Caspian Ports are to be improved and possibly new ones constructed. No work on this has been started.

The Customs Service is responsible for cargo handling, transfer and storage at all Iranian ports and intends to import, outside of the Plan, cranes, lift-trucks, and other equipment costing the ecuiivalent of about Rls. 300 mi:lion 07 million). It is understood that this is to be financed by the Customs Service through suppliers' credits.

If properly managed, the improved and new ports could contrnbute significant:Ly to the development of Iran.

37. Airports account for 2% of programmed expenditures under the Plan., A Bri-tis consulting firm has been retained to design and supervise the enlargement., improvement and modernization of the Tehran and Abadan airports on prevailing standards for international airfields, and of the Isfahan, Shiraz, Kerrsanshahr and Yazd airfields on the basis of good standards for domestic air services. In addition, the Civil Aviation Department of the Ministry of Transport is to improve existing, and construct new, secondary airfields. Improved air transport facilities should stimulate the further growth of airline transportation but the airport program has been prepared without evaluating the cost-benefit ratio of the various projects.

38. Telecommunications account for 2% of expenditures progranmed under the Plan. The program is designed to (a) expand the exchange and iine capacity of the local telephone services in the main towns and modernize their existing equipment, (b) rehabilitate the inter-regional telephone and telegraph lines and improve them by replacing iron wire with copper wire, and (c) introduce UHF and VHF for the wireless transmission messages.

Improvement of the local telephone services is being carried out by the Government-owned Telephone Company of Iran with some technical help from the West Gerran Federal Post Office. The improvement of inter-regional line and wireless services is being carried out on the basis of surveys and plans now being made by a French manufacturer of telecommunications equipment. 13 -

The total cost of this program is estimated to be about Rls. 2,2',0 million ($:30 million) of which 70% is to be financed by the Plan Organiza- tion and the remainder from suppliers' credits obtained by the Government outside the Plan Organization.

Present telephone and telegraph services in Iran are unreliable, slow and congested, largely because of technical deficiencies. By correcting these deficiencies, the planned new system will remove a serious obstacle to the proper functioning of business, industry, and Government.

39. Industrial Projects account for 1l4% of the programmed expenditures under tle Plan. The ltiission did not examine this sector of the program but understands that firm plans have been made for the expansion of the cement, textile and sugar industries. Five newT cement plants are to be completed by 1959, raising nominal productive capacity from 1,000 tons a day to 2,375. Five new textile mills are contemplated and the sugar industry is to be expanded considerably. A Belgian firm is studying a proposal to establish a fertilizer plant and a German firm a steel mill.

40. General Observations. In addition to the specific comments mentioned above, Th-e Mission has the following general observations.

(a) Management. The programming, planning and execution functions of the Plan Organization are extremely heavy. At present it is not adequately staffed or organized to carry out these functions speedily and effectively. This is recognized by the Managing Director, who has engaged a managemenit firm (to bDe paid for by the U.S.) to advise the Plan Organization on its organization and management.

(b) Economic Benefits. The Mission feels that the projects which it reviewed are potentially useful and will contribute substantially to Irants national income if properly managed and maintained. However, the amount of this contribution cannot be estimated since no national income data are presently available and no comprehensive cost-economic benefit studies ha-ve been made for most sectors of the program. Assuming a capital-income ratio of 3 to 1, an increase in national income of about Rls. 25,ooo million, perhaps 20% of Iran's national income, might be expected over the period of the Plan. Considering that there is considerable capital de-velopment taking place in Iran outside the Seven-Year Program (including that of the National Iranian Oil Company, the State Railways and the private sector) an estimated increase in national income of this magnitude appears to be conservative. Based on the limited population growth estimates available, the per capita national income might be expected to increase at something more than 1% a year during the Plan period.

The lack of economic benefit studies is a serious shortcoming in the selection of projects and the allocation of funds. Over-investment may occur in some sectors at the ex?ense of more important sectors. For example, the progranmmed expenditure of 1 times as much for transport as for agriculture merits re-examination, particularly in views of the additional - 14 - investments being made by the National Iranian Oil Company (for the Abadan-Tehran pipeline) and by the 1Silways out of their own resources. It is recognized, of course, that important political, social and other considerations have to be given substantial weight in programming decisions. - 15 -

III. FINANCING THE PLAN

41. The Second Seven-Year Development Plan Act provides that the Plan will be financed from the oil revenues, including taxes, accruing to Iran from operations under the October 29, 1954 Oil Agreemient between Iran, the National Iranian Oil Company and a Consortium of foreign oil cormiparies. Other income from the Iranian oil industry (such as that earned by the NIational Iranian Oil Company on the internal sale of oil products or the export of oil produced outside the area reserved for the Consortium) is not available for the financing of the Plan.

42. The amount of oil revenues made available to the Plan Organization for the carrying out of the Plan is determined by (i) the total amount of oil revenu(es accruing to Iran, and (ii) the portion of those revenues allocated to the Plan Organization.

43. Estimated Oil Revenues Accruing to Iran. The amount of total oil revenues accruing to Iran is determined largely on the basis of the terms of the Oil Agreement with the Consortium, the volume of crude oil produced and its pr:Lce.

44. The arrangements under the Oil Agreement with the Consortium are:

(a) The crude oil produced in a designated area in soutlhwestern Iran is purchased at the well-head by Consortium members or their nominees (collectively called Trading Companies) from the National Iranian Oil Company for a "stated payment", which is fixed at 121% of the "posted price". The posted price is the price f.o.b. tankships at which crude oil is offered for sale by the Trading Companies to buyers generally for delivery under similar conditions and at the same seaboard terminal. The stated payment is deducted from the income tax payable to the Golrernment of Iran by the Trading Companies. (In August 1956 the posted price was $1.91 per barrel and the stated payment was $0.24 per barrel).

(b) Two operating companies were incorporated in the Netherlands, one to produce and the other to refine the oil. They receive the actual cost of handling and refining the oil plus a fixed fee (in August 1956 these charges totalled approximately $0.21 per barrel).

(c) The posted price less the total of the handling and refining costs and the fixed fee is considered income (in August 1956 the income per barrel was $1.70, i.e. $1.91 less $0.21). This income is taxable at the rate of 50% (thus the Iranian share, per barrel in August 1956 was $0.85 per barrel). Iran agrees not to increase this rate of taxation during the life of the Agreement. The Agreement is for 25 years and can be extended. - 16 -

(d) The Consortium guarantees (subject to force majeure) to produce and purchase at least 27.5 million cu. meters in calendar year 1956 and 35 million cu. meters in 1957. Output thereafter, assuming favorable operating and economic conditions in Iran, would reflect the trend of supply and demand for Middle Last oil.

45. Iran is, thus, reasonably assured of a substantial income from oil through 1557. The Oil Agreement contemplates that production in Iran after 1957, assuming favorable operating and economic conditions, will at least keep pace with Middle East oil production generally and representatives of the Consortium of foreign oil companies told the Mission in Tehran that they were implementing an investment program designed to substantially increase the production of crude. Production in the Middle East, in the opinion. of oil men in Iran, is expected to e:xpand at the rate of 8% to 9% per year on the basis of an annual increase of 7% in the world consumption of oil. Provided lran remains relatively stable politically and economically, a somewhat gfreater expansion of oil production may be expected from Iran since it is free from any external pipeline prcbleqs, Iran will not have regained its pre-1.951 relative position in the prccdiction of oil from that area until. it increases its present production by 6)'Yo. Although the Oil Agreement guarantees that crude production in 1957 will be 13% over expected production in 1956, an increase of 20% might be more realistic. Crude production in the area assigned to the Consortium may reasonably be expected to increase at the rate of 10% per year during the remainder of the Plan period.

46. The Plan Organization hlas used the current price of crude as the basis of estimating oil revenues during the remainder of the Plan pericd, but the MIEssion di.d not feel that this was sufficiently conservative. The Oil Agreement provides for discounts from the posted price and it is understood that Iran has agreed to a discount for crude produced in excess cf the guaranteed volume. The present cost of handling and refining oil (abou.t $0.21 per barrel) is expected to remain unchanged. A gradual recduction. of surplus employees taken over by the Consortium from the National Iranian Oil Company will likely compensate for any increase in wages, which are already high by Iranian standards. The Mission, therefore, concluded that a more conservative estimate of the posted price would be $1.81 per barrel as compared to $1.91 per barrel in August 1956; and, thus, Iran's share of the oil revenues would be $0.80 per barrel.

47. Accordingly, Iran's oil production and revenues have been estimated to be as iollows: - Production YeaLr (millions of bbls.) Millions of dollars

195'6/57 195 156 19'57/58 233 188 19'58/59 258 206 1'95q/60 284 237 196o/6i 312 252 1961/62 343 268 1962 (6 months) 189 151 1,858 - 17 -

48. Allocation of Oil Revenues to Plan Organization. The Second Seven- Year Development Plan Law establishes the basis on which the total oil revenues accruing to Iran are apportioned to the National Iranian Oil Conpany, the Ministry of Finance and the Plan Organization. The Law establishes one basis of apportionment for the period up to March 20, 1958 and a different one thereafter, The basis for apportionment of the total Iranian share ($0.85 per barrel in August 1956) for each of these periods is as follows:

(a) Up to March 20, 1958:

(i) The National Iranian Oil Company is to get the stated payment (:O.24 per barrel in August 1956 representing 28% of the Iranian share) for authorized expenditures. Any amount in excess of the National Iranian Oil Company's authorized expenditures under the Company's charter is to go to the, Ministry of Finance.

(ii) The Ministry of Finance is to get (i) 10% of the total Iranian share (E-2O.08 per barrel in August 1956), (ii) any amount of the total oil revenue in excess of $144 million in 1956/57 and in excess of $188 million in 1957/58, and (iii) any amount of the stated payment in excess of the National Iranian Oil Company's authorized expenditures.

(iii) The Plan Organization is to get the remainder ($0.53 per barrel in August 1956, representing roughly 60% of the :ranian share). Oil revenues to be received by the Plan Organiza- tion in 1956/57 and 1957/58 can be predicted reasonably accurately since (i) the output guaranteed by the Consortium will, at present prices, produce revenues of about $144 million in 1956/57 and about $188 million in 1957/58, and (ii) production may considerably exceed the guaranteed amounts thus giving a cushion to the Plan Organization for a possible recluction in price. The Plan Organization's share is, therefore, estimated at $86 million for 1956 i57 (about 6c% of $144 million) and $113 million for 1957 53 (about 60% of $188 million).

(b) After March 20, 1958:

(i) The Plan Organization is to get 80% of the Iranian shara, with the exception that (i) this share may be reduced down to a minimum of 75% if the Government's financial position is such that a special commission (consisting of the Minister of Finance, one other minister appointed by the Government, and the Managing Director of the Plan Organiza- tion) confirms that part of the oil income is necessary for the maintenance and management of Government non-profit establishments, and (ii) in 1958/59 only the Plan Organiza- tion does not share in any oil revenue in excess of $188 million. (The estimates contained in this report have been based on the assumption that the Plan Organization's share - 18 -

will be 80% in 1958/59 and 75% thereafter. However, thle Plan Organization is in no way committed to accepting only 75% of the Iranian share of the oil revenues and the IManaging Director informed the Mission that he would endeavor to receive the full 80%).

(ii) The National Iranian Oil Company is to get 20% of the Iranian share but the amount thereof in excess of the National Iranian Oil Company's authorized expenditures is to go to the Ministry of Finance.

49. On the basis of the above estimates of the total oil revenues accruing to Iran and on the above bases of allocating these revenues, the Plan Organ- ization will likely receive more than $1,000 million during the Second Seven-Year Plan period as follows; and for purposes of comparison the Or- ganizationts programmed expenditures as of August 1956 are also shiown:

Estimated Plan Organization Revenues Expenditures Year (In millions of Y)

1955/56 (6 months) 26, 37 1956/57 86 138 1957/58 113 168 1958/59 150 174 1959/60 176 175 1960/61 189 175 1961/62 201 139 1962 (6 months) 113 66

Total 1,o54 1,072 * actual. 50. It Ls yet too early to determine -the extent of the impact of the Suez crisis on Iran's, and thus the Plan Organization's, finiancial prospects. However, the situation may very likely affect Plan Organization expenditures as well as revenues. kbout one-half of Iran's oil was shipped through the Suez Canal immediately prior to the crisis.

51. The Financing Problem. In the spring of 1956, the Plan Organization became concerned about the excess of programmed expenditures over ecpected revenues during the early years of the Second Seven-Year Plan Period. 'T'he Plan Organ-ization had already obtained several loans in anticipation of oil revenues and was operating with an extremely small cash balance. The Organization's plight is illustrated by its financial position as of August 20, 1956, as follows:-

Million $ Equivalent

Cash and deposits Rls. 229.19 rmillion 3.1 E 0.25 0.7 US$ 0.98 1.0

Total 4.8 - 19 -

Million $ Equivalen-t_

Credit: Bank NIelli advances Rls. 1,100.00 million 14.7 IMF drawings US$ 12.00 12.0 Suppliers' credits US$ 14.31 14.3 Uncovered letters E 1.90 5.3 of credit US$ 0.12 001 Total 46.4 Since Auguast 20, 1956, the Organization has obtained some additional resources but in view of a monthly rate of expenditure amounting to the equivalent of approximately $10 mi.llion it continues to operate on a sm.al cash balance. In September 1956, the Organization received a rial cred:it from the Bank Melli equivalent to the recent drawing of $5.5 million by Iran on the International Monetary Fund, which represented the balance of the $17.5 million stand-by credit obtained by Iran in May 1956. In October 1956, oil revenues equivalent to $14.4 million were received but no further payments are due until about mid-January, ].957.

52. The Plan Organization's financial position and prospects therefore necessitated a reconsideration of the scheduling of its development expenditures and the desirability of obtaining a more satisfactory method of financing any deficit occurring in the initial years of the Second Seven-Year Plan Period.

53. Fol:lowing discussions with the Bank in Tehran and in WIashinlgton, the Plan Organization agreed, except as the Plan Organization and the Bank may otherwise agree, that total expenditures would not exceed the equivalent of $70 mil:Lion between August 21, 1956 and March 20, 1957 and the equivalent of $135 mi:Llion from March 21, 1957 through March 20, 1958. The actual expenditures during the periods for which inforrnation is available to the Bank and these expenditure ceilings would indicate programmed expenditures as follows:

Year Millions of Rials Dollar Equivalent in millions

1955/56 (6 months) 2,025 27 l 1956/57 8,250 110 19157/58 10,,125 135

These modifications would result in an expenditure of about Rls. '75,000 million, equivalent to $1,000 million for the 7-year period if the total expenditures projected for the period 1958/59 through 1962 remainiunchanged.

54. Taking account of these adjustments in the schedule of expenditures programmed by the Plan Organization, there is now areasonable prospect of an over-al:l balance between expenditures and revenues over the entire period of the Plan, assuming that there will be no serious developments re- lating to the production and sale of Iranian oil and that the allocation of .oil revenues in the Plan Law will remain substantially as currently provrided. - 20 -

Substitutirng the expenditure figures indicated in paragraph 53 above in the Plan Organization's schedule of programmed expenditures (paragraph 49) and comparing these with the estimated Plan revenues, gives a rough approximation of the possible deficit in the early years, as follows:

Excess or Year Expenditures Revenues Deficit (in millions of dollars)

1955/56 (6 months) 27 26 - 1 1956/57 110 86 .24 1957/58 135 113 -.22 1958/59 174 150 -24 1959/60 175 176 + 1 1960/61 175 189 414 1961/62 139 201 +62 1962 (6 months) 66 113 +47

Total 1,001 l,054 +53

55. These figures also indicate that during the later years of the Second Seven-Year Plan the Plan Organization would have surplus revenues, over and above the expenditures naw contemplated,sufficient to repay any credit required in the earlier years. - 21 -

IV. THE FINANCIAL POSITION OF IRAN

56. With the nationalization of the oil industry in the summer of 1951, Iran's financial position became considerably strained. Prior to that action about 30% of total Government revernes were derived from taxes and royalties paid by the Anglo Iranian Oil Company. These payments, which were paid in sterling, p:Lus the Company's purchases of rials to meet local currency expenses in Iran, accounted for more than 60% of the total foreign exchange receipts. Receipts from these two sources dropped from the equivalent of $113 million in 1950/51 to $13 million in 1951/52.

57. Financial Developments 1951/52 to 1955/56. The adverse impact on the economy of lhe loss of these receipts is clearly indicated in the financial data for the ensuing years. During 1951/52 and 1952/53 Government debt to the Bank Melli more than doubled from Rls. 5,194 million to Rls. 11,003 million (see Table 6), despite the virtual stoppage of the first Seven-Year Plan. Gold and foreign exchange reserves fell by 31% from $252 million in March 1951 to $173 million in i'iarch 1953, and the exchange rate depreciated substantially; the free market selling rate for the ria j / rose from an average of Rls. 478 per dollar in 1950/51 to Rls. 80 per dollar in 1952/53 (see Table 7). The contractive effect of the decline in foreign exchange reserves was far from sufficient to offset the expansionary effects of the budget deficit, and the money supply rose by las. 3,930 million (28%). The official price indexes reacted after some time lag. Over the two years ending March 1953 wholesale prices rose about 7% and the cost of living about 10%. Much larger increases caime in the following year (see Table 8).

17 Official rate plus certificate rate. Since March, 1946, Iran has had a.mul- tiple exchlange rate system. The official buying and selling rates have remained urnchanged at Nls. 32.00 and 32.50 per dollar respectively. The official rate, however, has been applied to very few transactions. The most important application was with res.Dect to foreign oil companies which, prior to November 1954, were required to purchase rials needed for local expenditures at the rate of Ri1s. 32.00 per dolar. Since i4ovember 1954, however, the oil companies have obtained rials at the rate prevailing for commercial transactions (Rls. 75.00 per dollar). There are a few subsidy rates such as for remnittances for students expenses abroad. Most transacticons, i.e. commercial exports and imports, take place at a higher rate composed af the official rate pl-as a certificate rate. Exporters receive, in addition to rials at the official rate of Rls. 32.00 per dollar, exchange certificates denominated in foreign exchange. These are sold to importers who in making imports are required to surrender certificates in addition to rials at the official rate. Up to June 1953 the certificate market was essentially a free market, although the Bank Melli entered it from time to time on both the buying and selling sides, thus limiting short-term fluctuations in the certificate rate. In mid-1953 a policy of appreciation of the rial was undertaken, and the rate has been controlled since that time. - 22 -

58. The low point in the financial situation came in 1953/54. Gold mnd foreign exchange reserves hit a low of .168 million in July 1953. The free market selling rate for the rial rose from 87 per dollar in March 1L953 to 124 in June 1953. Wholesale prices jumped by appro:dmately 30% between March and December 1953, and the cost of living index increased by about 152O during the same period.

59. Since 1953/54 the situation has substantially improved. The Agreement reached with- the Consortium in October 1954 paved the way for the resumpt;ion of oil production and exports. Of more iimnediate consequence were the arrangements, also concluded in October 1954, to obtain substantially more economic aid from the United States, in addition to the technical assistance received since 1951. lth the help of rising foreign exchange receipts, the Government was enabled to carry out its decision, talcen in June 1953, to appreciate the rial in order to slow do' ,n the increase in the cost of iiving. The selling rate, set at Pas. 100.5 per dollar in June 1953, was gradually reduced to 90.5 by the end of December 1953 and has been fu;^ther reduced on three different occasions -- to 84.5 in August 1954, to 79.5 in February 19,55 and finally to 76.5 in .ugust 1955. The buyinF. rate has been Rls. 75.0 per dollar since February 1955. The aid recei-ved from the LUnited States -- about 428 m-,llion in 1953/54 and a further $48 million in 1954/55 --- permit- ted the Goveriment and its agrencies to recdce their new borrowings from the Bank %Mellifrom Rls. 3,400 million in 1952/53 to Rls. 1,664 million in 1953/54 and to Els. 1,288 million in 1954/55 (see Table 6). The increase in foreign exchange receipts resulting from foreign aid was augmented by an aooreciable rise in commercial exports (which had remained relatively stable from 1950/5-: to 1952/53) and by the resumption of oil exports on a substantial scale after the conclusion of the 1954 Oil Agreement. (2,455,0co tons in 1954/55 compared with only 239,000 tons in 1953/54.) In 1953/54 a considerable part of the increased foreign exchange receipts was used to rebuild the gold and foreign exchange reserves (from $168 million in July 1953 to $204 milliorn in Mlarch 1954), but in 1954/55 the bulk of the increased foreign exchange receipts was used to finance addititional imports.

60. MIoney supply continued to rise rapidly in 1953/54 (23%), but in 1954/55 the increase tapered off to 7%. The major factor which led to the sharp rise during 1953/54 was the build-up of foreign exchange reserves in colmr.binationr with the continued, though reduced, Government borrowing from Bank IIelli. Moreover, cduring both 1953/54 and 1954/55 bank credit to the private sector, which had remained relatively stable between March 1951 and March 1953, increased considerably and partially offset the deciine in the rate of Government borrowing. Price increases, after the sharp acceleration in 1953/54, also tapered off in 195.4/55. The wholesale price index increased by 3% (compared to 32% in. 1953/54) and the cost of living index by 10% (compared to 16% in 1953/54). The improvement in the price situation in 1954/55 was probably due largely to increased supplies of imported goods, combined with the falling off in the rate of increase in the money supply. The decline in rial costs of imported goods resulting from the appreciation of the rial did not become evident in the official price indexes until 1955/56. - 23 -

61. The easing of the financial strain which became evident in 1954/55 has continued, and relatively stable financial conditions emerged in 1955/56. Government debt to Bank Melli remained virtually unchanged over the year. Increased foreign exchange receipts from foreign aid and oil revenues per-- mitted a further increase in imports while holding foreign exchange reserves steady. Monev supply increased by 5.57% due mainly to bank credit expansion to the private sector (see Tables 9 and 10) probably largely for financing imports. The wholesale price index was stable, with some increase in prices of domestically produced goods offset by a decline in prices of imported goods; the cost of living index rose by 3%.

62. It should be noted that the easing of the financial strain is due in no srmiall measure to the budget suoport provided by the U.S. Government. In 1954/55 and *955/5 6 U.S. aid financed resnectively Rls. 3,580 million ($46T million) and Rls. 4,140 million ($55 million) of the Government's over-all requirements (see Table 11). Iran accordingly faces the problem of making her- self progressively less dependent on U.S. aid for budget support and keeping the general budget deficit within such limits that there would he no need either for (1) government borrowing from the Bank Melli on a scale likely to generate serious inflationary pressures, or (2) a diversion of oil revenues from the Plani Organization to the general budget. The general budget is sup- posed to provide for the normal operating functions of the Government excluding, for example, the development activities of the Plan Organization and the operations of' various independent Government agencies or enterprises such as the National Iranian Oil Company.

63. The Budget Problem. The magnitude of the task of bringing a. better balance between general budget expenditures and receipts is indicated by the deficits of the last three years as given below:

General B-udget Summary (in millions of rials)

1954/55 1955/56 1956/57 Actuals Actuals Budget Estimate

Revenue 7,063 11,227 14,666 Expenditure 10,906 13,987 18,722

Deficit 3,843 2,760 41,o56 ($51 million) (3$37 million) ($54 million)

The revenue f'igures given above exclude U.S. contributions to the budget, but in 1956/57 estimated oil revenues are included (see Table 12). The actual deficit for 1956/57 may well prove substantially smaller than that indicated above because revenues appear to have been underestimated and expenditures overestimated. Oil revenues may be larger than estimated since crude production will probably exceed the guaranteed minimum, and income accruing from this production was not included in the budget estimate. Ioreover, certain fiscal measures put into effect during the current year are likely to yield more revenue than anticipated. Beginning in March 1956, imports were valued - 24 -

for duty purposes at Rls. 76.50 to the dollar compared with the previous rates of Rls. 45.75 and Rls. 32.25. Also, the Government's selling price for sugar and tobacco and the tax on alcoholic beverages were increased quite sharply. Judging by the actual results of the first four months of the current year, non-oil revenues were about Rls. 660 million, or almost 20%, above the cor- responding period of the preceding year. Mlost of this increase came from customs receipts and profits from tobacco and sugar. Assuming these favorable trends continue, non-oil revenues in the current year might reach about Rls. 13 000 million. Taking account of the budgeted oil income (Rls.3,02, million3 , total revenues might come up to flls 16,025 million which even as- suminr- that the substantial increase in budgeted expenditures is achieved, would leave a deficit of around Rls. 2,700 million.

64. There appears to be little prospect that the deficit can be reduced over the next three or four years by cutting expenditures. A substantial portion of general budget outlays appears to be rather inflexible. Security outlays amount to about one-third of the total outlays and have increased roughl-y in proportion to the growth of the general budget during the last three years. It -

65. The probability that expenditures will continue to rise makes it imperative to raise mQre revenue. The Ministry of Finance cannot look to higher oil revenues, since after 1957/58 itt will no longer be entitled to 10% of the total oil income, and after 1958/59 it will not be entitled to oil revenue accruing from production in excess of the guaranteed minimum. The Finance Ministry's share will be confined to that portion of the National Iranian Oil Company's share (20%) which the Company does not need to cover its own investment requirements and possible losses on its oil operations. It is difficult to forecast what the Company's needs will be, but in the table below it has been assumed that they wrill not exceed $40 million per year. - 25 -

On this basis the Ministry of Finance would get the equivalent of $13.6 million (Rls.1,020 million) by 1961/62 or no more than the amount it w,as budgeted to obtain from the National Iranian Oil Company in 1956/57. In addition, it is possible for the Ministry of Finance to obtain 5% of total oii revenues if a special commission rules that this is essential in view of the financial situation. If such a claim were recognized, an additional 413.4 million (Rls.1,005 million) would become available to the general budget. Even the total of these two sums (Rls.2,025), however, is about Rls.l,OOO million Less than the amount estimated as accruing to the general budget in 1956/57.

Estimated 5% of total excess of Iranian oil Year NbOC needs revenues (in millions of dollars) 1959/60 7.4 11.8 1960/61 10.4 12.6 1961/62 13.6 13.4 1962(6 months) 10.2 7.5 66. It is therefore imperative to raise more non-oil revenues. Indirect taxes including customs duties, other commodity taxes and monopoly profits on sugar, tobacco and opium, account for roughly 80% of the general budget's non-oil revernues. As already indicated, certain increases in taxes and monopoly selling prices were put into effect in 1956/57. While it may be difficult to raise indirect tax rates still further in the face of mounting oppo- sition, the expected growth in national income and in the volume of imports may well increase the yield of existing taxes. It is quite possible, however, that all or almost all of any increase in indirect tax revenues would be ab- sorbed by a further rise in general budget outlays.

67. There does not seem much doubt that the general budget cannot be balanced without a major shift of emphasis towards direct taxation. The general income tax as such requires accounting, deposit banking and similar techniques, the lack of which makes evasion relatively easy in Iran. There- fore, while the returns from this tax should increase as national income grows with economic development, it probably cannot be relied upon as a principal source of government income for a long time to come. This and other considerations have led the Government to consider recommendations for the reform and intensification of property taxes on cultivated land and real estate and particularly the assessment of such taxes on a capital value rather than on an income basis as at present.L/ It is estimated that cultivated land, while producing over 50% of Iran's national income, contributes not. more than 4% of the Governmentts budget revenue. While many problems such as re-assessment, small-holder exemptions or rate reduction, etc., would be associated with the implementation of this proposal, it merits careful con- sideration as a means of achieving reasonably quickly, a substantial increase i/ Proposed in a report submitted to the Iranian Government by Philip E. Taylor, Tax Consultant, U.S. Operations Miission to Iran. - 26 -

in direct tax revenues. If some such measure is taken the income from direct taxation might rise from about Rls. 1,300 million at present to Rls. 4,00) million, although it is problematic whether this goal could be achieved within a three or four year period.

68. It seems apparent also that there is much room for improvement of tax administration which, over a number of years, might be exoected to bring about a sizeable groTwth in income. It is unlikely, however, that this factor will increase tax receipts at a rate faster than expenditures will expand, so that they cannot be counted on to reduce the present level of the deficit. However, higher taxes on petroleum products consumed in Iran do offer a possibility of meeting a part of the higher maintenance outlays referred to above.

69. Altogether it is evident that the balancing of the general budget poses a serious problem for the Iranian Government and one which requires prompt and vigorous action. For the time being the Government continues to enjoy budgetary assistance from the U.S., but it would be unwise to predi.- cate future action on the indefinite continuation of that aid.

70. Limits on Credit Expansion. One safeguard against inflation, whether from central bank financing of government deficits or from bank credit expansion to the private sector, is the fact that the bank Melli operates as the central bank of the country and at the same time does about 80% of the commercial banking business. Although owned by the Government, the Bank IMIelli has pursued a reasonably independent policy in the past and continues to operate under legislation severely limiting its own poTwers to expand the money supply. The Note Reserve Act of 1954 requires a 40% reserve (calcu- lated at the official rate of Rls. 32.25 per dollar), and provides that not more than $30 million equivalent (Rls. 967.5 million at the above rate) may be added to the initial coverage. Since the latter has not changed signifi- cantly because currency circulation has remained virtually stable, there is still scope for an increase in the note issue by Rls.2,400 million (about 20%) by the deposit of $30 million equivalent in gold and foreign exchange.

71. IThus unless the law is changed or action taken to revalue the gol(d and foreign exchange reserve of the Issue Department of the Bank l.lelli, the possibilities of expanding bank credit to the Government or to private bu::i- ness are limited. Even though expEansion of bank credit may take the form initially of creating deposit money, it is bound to result also in a proportionate or nearly proportionate rise in the amount of currency in circulation.

72. It may be said that the present margin for an increase in money supply under existing legislation is sufficient to cover the growing credit needs of the private sector as the economy expands over the next five yearcs, but it will not leave much room for additional Government borrowing from the Bank lielli. - 27 -

73. Although the existing lawr and policies governing the operations of the Bank Melli would seem to preclude a sudden and excessive expansion of the money supply, this does not mean that no inflationary price increases will be eXperienced in Iran. Limited or localized price increases may well take place because of the lack of mobility of resources arising from transport difficulties, the shortage of skilled and semi-skilled labor and the inability to compensate for a shortage of certain types of domestic supplies for which demand is increasing (e.g. vegetables, meat, etc.) by bringing in fully equivalent imports. Such limited inflationary phenoraena are difficult to avoid in an underdeveloped country in which the government is accelerating outlays on development. - 28 -

V. EXTERNAL FINANCE

74. Another element reinforcing the financial stability of Iran is the country's f'oreign exchange position. As of June 20, 1956 foreign assets, including gold, amounted to the equivalent of $217.5 million (see Table 13), representirLg about 82% of the estimated value of imports in 1956/57 (ex-. cluding imports of the Plan Organization and the National Iranian Oil Ccm- pany which spend their foreign exchange directly). While most of the fcreign assets are held as currency reserve (64% of the total) or committed against letters of credit or to Government agencies, there is a large and growing foreign exchange income available to meet foreign requirements. Since the beginning cif 1954 foreign assets have remained relatively stable despite an expanding volume of imports stimulated by the appreciation of the rial. It is anticipated that foreign exchange receipts and expenditures in 1956/57 will be approximately in balance, provided the gap between Plan Organization expenditures and revenues is filled by a loan in foreign exchange and the expected U.S. aid of about $42.5 million in cash and commodities is received.

75. Sources of Foreign Exchange Income. The large net foreign exchange income from oil, including that derived from rial purchases of the Consortium to meet the latter's local expenditures, together with the proceeds of foreign aid, enables Iran to maintain a volume of commercial imports of about three to four times her non-oil exports (see Table 14).

76. Earnings from non-oil exports probably will not show a marked increase during the next few years (see paragraph 86 below). It would be unwise to count on an. indefinite continuation of foreign aid receipts in the future. The major source on which Iran must depend for foreign exchange to service foreign debt and to finance an increased volume of imports in the future, is the excess of oil revenues over the foreign exchange expenditures of the Plan Organization and the National Iranian Oil Company.

77. Given reasonably stable economic and political conditions, oil revenues (excluding foreign exchange income from rial purchases by the Con- sortium), should rise from the equivalent of $156 million in 1956/57 to about $268 million in 1961/62. While these revenues are paid in sterling, the latter is convertible by special agreement with the United Kingdom, to meet necessary dollar payments. Thus, while this arrangement obtains, no serious currency problem should arise out of the fact that Irants trade with the dollar area shows a large deficit (see Table 15).

78. The table below shows the foreign exchange which it is estimated will become available from oil revenues for external debt service and other current payments, after meeting the estimated foreign exchange expenditures of the - 29 -

Ple- ODrganiZatioon and the ;.;ional I.a:na'- Oil Company. ThiM tnAlc is based on t',e ass--L-ition that A-1-r Orgunization - - -il.1,urcs -wil. Ic those sot forth in the t;ble on .age 20 above.

A B C D E istimated "'stimated .0 e NIOC Service on Available for iranian Oil Foreimn x.xchange Present Other Current Year RTevsnue Expenditures v/ A-B External Debt Payments (millions of dollars equivalent) 1956/57 156 76 80 6 74 1957/58 188 83 105 23 82 1958/59 206 93 113 26 87 1959/60 237 94 143 21 122 1960/61 252 95 157 19 138 a/ NIOC foreign exchange expenditures are estimated at $21 million for 1956/57 (see Table 14) and rising at $1 million per year thereafter. Foreign exchange expenditures by the Plan Organization are estimated at 50% of total programmed Plan expenditures in 1956/57, 45% in 1957/58 and thereafter at 40%.

79. It will be seen from column C that the foreign exchange remaining available for other purposes, including service on the existing external debt and imports other than those of the Plan Organization and the National Iranian Oil Company, is expected to increase from $80 million in 1956/57 to $157 million in 1960/61 or by about ,'77 million.

80. External Debt. The outstanding external debt of the Government and its agencies as of June 30, 1956 was reported by the Bank Melli at the equivalent of $233 million (see Table 16). However, the Mission was infonrved of additional suppliers' credits, not included in the Bank Melli estimate, which have been contracted by various; Government agencies, and which might bring the total debt to around $240 million. This amount excludes a second sterling credit of L 10 million which, however, may never be utilized.

81. The service on the debt as reported by Bank Melli ($233 million) wiLl rise to a peak of around $26 million in 1958/59 and decline to about 1`19 million by 1960/61 and to $11 million by 1965/66 (see Table 17). These amounts do not includea service on IMF drawings and on U.S. War Surplus Property Credits. No payments are currently being made on the U.S. War Surplus Property Credits, of which about $24 million is outstanding;some principal repayments are past due. The United States and Iranian Gcovernments have not reached agreement as to the settlement of these credits.

82. Foreign Exchange Prospects. After deducting debt service, the foreign exchange balance left over from oil revenues would rise from $74 mill:Lon in 1956/57 to $138 million in 1960/61, or by $64 million as indlicated in column E of the table above. This, together with the developments referred to in paragraphs84 and 85 would appear to - 30 -

provide Ir,an with an adequate growth in foreign exchange income over the longer run. However, if the Plan Organization were to attempt the level of expenditures set forth in the table on page 20 without securing foreign exchange to cover the gap in the program, Iran's position would be difficult in the early years of the Plan period. To accomplish that level of Plan expenditures, credit would have to be obtained from the Bank llelli in the amount of about $2hL million equivalent in 1956/57. Also amounts of the same order would be required in each of the following two years. To compensate for the inflationary impact of this credit expansion, either private credit would have to be shiarply curtailed, which would not seem feasible, or foreign exchange reserves woulld have to be drawn down to bring in commercial imports.

83. The effect of the proposed loan on the data in column E of the above table would be, of course, to increase the availability of foreign exchangc for other goods and services in the early years of the Plan period when the loan was beizg disbursed and thus obviate the need for Iran to draw down her reserves. In the later years, the availability of foreign exchange for such purposes would be reduced by the amount of the service paynents on the loan. However, the projected increases in oil revenues arc such that even after these adjustments Iran would have an increasing flow of foreign exchange available for other goods and services during the Plan period.

84. In addition to the expected expansion of oil revenues, other factors may contributze to a more favorable ioreign exchange position in the longer run. There arc some projects in the Second Seven-Year Plan which will result in the substitution of domestic products for imports and thus may relcase foreign exchange for alternative iriports that may be required as the national income rises. To important exammples are sugar and cotton textiles. Sugar ranks first among Iroan's imnports at about $;30 million a year (sec Table 1P). The local sugar industry produces 2Cf9 to 305Z of domastic requiremrents. Sugar beets can be grown in most arable places in Iran and production has increased about L00% since 1939. Less than 1% of the arable land is now used for bect production. The Plan Organization has included funds for now sugar factories in the program. Better seed, teaching of improved cultivation raethods and the pricing of beets on the basis of sugar content instead of on weight only - as at present - appears to be required to increase incentives for production.

85. The value of imports of cotton goods declined by about $8 million between 1952/53 and 1955/56 but these imports stiLll cost Iran about $18 million a year. The Mission observed some of the problems of the local textile industry but reached no conclusion regarding the desirability of further expansion with a view to import substitution. Since Iran exoorts raw cotton, the foreign exchange saving resulting from more textile production and reduced cloth imports would be partially offset by lower exports of raw cotton. Eased on experience elsewhere, the net saving might perhaps be 501% to 60% of the reduced imports, or about $10 million a year if the Plan Organization prog!ram. is carried out.

86. Aside from the probability that some imports can be reduced through the expansion. of domestic output, it is in theory possible -to increase imports other than oil. WGhile the Mission did not evaluate the country's export - 31 -

potential carefully, it seems unlikely that any significant rise in dxporrt- can be attained over the next four or five years. The most important expert is raw cotton, which in recent years has accounted for about one-fourth of total export proceeds excluding petroleun products (see Table 19). However, production and exports of this commodity can probably be raised only in the long run with the realization of irrigatiorn projects and better agricultural practices. The same is probably true of fruits and rice which in the last three years have contributed respectively about 14% and 5rfl to export earnings. Exports of certain types of animal products such as wool, hides and skins, which together have amounted to almost 14% of the value of sales abroad, nave not shown any tendency to rise in volume and are unlikely to expand measurably. On the whole, the impact of the Seccond Seven-Year Plan will probably be mani- fested more in the forml of import substitution than in the form of export expansion.

87. By and large it does seem likely that the rise in imports (other than those of the Plan Organization and the National Iranian Oil Company) made possible iby the expansion of oil revenues will be sufficient, considering the probablp development of some domestic import substitutes, to rmeet the expected rise in money incomes. This conclusion, however, is likely to be sound onlv if Iran can progressively balance her general budget without inflationary financing. - 32 -

STATISTICAL APPEfTIK

Table 1

ESTIMATED LAND UTILIZATION IN IRAN

(Thousand Hectares)

% of % of Total Cultivated Area (1954) Area Land

1. Land in Farms

Cropland: Wheat 2,300 50.6 Barley 800 17.6 Rice 251 5.5 Sugar Beets 40 0.9 Beans 34 0.7 Cotton 225 5.0 Tobacco 17 0.3 Fruits and. Nuts 688 15.1 Other Crops 245 5.3 Fallow 12,500 Total Cropland 17,000 Other land in farms (pasture, villages, etc.) 2,000 Total Land in Farms 19,000 11.6

2. Land not in Farms

Potential farm land 33,000 20.1 Forest 19,000 11.6 Grazing land 10,000 6.1 Desert, nmountain 81,000 49.4 Other (cities, roads, etc.) 2,000 '1.2 Total Land not in Farms 145,000 88.4

3. Total Land Area 164,000 100.0

Source: FAO and USDA publications. - 33 -7

Table 2

ESTfLIMATED AGRICULTURAL PRODUCTION

193h-1938 1948-1950 Annual AVWrage Annual tvcrae 1_955 1000 1000 1000 1000 1000 1000 Hectares M.Tons Hectares M.Tons Hectares M.Tons

lTheat 1,552 1, 869 2,030 1,825 2,300 2,741

Barley 638 793 742 758 800 980

Rice 219 423 246 460 251 h43

Cotton (lint) 158 35 110 23 225 60

Sugar Beets 12 113 28 255 Lo 521

Beans 30 18 35 25 34 na

Tobacco 12 15 15 15 17 na

Tea na 1 na 4 na na

Sources: Bank Melli; FAO. Very rough estimates only. - 34 -

Table 3

ESTIMATED ANNUAL YEI-.ZAL PRODUCTION AND EXPORTS

(tons)

Production Exports

Coal 260,ooo nil

Sulphur 650 124

Iron oxide 12,000 7,500

Lead ore 20,000 na

Zinc ore 12,000 na

Copper (electrolytic) 300 na

Chromite ore 20,000 na g

Manganese ore 6,ooo na

Arsenic ore 750 naj

1/Total exports shown in the Iranian Customs statistics for these items, and possibly others, are about 60,000 tons, indicating that practically all of these minerals are exported. Total value of eyports of mineral products (other than oil) probably does not exceed 03 to $4 million a year.

Sources: Production data prepared in consultation with the General iMines Co. of Iran. These data are rough approximations only. Table 4

PRINCIPAL INDUSTRIAL PRODUCTS

(1955j~56j % oa - % Increase 1950/51. Ownership Employment Domestic since Future Production of Plants Production 195h/55 Requirements 1950/51 Estimates

Sugar (1000 m.tons) 55.7 13 Govt. 76.2 3,7ao 25 37 n.a.

Cement 1 Govt. (1000 m.tons) 53.5 1 Mixed 126.0 1,500 60 136 710 (1960) 1 Private

Cotton Clo-th 6 Govt. 2/20 (million metres) 20.0 25-30 Priv. 60.0 30,000 27 200 200 (1958H Tea 8 Govt. (1000 tons) 2.3 46 Private 6.o 2,000 37 65 n.a. Glass (1000 tons) N'1 21 Private 10.5 2,50C 60 _ n.a.

Source: From data collected by the Plan Organization. Employment and output figures are rough estimates.

j 5 more plants are included in the Second Seven-Year Plan.

J 5 more plants axe contemplated, 3 O' -Wllichl h-ave been ordered. Table i

PROQPA3 ,ED EXP1DIThURfS UNDER S7GCOUID SEVEN-YEAR PLAN AS OF AUGUST 1956 (l'il'i'ons of rials) (6 mos.) (6 mos.) % of 192L5 1956/57 1957/58 1958/59 1959/60 1962/61 1961/62 1962/63 Total Program Agriculture, Irrigation and Multi-purpose Irrigation and multi- purpose 528 1,011 1,559 1,984 2,126 1,760 1,013 395 10,376 12.9 Agric. Training 9 60 57 59 64 30 19 18 316 Crop Improvement 41 107 127 128 85 70 70 67 605 Animal liusbandry 13 111 130 150 235 215 214 84 1,152 Plant Disease and Pest Control 26 154 180 172 191 160 160 76 1,119 Forestry h 100 160 220 220 200 176 88 1,168 1 Rural Community Dev 4o 102 127 120 97 82 59 20 647 k Ag. Extension 5 39 50 70 70 70 70 32 4C6 O Ag. M4achinery 3 101 140 185 183 84 4 3 703 Meteorology 15 19 22 25 28 - - 109 Cooperatives etc. -14. 30 25 26 25 25 6 181 Silos (elevators) - 100 70 80 105 80 - - 435 Ag. industries 21 137 45 42 37 16 - - 298 Fertilizer Plant - - 70 300 500 610 250 100 1,830 Ehuzistan Survey - 20 50 50 50 30 - - 200

Sub-Total 690 2,101 2,8l4 3,607 ,014 2,060 889 19,635 24.4 Table 5 (Conttd,)

(6 mos.) (6 mos.) % of 1955/56 1956/57 1957/58 1958/59 1959/60 1960/61 1961/62 1962/63 Total Program 2. Transportatiorn ar.d Ccrur,unicaticns Roads 499 1,661 2,619 2,928 2,908 2,294 2,085 939 15,933 19. Railways 520 1,339 1,429 985 959 753 514 242 6,741 Airports 79 362 370 328 181 125 130 73 1,648 Ports 47 614 588 489 546 562 562 300 3,708 Telecommunicatior,s 67 210 305 345 325 166 91 91 ',600 Cartography 22 -_69 62 68 72 72 102 69 536

Sub-Total 1,234 4,255 5,373 5,143 4,991 3,972 3,484 1,714 30,166 37.5

3. Industry

Textiles 263 432 529 456 127 - - - 1,807 Sugar 125 268 70 97 180 500 14OO 1400 2,040 w Cement 22 394 448 301 267 350 350 180 2,332 Steel -- 300 600 800 1,009 300 - 3,000 Chemicals 2 25 18 18 2 1 1 - 67 Industrial Credit 7 305 405 237 - - - - 954 Fisheries - 24 19 15 10 10 10 11 99 i4ining (mainly coal and salt) 17 109 90 10 6 30 26 - 288 Other 39 159 121 152 142 88 60 20 781

Sub-Total 475 1.716 2,00 1,886 1,534 1,979 1,147 611 11,378 14.2 Tab1e 5 - (Conttd.)

(6 mos.) (6 mos.) % of 1955/56 1956/57 1957/58 1958/59 1959/60 1960/61 1961/62 1962/63 Total Program

4, Social Development

Public Health 124 855 908 932 961 985 999 411 6,175 Education 125 438 443 438 407 351 348 181 2,731 Electricity for Provincial Towns 30 347 351 230 306 370 3LtO lO 2,0o44 Hydro and steam tur- bines (maj.producers) - 6 50 120 350 790 750 319 2,385 Urban Development 92 598 500 501 405 1,180 1,303 710 5,289 Other 12 52 132 202 177 48 3 2 628

Sub-Total 383 2,296 2,384 2,423 2,606 3,724 3,743 1,723 19,252 23.9

Total 2,782 10,368 12,571 13,059 13,145 13,135 10,434 4,937 80,431 100.0

Total Million Dollar Equivalent 37.1 138.2 167.6 174.1 175.3 175.1 139.1 65.8 1,072.4 Table 6

INTERNAL DEBT AND TREASURY CASH POSITION

Bank Mlelli Iran Credits to the Public Sector (in millions of rials)

March March March March Kaich March June 20 20' 20 20 20 20 21 1951 1952 1953 1954 1955 1956 1956 Government liability to Issue Department 1,400 2,664 4,224 5,784 7.187 7,187 7,187 Credits to Government 1/ 4,995 5,011 5,398 4,819 4,083 4,239 3,886 Credits to Government Agencies 1,322 1,787 3,216 5,266 6)147 6,708 6,952

Sub-total 7,717 9,462 12,838 15,869 17,417 18,134 18,025 Less deposits and claims on Bank Melli Iran i2/2,523 1,859 3,202 3,462 4,141 4,796

Total Credits 5,194 7,603 11,003 12,667 13,955 13,993 13,229 Source: Bank Melli Iran,

/j Exchange Certfficate Account i.9 not irncri-Ader 2/ Income tax and dividend due to be paid are not inclulded. - 40 -

Table 7

MOVEI,iENTS IN EXCHANGE RATE

(Rials per TJS $)

BUtYNG SELIING

Official Rate 32.00 32.50

Principal Buying and Selling Rates for Commercial Transactions (annual averages)

1950/'1 45.70 46.24 1951/52 57.75 58.28 1952/53 79.64 80.34 1953/54 93.80 97.80 1954L/5 82.50 85.70 955/56 75.00 77.75

Note: Prior to November 1954 the oil companies purchased rials for local expenditures at the official rate (rials 32 per dollar). Since November 1954 these purchases have been at the principal buying rate.

Source: International Financial Statistics. Ttble 8

PRICE INDICES (1948 = 100)

Mar. 1951 Far. 1952 Mar, 1953 Mar. 1954 Mlar. 1955 Mar. 1956

Cost of Living Index 93 98 102 120 131 135

:4Jholesale Prices (Tehran)

All Goods 92 92 98 132 134 137

Imports 110 114 124 1W4 162 137

Exports 87 83 87 133 130 ihi

Home Produced but not Exported Goods 90 92 101 128 129 :133

Source: International Financial Statistics - l42 -

Table 9

MONEY SUPPLY

(Ilillions of Rials)

Private Time and Currency in Demand Savings Circulation Deposits Total Deposits 195

March 20 10,460 11,820 22,280 3,280 June 20) 9,970 11,510 21,,480 3,260 September 20 9,870 10,890 20,760 3,330 December 20 9,980 11,700 21,680 3,350

1955

Tarch 20 11,290 12,540 23,830 3,480 June 20 10,150 12,600 22,750 3,590 September 20 9,870 12,530 22,400 3,590 December 20 10,020 13,520 23,540 3,590

1956

Mirch 20 11,160 13,780 24,940 3,950 June 20 10,440 4,110

Source: IFS and Bank Melli Table 10

FACTORS AFFECT[nf THE MONEY SUPPLY

(in millions of rials)

March 21, 1954 _ March 21, 1955 - March 20, 1955 March 20, 1956

Sales of rials for foreign exchange to

Plan Organization 337 2,182 Other Government 9/ 877 3,953 Oil Consortium 893 3,502

Sub-total 2 ,107 9,637

Net sales of rials for other current invisible payments _300 2/ 300

Total rials generated by non-trade foreign exchange transactions 1,807 92937

Increase in Bank Loans and Advances

To public sector 1,380 210 To private sector 1,373 1,320

Total of factors tending to expand money supply 4,560 11,467

Trade deficit involving foreign exchange transactions 3,000 10,500

Increase in money supply 1,550 1,110 Statistical discrepancy 10 - 143

4,56o 11,467

/ ~Includes U.S. aid furnished in cash. Net receipts. Table 11

FINANCING THE OVER-P.-LI COVERNIENT REQUIREMEAWTS

(Millions of Rials)

1956/57 1954/55 1955/56 Ist Quarter

1. Borrowing from Bank Melli (exclulding exchange certificate a/c) 1,540 720 -130

2. Less increase in cash balances (adjusted from change in cash balances due to US aid) -160 -520 - 30

3. Net financing by Bank Melli 1,380 200 -160

4. Derived from US aid 3,580 4,140 630

5. Oil income of Government and u:EOC 1590 6,910 3,060

Total non-revenue financing 6,550 11,250 3,530

Source: Bank Melli Iran, - 45 - Table 12

GENERAL BTDGLT OF IRAN

(Miillions of Rials)

Actual Actual Budget 19514/55 1955/556 19677 (Est.)

Taxation

Income and property taxes2/ 915 1,207 1,340 Inheritance tax 37 80 30 Direct taxes 952 1,287 1 370 Tax on petroleum produlets O 600 Customs 2,500 4,200 14,875 Other indireclt taxes and duties 63 363 165 Indirect taxes 3,043 6 190 Total Taxes 3,995 7,050 7,560

Monopolies

Tobacco2/ 1,772 2,760 1,14l01 Opium 150 150 98 Sugar - - 450 Sale of Industrial Alcohol 213 300 440 Total Mlonopolies 2,__135 _93,210

Oil Revenue

Income tax - - 2,025 From NIOC - - 1 000 Total Oil Revenue - 3- Other revenue 933 967 1,292

Total Rlevenue 7,063 11,227 1)4,666

1/ Includes taxes on cultivated properties and real estate which are levied on the basis of income produced.

2/ Budget presentation lists as expenditure fairly large amounts (Rials 1,118 million in 1956/57) as expenditures of tobacco monopoly. These have been deducted frora tobacco monopoly revenues and the net shown in this table. - 46 -

Table 12 (Contld.)

EXP: TITUR S (Millions of Rials)

Actual Actual Budget

1954/55 1955/56 1956/57

National Defense 1,878 2,111 3,684 Internal Securi.ty 1,710 1,981 2,461 Sub-Total 3,588 4,092 69145 Education 2,163 2,563 4,219 Health 459 530 595

Sub-Total 6,210 7,158 10,959

Agriculture - Irrigation 306 368 445 Transport and Communications 905 911 1,329 Other regular expenditures 3,385 5,378 5,20o4 Sub-Total 10,806 13,845 17,937

Karaj Dam 100 - - Rials for fIF repurchase 142 335 Loss on food distribution - - 450

Total 10,906 13,987 18,722

SUMMARY Total Revonue 7,063 11,227 14,666 Total Expenditurcs 1o,906 13,987 18,722

Deficit 3,843 2,760 4,056

Source: Government Budget Table 13

FOREIGN EXCHANGE ASSETS (millions of dollars) Issue Department Bankin Department Total Foreign Foreign 2/ Foreign 3/ Year Quarter-' Gold Exchange Total Gold Exchange Total Gold Exchange Total 195 I 130.6 21.5 15"21 6.7 h5.5 55.2 137 67.0 204.0 II nra. n.a. n.a. n.a. n.a. n.a. 138 h6.o 181L.0 III 131e5 7.6 139.1 6.7 27.8 34.5 138 35.i4 173.h IV 131.5 7.6 139.1 6.7 41.4 h8.h 138 48.0 186.0

1955 I 131.5 7.6 139.1 6.7 65.4 73.5 138 73.0 211.0 II 131.5 7.6 139.1 6.7 71.4 78.1 138 79.0 217,0 III 131.5 7.6 139.1 6,9 54.k 61.3 138 62.1 200.1 IV 131.5 7.6 139.1 6.9 59.44j 66.3 138 67.0 205.0

1956 I 131.5 7X6 139.1 6.9 63.4 70.3 13C 71.0 209.0 II 131.5 7.6 139.1 6.8 71.9 79.2 138 79.5 217.5

/ End of quarter on March 20, June 20, September 20 and December 20. E Net of the amount hield in the Banking Department for the account of the Issue Department. / Source - IFS. Breakdown between Issue and Banking Departments was based on information furnished by BMI. / Includes increase of $8.5 million in net IMF position. This was liquidated in February 1956, - L5 -

Table 14

FOREIGN EXCHANGE TRANSACTIONS

(2ivillions of $)

1955/56 1956/57 (Est.)

Exports (except Consortium oil) 69.8 65.0 Imports (other tham NIOC and P.O.) 2O9.8 264.0 Deficit (commercial a/c) 1io.o 199.0 Non-commercial transactions (net) 4.o 5.0 NIoc Forei.gn fchange Expenditures 6.1 20.5 r.o. Fnreign Exchainge Expenditures 30.3 57.0

Financing Required 168o4 281L5

Receipts 1rom oil 92.1 156.0 Rial Purchases by Consortium 146.6 30.O0/

Total Rece!ipts from oil economy 138.7 186.0 US Aid - cash or Purchase Authorizations 51.9 42.5 Financing other than credits 190.6 228.5

Net financing required -10.2 +53.0

Drawdown of UK Credit 3.7 2 Net T1iF drawing 13. 1- Eximbank loan 140° Errors and omissions -8.3 - Net Change in Foreign Assets (increase -) (decrease t) -5.6 t26.O0

g This is lower than the previous year because in 1956/57 the NIOC is expected to make more substantial paynents of rials to the Consortium for oil products. This assumes a repurchase of about half or $4.4 million of the drawving of $8.75 million made in 1955 under the automatic repurchase provisions of the Fund Articles. This estimate was made unofficially by Bank Melli. Later reports indicate it may not exceed about $2 million. 3 Approximately equal to the gap between receipts and expenditures of the Plan Organization. - 49 -

Table 315.

FOREIGN TRADE BY COUNTRIES

(Millions of Dollars Equivalent)

Imports Exports (except Petroleum)

Country 1950/51 1954/55 . 1950/51 1954/55 U.S. 51.1 55.2 5.5 12.2

Germany 11.2 4o.'5 16.4 19.9

Japan 5.0 22.5 0.1 9.1

U.K. 54.3 19.3 : 15.3 11.8

India 19.3 13.8 2.2 5.8

Italy 7.7 6.3 5.1 10.5

USSR 25.0 16.8 . 18.0 19.8

France 7.6 7.8 1.3 14.5

Holland 2.2 5.7 5.3 3.5

Czechoslovakia 4.0 5*9 - 1.h

Other 29.9 38.1 13.5 11.7

217.3 232.0 84.7 120.2

Source: Annual Customs Statistics of Iran. - 50 -

Table16

EXTER'AL DEBT - GOVERNMIENT AND GOVERNHENT GUARANTEED

June 30, 1956

(Thousands of' US Do:Llars)

In US Dollars 1/ Export-Import Bank Loans

Railway Equipment loan 14,000 Highway Equipment loan 5,000 Borgaba Bargh loan 780 19,780

Other US Government Loans

ICA loans 42,O00 Surplus property credits 24,216 66,216

IMF Drawings

Drawn in :L955 8,750 Drawn in :L956 17,500 26,250 Sub-total 112,246

In Sterling 2.1 Owing to British Petroleum Company 70,000 Exports Credit Guarantee Department 28,003W/ 98,000

Other

Suppliers' credits in various currencies 23,200

TOTAL 233,446

1/ Eximbank credits granted in 1954 and 1955 total $53 million, $34 million remains unallocated. $5,780,000 of the $I19,780,000 allocated has not yet been disbursed. - 51 -

Table 16 (Contld.)

/ Payment to be made by Iran to the successor to the Anglo Iranian Oil Company as provided in the Iranian Oil Consortium Agreement of October 29, 1954. L 28 million equivalent to be paid in ten equal amount install- ments starting in 1957 without interest. These payments will be deducted from the income tax payments due from the trading companies in the Con.- sortium.

3/ $3.7 mill-ion of this credit was idrawn down in 1955/56. The amount drawn during the current Iranian fiscal year is not known. The entire credit has been allocated among various Iranian Government agencies.

Bank Melli has estimated outstanding suppliers' credits guaranteed as to repayment or transfer at $23.2 million. The Mission was informed of some additional commitments of Iranian Government agencies which were not included in, the Bank Melli estimates. The total amount of these is not known but may be $5 million to $10 million equivalent. - 52 -

Table 17

ESTILATED FORE:IGii DEBT SERVICE_/

(Thousands of US Dollars Equivalent)

Year Total Dollars Sterling Other

1956/57 5,729 9 1,120 4,600 1957/58 22,941 1,021 13,720 8,200 1958/59 25,552 3,4h6 13,496 8,600 1959/60 20,966 5,9!?4 13,272 1,700 1960/61 19,314 6,6166 13,o48 100 1961/62 18,849 6,025 12,824 - 1962/63 12,885 5v,885 7,000 1963/64 12,7X44 5,744 7,000 _ 1964/65 12,605 5,6()5 7,000 _ 1965/66 10,992 3,9!?2 7 >000 _

1/ Does not include payment on the IJS Surplus Property credits or repurchase of the ThF drarrings. Table 18

IMPORTS - C.I.F.

(Til1iron9 oft US Dollars)

1952-53 1953-54 1954-55 (Prel.) 1955-56 % Quan- Quan- Qwuan- flin_qr change tity tity tity tity value % Value 1000 in Value 1000 Value 1000 Value 1000 1952/53- Change Rank Mile M.Tons Mil, §3NM,Tons Mil.- MNTons Rank Mil.,$ h. Tons 1955/56 Quantity Sugar 1 29.3 117.4 36.5 214.2 35.8 212.6 1 29.5 221.6 +0.7 +88.8 Cotton Goods 2 26.4 8.2 23.4 11.5 21.7 11.2 Tires and Tubes 6 18.3 8.7 -30.7 +6.1 3 11,3 6.3 9.7 6.3 10.2 6.9 7 12.5 N<.chinery 4 9.9 6.6 +11.1 +4.8 6.6 10.8 10.1 i5.6 13.8 5 20.9 15.2 +111.1 Chenicals and +130.3 t Drugs 5 8.3 6.9 6.2 9.7 8.5 8.4 8 9.7 12.6 +16.9 +82.6 Iron and Steel 6 7.6 21.8 12.2 58.8 15.5 86.2 Tea 3 23.5 124.0 +209.1 +l68.9 7 4.6 2.6 4.4 3.3 9.5 4.6 4 Edible Oil 22.0 10.1 +378.2 +288.4 and Fats 8 4.3 6.8 2.8 7.3 3.3 13.5 11 3.4 12.4 -20.9 +82.3 Paper Products 9 4.0 9.7 4.2 18.8 3.8 16.1 9 Automotivc 4.1 17.2 +2.5 +77.3 L-quipment 10 2.9 2.7 5.0 3.8 28.8 23e6 2 25.9 20.5 +793.1 +659.3 yt,res 11 2.2 3.2 2.1 3.4 2.7 10 Glassware 4.4 3.8 5.9 +17.3 +84.3 12 0.8 2.1 1.2 6.4 1,6 7.7 12 6.5 Other 2.0 +150.O +209,5 45.7 48.0 75.0 109.5

Total 157.3 166.5 232.0 285.1 +81.5

Source: Annual Customs Statistics of Iran. - 54 -

Table 19

EXPORI'S (F. O.B.) %ZChange 1953/54 to 1953/54 1954/55 1955/56 1955/56 Quantity Value Quantity Value Quantity Value Quan- 1000 Tons Mil.$ 1000 Tons ni1.$ 1000 Tons Mil.$ tity Value

Raw Cotton 36.2 21.9 45.2 35.1 36.3 22.3 ' 0.3 + 1.9

Carpets 5.3 114-5 4.6 15.1 5.0 16.7 - 5.7 +15.2

Fruits 706 11.7 93.2 17.7 89.9 15.6 +27.3 +33.3

Wool 10.2 5.8 10.2 7.2 9.0 9.5 -11.8 +65.5

Hides and Skins 6.3 5.2 6.4 5.4 6.6 4.3 - 4.8 - 8.3

Rice 49.o 6.14 61.2 8.1 28.14 3.7 -42.0 -142.3

Gums 3.3 2.7 2,9 2.2 2.6 2.9 - 7.9 . 7.4

Animal Casings 0,14 1.6 0.5 2.2 0o6 2.4 +50.C0 50.0

Spice n.a. n.a. 915 1J8

Other except oi.1 products 23.9 27.2 2$ O

Sub-Total 93.7 120.2 105.2 +11.2

Petroleum Products 238 8.2 3,14314 62.0 15,365 23".8/'

Total 101 9 182.2 33-`.0

1/ NIOC - $12.4 million Oil Consortium - $221.14 million

Source: Annual Customs Statistics of Iran.