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 A) U S S R TURKEY . .. *_,~ ' B IZ i- Ui. RT i \ L X ~~~~~~--? Qosr-i-Shi#i'j K*8' /cHAMADAN N ) . / ,aQt~~~~~um, ~(erm>shoh G-,, - .*(t_shon RI A O I.S H. & -~~ ~ 1 I SFAHA!j, .'" 4 Khorrosha r~Bno '.. ' '- (Kermon O '\~4EtITL. - ':.shp-' . IRAZ , 6'~~~~~~Bu I Zahidan~~ 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 ex- cept 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 alloca- tion 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 gen- erated 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 mil- lion 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 be- fore 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.