THE FIRST FIVE- YEAR DEVELOPMENT PLAN

The Islamic Republic of Iran's First Five Year Social, Cultural and Economic Development Plan (hereinafter the First Plan) was implemented from the periods of March 1989 to March 1994. The primary objective of the First Plan was to remove the legacy of the economic burdens brought about by the Iraqi invasion of Iran. It was within this context that the First Plan envisaged an annual growth rate of 8%, the creation of some two million new jobs, the rehabilitation and expansion of new industry and greater de-centralization and private sector participation. The First Plan drew up targets for every economic sector as well as identifying key areas needing reform encompassing such areas as:

1. It is of note that even today, less than 1.6% of Iran's GNP is allocated to defense and has remained unchanged for the past four years.

1. The move towards privatization of the economy through the gradual reduction of governmental activity in the economy and the transfer of state controlled industries and enterprises to the private sector;

2. Price liberalization of commodities and elimination of subsidies;

3. Trade liberalization through the elimination of superfluous customs regulations and formalities;

4. Increase in the export of manufactured goods, growth in the agriculture sector, efficient utilization of existing industrial capacity and the attraction of new investment into this sector;

5. Re-construction of war-torn regions and major new investment in the nation's infrastructure.

The means by which such objectives were to be carried out varied, however some of the key channels included the transfer of ownership of portions of Government ownership in industries and institutions to the private sector via the revival of the stock exchange, removal of subsidies on almost all but the most basic commodities and the like.

Despite a number of obstacles, including increases in population, multiple rates of foreign exchange and inflation brought on by liquidity expansions resulting from vast investment undertakings in industrial, agricultural and major infrastructural projects, the First Plan has been hailed as a success. Major achievements included:

1. The successful transfer of a significant number of public sector industries to the private sector;

2. An increase of 7.3% in Gross Domestic Product (GDP) annually;

3. An increase of per capita GDP from 197,000 Rls. at the start of the Plan to 246,000 Rls. in 1993;

4. Increase in private consumption by 7.7% and in public consumption by 5.5% per annum;

5. A change in the ratio of fixed gross domestic investments to gross domestic product from 12.4% in 1988 to 16.3% in 1993;

6. Growth in agriculture at an annual rate of 5.9%; Industry at a rate of 9.1%; water, gas, electricity at 18.9% and transport at 11.9%;

7. A doubling of financial resources allocated for research in energy, education, and telecommunications from 0.18% to 0.34% of GDP.
Despite the above successes, the First Plan did reflect a few shortcomings. With the

end of wartime spending , the early years of the First Plan were marked by rapid growth which were buoyed by the increase in oil prices and the temporary lifting of OPEC quotas resulting from Iraq's invasion of Kuwait. As reconstruction of war-damaged areas and infrastructure took place, economic growth soared to 11.7% in the period of 1990-1991. This momentum continued until the following year, but the subsequent fall in international oil prices and a subsequent cut back on imports by the Government brought about a slowdown in growth. This slowdown resulted in a real growth rate of 7.4% instead of the projected 8.1% originally envisaged by the First Plan. Additionally, macro-economic imbalances emerged including a deteriorating balance of payment and the emergence of external debt arrears which are covered in greater detail in the segment pertaining to 'Banking' of this Chapter. Additionally, despite concerted efforts, Government investment still outpaced private investment 14.1% versus 8%

THE SECOND FIVE YEAR DEVELOPMENT PLAN

The Second Five-Year Social, Cultural and Economic Development Plan (hereinafter the 'Second Plan') was drawn up specifically with the achievements and failures of the First Plan in mind. As a result, following a one year delay so as to incorporate necessary revisions, the Second Plan has envisioned that for the period of March 1995 to March 2000, development and administrative expenditures will total $135.5 billion, greatly outpacing the expenditures accommodated by the First Five-Year Plan. The Second Plan was based on projected oil revenues of $86.5 billion.

Priorities of the Second Plan include the completion of infrastructure and development projects initiated under the First Plan including the allocation of some $59 billion to development projects, 11.4 times higher than budgets allocated to the same sector under the First Plan. Additionally, the allocation of over $76.4 billion towards social, administrative and other expenditures represents an increase of over 580%.

The significance accorded to development projects in the Second Plan indicates a focus towards the need to attain a higher development of local technology and development of local industry. This concept finds its roots in Iran's Constitution as alluded to earlier in Chapter One. The Second Plan also appears somewhat conservative on revenue estimates in light of the First Plan's inability to attain projected revenues as a result of the slump in oil prices that took place during the First Plan. This more conservative approach is expected to strike a better balance between revenues for the 1995 to 2000 period in which a reduction in budgetary deficits of some 82.6% lower than the First Plan is envisaged.

It is believed that during the period of the Second Plan, ongoing and newly commissioned projects that were initiated during the First Plan will have matured to the point so as to start contributing to the national income, further increasing the flow of revenue. This projection can be best exemplified by the fact that key investments under the First Plan have led to increased production in oil, refining, petrochemicals, communication systems, railroads, sea and air networks and heavy industry that have now begun to contribute to the national income. These achievements can be exemplified in such sectors such as steel and petrochemicals where importation is no longer necessary and in turn surplus output is now exported.

Foreign Trade: Based on the estimates made in the Second Plan, the foreign exchange earned from oil is estimated to be $72,658 million and the earnings from the export of non-oil products is expected to amount to $27,527 million. As such a sum of $91,979 million has been set aside specifically for imports during the Second Five-Year Plan reflecting a yearly increase of 4.3% per year.

Oil/Non Oil-Exports: During the Second Plan, the average annual export of oil is expected to grow by 3.4% and that of non-oil products by 8.4%.

Population: Taking into account the figures mentioned for capital investments combined with national production during the Second Plan, through the years 1995 to2000 the creation of a total of 2,019,000 new jobs are expected to offer new employment opportunities.

Money & Credit:: The net foreign assets and net assets of the Central Bank of the Islamic Republic of Iran (CBI) during the Second Plan are to remain fixed. Considering an expected net debt of 3.8% to the CBI and a net debt of 18.1% by Government to the CBI and a growth of 33.6% in bank loans to the CBI, liquidity is expected to increase by 12.5%. Taking into account the growth in GNP and liquidity, the average annual rise in prices is expected to be 12.4%.

Promotion of Export Facilities: Under the Second Plan, the Export Guarantee Fund and the Export Development Bank are to be strengthened and backed by a comprehensive export insurance system.

The Environment:: In light of global efforts at protecting the environment, the Second Plan attaches special importance to environmental protection, primarily in the areas of air and soil pollution.

Maternal Education and Training: The Second Plan is somewhat unique in that it pays special attention to the important role that mothers are to play in the shaping of society and its human resources. Thus comprehensive educational programs aimed at the complete eradication of illiteracy among young mothers is listed as a national priority.

Infrastructure and Communication: Allocation is to be provided to these sectors with the aim of laying the foundation for the long term needs of the Country (up to the year 2020) in infrastructure, communications, transportation etc. and other vital sectors.

The Structure of Government: One of the aims of the Second Plan is the paring down of Government (through reductions in recruiting, elimination of unnecessary and wasteful programs etc.) and the transfer of many governmental functions and services to the private sector.

Performance of the Second Plan

Despite a sluggish start at the beginning of the Second Plan , real GDP picked up by 7.5% in 1995/6 with the commissioning of hundreds of large and medium size projects

that were initiated in the First Plan, particularly in the metals, petrochemicals and industrial sectors where value-added surged by 6% in 1995. Highlights of the performance of the Second Plan in comparison to the First Plan reflect the continued utilization of economic growth targets set in the First Plan, however with a greater focus on fiscal policy aimed at the reduction of government borrowing , thus easing demand pressures and reducing inflation. The latest results of the Second Plan in comparison to the gains of the First reflect the following achievements:

1) Meeting Projected Revenue Forecasts: During the period of the First Plan, approximately 94.2% of predicted revenues were realized. In 1994, this level had reached 98% of targeted income and in 1995, the figure was 99% especially following increases in tax revenues and increased oil income.

2) Elimination of Budget Deficits: Throughout the period of the Iraqi invasion of Iran, the high financial cost of the War forced the Government to run up substantial budget deficits, reaching as high as 8% by 1988. Since the end of hostilities , the deficit was cut to 1% of GDP in 1992/93 and eliminated by 1994/95. The 1996 budget was successfully nominally balanced.

3) Increased Revenues: A 7% increase in tax revenues above predicted figures , 1.45% increase in oil income and a 17% increase in the export commodities.

4) Trade Surplus: In 1991, Iran ran a huge trade deficit with total imports amounting to $25.2 billion and that of exports to $18 billion. In 1995, these figures were reversed as total imports amounted to $12.8 billion and exports exceeded $18 billion.

As the year 2000 nears and the Second Five Year Plan gradually draws to a close, a comprehensive tabulation of the achievements and failures of this Plan are now under way. However, its failures and achievements are now being drawn upon for the implementation of the forthcoming Third Five Year Plan explored below.

The Khatami Economic Plan: Setting the Stage for the Third Five Year Plan.

As the Second Five Year Plan Draws to an end, the Khatami Administration, having taken the reigns of Iran's economy in 1997 is setting the stage for the implementation of its economic agenda. As highlighted earlier in Chapter One, the Khatami Administration has undertaken a socio-economic approach to economic development. In today's world of interdependence, creating or sustaining a nation's development is possible only when a nation's capability portfolio is driven in the right direction and in a manner by which it fits in with the general and competitive environment of the world economy. As President Khatami rounds out his second year in office, his administration has been striving to develop policies based on a vision of capitalizing upon a comprehensive synthesis of Iran's capability portfolio which can be subsumed in the economic and cultural policies under plan. As such, first presented in August 1998, the Economic Plan drawn up by the Khatami Administration draws heavily upon the direct correlation between a predictable and equitable institutional framework and increased possibilities for trade, investment and growth.

Key highlights of the Khatami Administrations Economic Plan include broad based administrative and legal reform as evidenced by the fact that the institutional framework foreseen in the Khatami plan comprises of the update and development of basic laws pertaining to (1) the operation of businesses, (2) industrial laws governing such matters as deregulation and privatization and (3) the protection of civil liberties and increased transparency in government. The actual implementation of these policies can be witnessed by the mass privatization or dissolution of 4,000 State controlled enterprises or firms, of which the shares of 190 have already been prepared for flotation in the Tehran Stock Exchange, as well as the commencement of a comprehensive overhaul of Iran's taxation laws in a manner that will serve to promote and encourage investment. Supplementing these measures have been initiatives towards broad based administrative reform as evidenced by major re-structuring of the Ministries of Oil and Mines and Metals, attraction of foreign investment, especially investment by the large numbers of Iranian expatriates living abroad, as well as achieving increases in employment and standards of living.

In light of the President's socio - economic approach to the economy, it is of little surprise that despite an emphasis on macro-economic indicators (including total investment in the private and public sectors), inflation, employment and economic growth in Iran's Third Five Year Development Plan, cultural and political development are expected to figure in more prominently as compared to previous plans. Currently under review, the Third Economic, Social and Cultural Development Plan (hereinafter referred to as the 'Third Plan'), was drawn up following 24,000 man-hours of deliberations by seven separate councils each focusing on a specific agenda. These councils comprised of: