R E S T R I C T E D

R e p o r t N 0. A.S. 55-a

FiLE COPY

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

INTERNATIONAL, BANK FOR RECONSTRUCTION AND DEVELOPMENT

ECONOMIC DEVELOPMENT OF IRAN

January 3, 1957

Department of Technical Operationsand Department of Operations,Asia and Middle East

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EXCHANGE RATES

Official Rate

1 US dollar 5 32.25 rialsI rial 5 .031 US dollars1,000,0Q rials * 31,000 US dollars

Effective Rate

I US dollar 75 rials1 rial 5 .0133 US dollarsi.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, 3Agriculture **.ooee.e.Celo.. tccc cv le ccc 3Other Natural Resources ee eececceee 4Industry cecc@ee ccee..ce ee5e.c .cgec STransportation and Communications .... c 6

SECOND SEVEN-YEAR DEVELOPEENT PLAN .. . O . . 7Irrigation and Multi-Purpose Projects .................... 7Agricultural Projects *e *ecgec.c se ec.ee..ceeo. 9Urban Development Projects 'Leccc.gecccgceee 10Roads a ooe eeeloec.eeegcec.Railroads Lige*gctgOhC*eOg*Ceeececeg.tceoeeeOgec. ecuPorts .. .. .cegcee..e.cc :1iAirports g e.e ......... c .. ae. 12Telecommunications *** oe*.c.e...c.... ee*cc**'ecocooeeee .12Industrial 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.... 15Allocation of Oil Revenues to Plan Organization ceacceecce 17The Financing Problem *4 ee .gecceee e c *@cc 18

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

EXTERNAL FINANCE .. c....... ....... c.......g.... e cc .. 28bources of Foreign Exchange Income . .cec.. 28External Debt S c@... c. .. emcc cc cc... c. ....... 29Foreign Exchange Prospects cceccccccccececcegcccccc.ccccce 29

TABLE OF CONTENTS(conttd)

Paje

STATISTICAL APPE;NIXTables1 - Estirriated Land Utilization in Iran *..................... 32

2 -Estirnated Agricultural Production ............ 33

3 - Estirmated Annual Mineral Production and Exports ......... 34

4 - Principal Industrial Products ........................... 355 - 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...... h8 - Price Indices 4................1,..., .............. h19 - Money Supply 42........... ........ ,.2

10 - Factors Affecting the Money Supply ...................... 143I1 - Financing the Over-all Government Requirements 0.......... 14412 - General Budget of Iran ..........................., ... 14513 - Foreign Exchange Assets ........ *................. 14714 - Foreign Exchange Transactions . 14815 - Foreign Trade by Countries .............................. 4916 - 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

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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 18,722Receipts 7,063 11,227 14,666Deficit 3,80 2,760 4,056

4. Internal Public Debt:(Millions of Rials)

As of' March 20 1955 1956

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

5. Foreign Exchange Reserves:

June 20, 1955 4217.0 million equivalentJune 20, 1956 $217.5 million equivalent

6. Balance of Payments:(Millions of Dollars Equivalent)

1955156 1956/57 (est.)

Foreign exchange expenditures 250.2 346.5Foreign exchange receipts ex-cept foreign aid and oilrevenues 116.4 95-0

137.8 75I;7Oil receipts 92.1 156.Foreign aid 51.9 42.5

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

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

8. Foreign Trade (commercial transactions excluding oil):

(Mf illions of Dollars)

1953/54 1954/55 1955/56

Imports (c.i.f.) 166.5 232.0 285.1Exports (f.oob.) 93.7 120.2 105.2Deficit 72.8 111.5 179.9

Note on Iranian Fiscal Years

The Iranian calendar year, which corresponds to the fiscal. yearof 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 1956undertook 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 generalbudget position.

2. The Economy. Iran is a country of large area relative to populationbut of relatively small income per capita because of the low percentage ofpotential resources that are utilized productively. This is particularly-true of agricultural lands. Less than one-tenth of the potential farm landis being actively cultivated. More irrigation and a better use of availablewater appear to be the greatest need. Except for oil, other natural resourcesare little exploited and their extent is not well known. Little industrialdevelopment 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 oilindustry in mid-1951 and remained very low until Iran and the new NationalIrarnian Oil Company entered into an Agreement with a Consortium of foreignoil companies in October 1954 for the production, refining and export ofoil. 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 productionin the area assigned to the Consortium may reasonably be expected to increaseat the rate of 10% per year, at least during the remaining six years of -theSecond Seven-Year Plan.

4. During the stoppage of the oil income, Iran's internal and externa:Lfinances were under severe strain. Government debt to the Central Bankincreased substantially, foreign exchange reserves fell and short-termexternal 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 oilreceipts 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 andforeign aid have financed an increasing volume of commercial imports whichhave offset the inflationary effects which would otherwise have been gen-erated by Government expenditures. Commercial imports have been encouragedby a liberal import policy and by the appreciation of the exchange rate. Arelatively stable price situation has emerged; prices of imported goodshave fallen while prices of domestically produced goods have shown someincrease.

5. Actions to Achieve Economic Development. The Oil Agreement with theConsortTiTum and the Second Seven-Year Development Plan Law of Fobnmry 27,. 1956provided the source of funds and the administrative specifications for Iran's

economic development. The Oil Agreement provided that Iran should receiveroughly 50M of the net returns from crude oil production. The Plan Lawallocated a substantial portion of Iran's share to economic development,increasing to a possible 80% for tne 4 years of the Plan period after March20, 1958; it also assigned the implementation of the program to the PlanOrganization, 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, irrigationand major power projects, 37% for transport,) 14% for industry and 24% forsocial 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 theSecond Seven-Year Plan. The extensive use of engineering consultants formajor projects should contribute greatly to the technical implementationof the Plan. The Bank Mission did not undertake to appraise all aspects ofthe Plan but did observe that some projects were being undertaken withoutadequate cost-benefit studies and without proper coordination with otherprojects. Also, the Plan Organization itself is not adequately organizador staffed at present to discharge its heavy responsibilities speedily andefficiently. Many of the difficulties appear to arise from an endeavor toaccelerate development works too rapidly.

7. The oil revenues allooatedto the Plan Organization for financing itsdevelopment projects appear to be adeauate over the Seven-Year Plan periodas a whole. Expenditures are so scheduled, however, that deficits are beingincurred in the early years while surpluses will accumulate in the lateryears. The Plan Organization nas agreed with the bank on the level ofexpenditures through March 20, 1958 and it now appears that the deficit inthe early years will be of manageable proportions.

8. Conclusions. There are reasonable prospects that the developmentprogramcaTn be carried out without jeopardizing the financial stability ofthe country and that credit obtained to finance the Plan deficit in the earlyyears of the Plan period can be repaid out of surpluses arising in thelater years of the period. Vigorous and prompt action will be necessary,however, to balance the general (non-development) budget of the country ifpressure to divert oil revenues from the Plan Organization or to borrowexcessively from the Centiral Bank is to be obviated. The fact that theEank Melli, which f unutlOns ar 4hz chief commercial bank as well as thecentral bank, operates under policies and regulations which tend to preventexcessive credit creation to both the publ1z and private sectors, is animportant safeguard against inflation. Another element inhibiting infla-tion is thte fact that part of the general budget revenues are received inforeign exchange, and that the Plan Organization receives all of its revenuesin foreign exchange while spending less than half abroad. Foreigh exchangethus becomes available to pay for commercial imports required to offset theincome-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 ormountainous., The population is estirmated at about 21 million and agricultureprovides 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 industryand handicrafts, and 5% by employment in government and the professions.

10. The Lack of reliable data makes detailed analysis of the Iranianeconomy very difficult. No accurate or complete nationalincome data areavailable but, on the basis of rough estirmiates for certain sectors, it appearsthat the arn-nual per capita income does not exceed $75. Standards of health,education and other social services are low, though they vary sharply fromplace to place anid among income classes. Wealth, which is largely represeentedby the ownership of land and real estate, is highly concentrated and themiddle class, consisting mostly of the merchants and traders, is relativelysmall. In terrms of income, the industrial workers are believed to be somewhatbetter off -than farm workers, even though their average wage probably isequivalent Go only $0.50 to $0.80 per day.

11. Agriculture. In terms of contribution to Iranls incomie, agricultLreis probably about three times as important as crude oilproduction. Thisratio will change as oil output increases but agriculture will probably holdits primary position. The total value of agricultural output has been roughlyestimated by the Government at about Rls. 61,000 million, of which aboutRls. 39,000 million come from crops and forests, and slightly overRls. 22,000 million from animalproducts. From 35 to 50 million hectares ofland are considered to be potentially arable but only about 4.5 miLlion pro-duce crops in any given year, indicating a cultivated area per capita of onlya little over half an acre. In addition to the potential but uncultivatedfarm land, 10 million hectares are meadow or pasture land and about 19 mil-lion are in forest (see Table 1). Of the cultivated land, 30% to 40% get;s somedegree of irrigation, though generally even irrigated land is not adequatelywatered.

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 evenless in the central-eastern area) makes for a great variety of crops.However, wheat occupies about half the cultivated area, and together withbarley, 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 thanthe production of field crops but overgrazing, particularly by the flocks ofnomadic tribes, subjects much of the semi-arid central and southern parts ofthe country to excessive erosion.

13. Agricultural production appears to be keeping pace with growth ofpopulation (about 30% in the last 17 years) and, from the standpoint of food,

Iran is largely self-sufficient. Important exceptions are sugar and teawhich make up about 16% of imports. A.bout 90% of the farm production isused internally, although the 10% tlhat is exported represents over 80% ofIran's exports other than oil. Raw cotton, fruit, wool and rice, in raridlydescending order, are the principal agriculturalexports.

14. IWith the possible exception of wheat and sugar beets, there is nonational market for agricultural products; a large number of local marketspersist as a result of transport difficulties, the considerable distancesinvolved, and the local restrictions on the movement of goods. Wheat has alimited na-tional market because of the Governmernt's collection and pricecontrol program directed towards cheapening food costs, particularly in theTehran area, and the national market for sugar beets is also partly theresult of governiLental actioni.

15- Only about one-fourth of the land in farms is cropped in a givenyear; thus, the growth potential would appear to be very large, especiallysince 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.za-tion of land and better yields are to (1) extend irrigation and make betteruse of available water; (2) improve thle farm tenure system which reducesincentive on the part of the cultivator (only 40% of the farmers own landand 1% of the landiowners own 56%o of the land); (3) provide more adequatetransport and marketing facilities; (4) improve farming methods andencourage the use of fertilizer and machinery; and (5) provide farm creditat reasonable rates.

16. Other Natural Resources. The only other natural resource being ex-ploited7Finquantity is petroleum. Oil reserves, which are not yetadequately appraised, are roughly estimated at over 4,000 million metrictons, or over 100 times the production expected next year. Although about99% of al]. crude now produced comes from the areabeing worked by the foreignoil Consortium in south-western Iran, a new field of promising, but as yetundeternmined, size has been brought in at Qum, 124 kilometers south of Tehran.If very preliminary production estimates are borne out, thiis fielcl mayproduce crude worth $40 to $50 million annually. The petroleum from thissource, for a time at least, will presumably be exported as crude sincethe National Iranian Oil Company has only limited refining capacity outsideAbadan. Transportation to the Persian Gulf ports will present a problemunless the pipeline under construction to bring refined products fromAbadan to Tehran shiould be used instead to carry crude to the Persial Gulffor export.

17. Natural gas, available in very large quantities (estimated at 450irillion 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 usesome 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 unknownfor the most part. Coal, copper, iaanganese, chroindte, lead, zinc, red ironoxide, sulphur, arsenic, potash and borax are now produced in small quantities

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(see Table 3). Coal reserves are estimated at from 10 to 40 million tonsbut the industry is in a weak competitive position with oil. Iron ore isalso available (reserves are estimated at 25 million tons) and the Governmentis 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, or12% of the total land area. The hardwood forests near the Caspian Sea arepotentially capable of supporting an export industry in lumber as well aslocal wood--processing industries. However, probably not more than 5% of thetimber cut annually is used for industrial purposes and valuable timber isused 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 reignof Reza ShTih Fahlevi in the late 1920's. From 1930 to 1940, protectivetariffs andl government investments were used to stimulate the sugar, textile,cement, chermical, match, glass, brick-making, tobacco, and food-processingindustries. 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 industrialplant and equipment. Since 1950 investment has been undertaken again, par-ticularly in the textile and cement industries.

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

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

23. It is the policy of the Government to dispose of these industrialproperties as private buyers can be found but this must inevitably be a slowprocess and no transfers have been made so far. In general the amount ofprivate capital and entrepreneurship available for private industrial venturesin Iran appears to be limited. Expectations of return have to be high toinduce such investment from local sources, the capital market is notdeveloped, and in spite of certain legislative measures aimed at encouraging

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private investment, there is considerable evidence of friction betweenestablished business interests and the Government. I',eanwhile, the PlanOrganization intends to expand its activities in cement, sugar, and anumber of other industries. Five newv cement plants are scheduled to startproduction (during the next two or three years, increasing output capacityto over three times present consumption. An undetermined but perhaps conl-siderable armount of increased conisumption may be expected, of course, asthe development program gains momentum. However, even present capacity isnot used to an economically desirable extent because of limitations of localmarkets and, in some cases, inadequate transportation.

2h. The (Governmenat is considering plans to increase production of cottzontextiles from its present level of approximately 60 million meters to about200 million:, which would be within about 25 rmillion meters of present con-sumption. Perhaps 60% of this expansion would be in government plants and40% in private plants. Such an increase in factory textile production would,however, result in some displacement of the hand loom industry, thus creatingtechnological unemployment. It is questionable whether private textile in-terests have sufficient incentive to expanid at present. Prices have beenfalling, due to foreign competition, primarily as a result of the liberali-zation of import control in 1955 and the appreciation of the rial. Frequentshutdowns occur and existing capacity is not fully utilized. The CGovernmenthopes that t;hese problems can be overcome by more efficient management.

25. Transportation and Communications. Transport and communications areparticularly vital to Iran because of the size of the country, the distanceof the Persian Gulf ports from the principal agricultural areas in the northand from Tehran, and the general "oasis" nature of much of the economy.The Alborz mountain barrier around the fertile and well-watered Caspiancoastal plain and the Zagros Range of west-central Iran, which has to betraversed by the route from Tehran to the Gulf, present formidable obstaclesto land transport. The severance of a large part of Iran's trade withRussia that foniierly went via the Caspian ports has also accentuated thetransportation problem.

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

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II. SECONTD SEVEN-YFAR DEVELOPMENT PLAN

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

28. A Seconld Seven-Year Development Plan extending through September 20,1962 was enaicted on February 27, 1956. The Plan law provides for the con-tinuation of the Plan Organization and for the division of Iran's portionof 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 programsinitiated in the first Seven-Year Plan. However, the Plan Organizationacting alone or in conjunction with the Joint Plan Commiittee of Parliament,is given considerable flexibility in adjusting the amount to be allocatedto any specific project or sector of the economy, and is also authorizedto 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 followJingallocations:

Amount(Ln Millions (In Millions

of Rials ) of $ ) % of Total

Agriculture., irrigationand multi-purpose 19,635 262 24

Transportation and communications 30,166 402 38Industry 11,378 152 14Social deveLopment 19,252 256 24

Total 80,h31 1,072

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

30. A brief description of the major projects in the agricultural, irriga-tion, transportation and comnmunications sectors of the Second Seven-YearPlan 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 riversvaries greatly during the year and it is necessary to create regulating

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reservoirs by the construction of dams to assure a firm supply of irriga-tion water during the growing season. The major projects currently includedin the Plan are set forth below and are designed to develop Iran's waterresources and increase agricultural production. These appear to be techni-cally feasible and potentially useful, but detailed water-use studies haveyet to be made, cost-benefit appraisals completed, legal problems in con-nection with water distribution overcome, and managSanent and organizationproblems 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 anarrow 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 constructedacross the cntrance to the gorge, creating a reservoir with a capacity of1,500 million cubic meters. The project is designed to irrigate 90,000hectares of the coastal plains, mainly for the production of rice. A power-house with an eventual capacity of 60,000 kw will also be constructed.

French consulting engineers have been retained for the planning andengineering 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 beginningof 1956 and five years will be required to complete the darn. 'The cost ofthe dam and powerhouse is estimnated at Rls. 3,525 million (;47 million).

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

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

(c) Saveh and Doroodzan Projects. The Saveh project is locatedsoine lbO kilometers southwest of Tehran and the Doroodzan project some 90kilomneters north of the city of Shiraz in south Iran. Both projects includethe 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 ofpower. Preliminary plans have been prepared on these projects but additionalstudies are to bc carried out, rnainly of the areas to be irrigated. Con-struction work will not likely beEin before 1958 and wvill require threeor 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 expendituresunder the Plan. The Ministry of Agriculture is responsible for carryingout most of the agricultural sectors of the Plan.

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

(b) Grain Silos. Since the end of World Wiar II, the Government hasbuilt seven large concrete grain silos to store wheat for the cities and thearmy but only three silos have been equipped with cleaning and transporta-tion machinery. The Plan Organization intends, after receiving advice froma consulting firm, to purchase equipment for the other four silos so thatthey can be put into operation.

(c) Development of Regions. The Plan provides for thie regionaldevelopment, (land reclamation, colonization, and road building) of fiveregions, but the Plan Organization expects to concentrate in the next fewyears on the Moghan area in the northwest and the Karkheh area in the southwhere major irrigation works have recently been completed.

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

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

The Division of Plant Science and Agronomy of the Ministry ofAgriculture operates 37 seed-improvement stations and plans to estiablish35 more. T'he equipment of existing stations is also to be improved. Theprogram has met with considerable success in respect to grains, cotton, andfruit trees but not in respect to sugar beets.

The Office of Pest Control has branches in each province and has beenquite successful in fighting locusts and other pests which often inflict;severe damage upon crops. This organization is to be provided with newequipment such as planes, vehicles, and sprayers to maintain and iLaproveits efficiency.

-. 10 -

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

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

33. Urban Development Projects account for 7% of the Plan expendituresprogrammed7 In order to improve living conditions in provincial towns, itis planned to construct a large number of water supply systems and dieselpower plants. The planning and engineering are to be carriod out by thlee groupsof consultants - one French, one American and one Genman. Half the cost ofeach project will be financed by the municipality in which the project t4illbe constructed and the other half will be met by a grant from the PlanOrganization. The planning work for the execution of these projects isstill in the initial stage and substantial expenditures will not be incurredbefore the Spring of 1957.

34. Roads account for 20% of the programmed Plan expenditures. Theroad new-ork of 25,000 km consists of 2,000 km of asphalted roads, 6,000 kmof gravel and Macadam roads on stabilized soil, and 17,000 km of unimprovednatural earth roads. The program provides for the construction and improve-ment (10,000 km) of two north-south trunk highways, intenlational road linkswith Iraq and Turkey, east-west highways along the Caspian, new roads inthe south-east, and access and farm-to-market roads. The trunk roads willbe asphalted two-lane routes fit for heavy trucks and buses running withfull 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 12iinistryof Roads and the other half by foreign consultants engaged by the PlanOrganization. All construction is to be done by contractors, mainly local,in accordance with established procedures for road building in Iran and trillbe turned over to the l4inistry of Roads for maintenance. Under a $5 millionloan from the Export-Import Bank, -the Ministry of Roads will soon retain ateam of experts from the U.S. Bureau of Public Roads to help organize ahighway department capable of providing proper maintenance for the' entireroad network. The remainder of the loan will be used to buy road maintenanceequipment.

All the road projects are potentially useful and they will decreasetransport costs, principally by reducing vehicle wear-and-tear and fuelconsumption. However, the program is ambitious, and it is questionablewhether it can be carried out on schedule with the technical and administra-tive facilities available. Also, there is no calculation, even approximate,of the benefits of new or reconstnrcted roads in relation to costs, and allthe main roads have been designed to much the same standards without regardto traffic load or local soils or availability of construction materials.

- Jl -

35. Rai:Lroads account for 8% of the programmed Plan expenditures. TheIranian Stte Railways link Tehran with the Persian Gulf, the Caspian Sea,and some nearby regions by a standard-gauge network of approximately 2,4tO0km. There is also a broad-gauge line, isolated from the rest of the system,which connects Tabriz with the Soviet railway system. The Iranian StateRailways are primarily a freight carrier (more than 90% of revenues) anclthe freight is highly specialized - 55% petroleum and 20% imports, allmoving north from Persian Gulf ports. Freight traffic has increased 22times since the war and is still growing but the Abadan-Tehran pipelinebeing constructed by the National Iranian Oil Compa y (to be completed in1957/58) will be capable of transporting enough refined fuel to supply theTehran-Isfahan market and to reduce the Railways' revenues 35%. Some oi thenon-petroletum freight may also be captured by trucks as the road network; isextended and improved.

The railway program consists of construction work on about 1,000 kmof new lines, track rehabilitation and improvement, the conversion of themain lines to diesel traction, acquisition of new rolling stock, install ationof a modern signalling system on the north-south line, and equipment for therepair shops. The cost of the railway program is estimated at Rls. 8,81A1million ($1Ll8 million) of which Rls. 2,100 million ($28 million) are to befinanced from the Railways' own resources and Rls. 6,741 million ($90 mJl-lion) by the Plan Organization (including a $14 million loan from theExport-Import Bank for locomotives and shop equipment).

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

Also the proper coordination of road and rail services does notappear to have received sufficient attention. Private truck operators arenow performing some services which are often performed by railroads in awell balanced and properly integrated transport system. For example, somebulk commodities destined for export are being hauled by truck over distancesranging from 1,500 km to 2,000 km and some imported goods are being hauLedby truck from the Persian Gulf to Tehran (1,100 km).

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

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(a) Khoramshahr and Bandar Shapur. The capacity of these portswill be doubled and their equipment Podernized. A Danish consulting finnis supervising the construction which has been started. The Khoramshahrand Bandar Shapur ports combined handle currently about one million tonsannually and their facilities are inadequate for the growing volume oftraffic. Also maintenance has been neglected and goods are not properlystored. The Government is considering transferring the operation of theports from the Custors Service to a specialized body within the Ministry ofTransport.

(b) Other Persian Gulf Ports are to be improved and some new oneSconstructed. A Dutch firm has beer engaged to design and supervise this workwhich 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 workon which a preliminary survey has been commenced.

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

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

If properly managed, the improved and new ports could contrnbutesignificant: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 theenlargement., improvement and modernization of the Tehran and Abadan airportson prevailing standards for international airfields, and of the Isfahan,Shiraz, Kerrsanshahr and Yazd airfields on the basis of good standards fordomestic air services. In addition, the Civil Aviation Department of theMinistry of Transport is to improve existing, and construct new, secondaryairfields. Improved air transport facilities should stimulate the furthergrowth of airline transportation but the airport program has been preparedwithout evaluating the cost-benefit ratio of the various projects.

38. Telecommunications account for 2% of expenditures progranmed underthe Plan. The program is designed to (a) expand the exchange and iinecapacity of the local telephone services in the main towns and modernizetheir existing equipment, (b) rehabilitate the inter-regional telephone andtelegraph 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 outby the Government-owned Telephone Company of Iran with some technical helpfrom the West Gerran Federal Post Office. The improvement of inter-regionalline and wireless services is being carried out on the basis of surveys andplans 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',0million ($:30 million) of which 70% is to be financed by the Plan Organiza-tion and the remainder from suppliers' credits obtained by the Governmentoutside the Plan Organization.

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

39. Industrial Projects account for 1l4% of the programmed expendituresunder tle Plan. The ltiission did not examine this sector of the program butunderstands that firm plans have been made for the expansion of the cement,textile and sugar industries. Five newT cement plants are to be completedby 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 beexpanded considerably. A Belgian firm is studying a proposal to establisha fertilizer plant and a German firm a steel mill.

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

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

(b) Economic Benefits. The Mission feels that the projects whichit reviewed are potentially useful and will contribute substantially toIrants national income if properly managed and maintained. However, theamount of this contribution cannot be estimated since no national incomedata are presently available and no comprehensive cost-economic benefitstudies ha-ve been made for most sectors of the program. Assuming acapital-income ratio of 3 to 1, an increase in national income of aboutRls. 25,ooo million, perhaps 20% of Iran's national income, might beexpected over the period of the Plan. Considering that there is considerablecapital de-velopment taking place in Iran outside the Seven-Year Program(including that of the National Iranian Oil Company, the State Railways andthe private sector) an estimated increase in national income of this magnitudeappears to be conservative. Based on the limited population growth estimatesavailable, the per capita national income might be expected to increase atsomething more than 1% a year during the Plan period.

The lack of economic benefit studies is a serious shortcoming inthe selection of projects and the allocation of funds. Over-investment mayoccur 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 agri-culture merits re-examination, particularly in views of the additional

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investments being made by the National Iranian Oil Company (for theAbadan-Tehran pipeline) and by the 1Silways out of their own resources.It is recognized, of course, that important political, social and otherconsiderations have to be given substantial weight in programmingdecisions.

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III. FINANCING THE PLAN

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

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

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

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

(a) The crude oil produced in a designated area in soutlhwesternIran is purchased at the well-head by Consortium members ortheir nominees (collectively called Trading Companies) fromthe National Iranian Oil Company for a "stated payment", whichis fixed at 121% of the "posted price". The posted price isthe price f.o.b. tankships at which crude oil is offered forsale by the Trading Companies to buyers generally for deliveryunder similar conditions and at the same seaboard terminal.The stated payment is deducted from the income tax payable tothe Golrernment of Iran by the Trading Companies. (In August 1956the 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 receivethe actual cost of handling and refining the oil plus a fixedfee (in August 1956 these charges totalled approximately $0.21per barrel).

(c) The posted price less the total of the handling and refiningcosts and the fixed fee is considered income (in August 1956the income per barrel was $1.70, i.e. $1.91 less $0.21). Thisincome is taxable at the rate of 50% (thus the Iranian share,per barrel in August 1956 was $0.85 per barrel). Iran agreesnot to increase this rate of taxation during the lifeof the Agreement. The Agreement is for 25 years and can beextended.

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(d) The Consortium guarantees (subject to force majeure) to produceand purchase at least 27.5 million cu. meters in calendar year1956 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 oilthrough 1557. The Oil Agreement contemplates that production in Iran after1957, assuming favorable operating and economic conditions, will at leastkeep pace with Middle East oil production generally and representatives of theConsortium of foreign oil companies told the Mission in Tehran that theywere implementing an investment program designed to substantially increasethe production of crude. Production in the Middle East, in the opinion. ofoil men in Iran, is expected to e:xpand at the rate of 8% to 9% per year onthe basis of an annual increase of 7% in the world consumption of oil.Provided lran remains relatively stable politically and economically, asomewhat gfreater expansion of oil production may be expected from Iransince it is free from any external pipeline prcbleqs, Iran will not haveregained its pre-1.951 relative position in the prccdiction of oil from thatarea until. it increases its present production by 6)'Yo. Although the OilAgreement guarantees that crude production in 1957 will be 13% over expectedproduction in 1956, an increase of 20% might be more realistic. Crude pro-duction in the area assigned to the Consortium may reasonably be expectedto increase at the rate of 10% per year during the remainder of the Planperiod.

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

47. Accordingly, Iran's oil production and revenues have been estimatedto be as iollows:

- ProductionYeaLr (millions of bbls.) Millions of dollars

195'6/57 195 15619'57/58 233 18819'58/59 258 2061'95q/60 284 237196o/6i 312 2521961/62 343 2681962 (6 months) 189 151

1,858

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48. Allocation of Oil Revenues to Plan Organization. The Second Seven-Year Development Plan Law establishes the basis on which the total oilrevenues accruing to Iran are apportioned to the National Iranian Oil Conpany,the Ministry of Finance and the Plan Organization. The Law establishes onebasis of apportionment for the period up to March 20, 1958 and a differentone 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 pay-ment (:O.24 per barrel in August 1956 representing 28% ofthe Iranian share) for authorized expenditures. Any amountin excess of the National Iranian Oil Company's authorizedexpenditures 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 totalIranian share (E-2O.08 per barrel in August 1956), (ii) anyamount of the total oil revenue in excess of $144 millionin 1956/57 and in excess of $188 million in 1957/58, and(iii) any amount of the stated payment in excess of theNational Iranian Oil Company's authorized expenditures.

(iii) The Plan Organization is to get the remainder ($0.53 perbarrel in August 1956, representing roughly 60% of the :ranianshare). Oil revenues to be received by the Plan Organiza-tion in 1956/57 and 1957/58 can be predicted reasonablyaccurately since (i) the output guaranteed by the Consortiumwill, at present prices, produce revenues of about $144million in 1956/57 and about $188 million in 1957/58, and(ii) production may considerably exceed the guaranteedamounts thus giving a cushion to the Plan Organizationfor a possible recluction in price. The Plan Organization'sshare 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 reduceddown to a minimum of 75% if the Government's financialposition is such that a special commission (consisting ofthe Minister of Finance, one other minister appointed by theGovernment, and the Managing Director of the Plan Organiza-tion) confirms that part of the oil income is necessary forthe maintenance and management of Government non-profitestablishments, and (ii) in 1958/59 only the Plan Organiza-tion does not share in any oil revenue in excess of $188million. (The estimates contained in this report have beenbased on the assumption that the Plan Organization's share

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will be 80% in 1958/59 and 75% thereafter. However, thlePlan Organization is in no way committed to acceptingonly 75% of the Iranian share of the oil revenues and theIManaging Director informed the Mission that he wouldendeavor to receive the full 80%).

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

49. On the basis of the above estimates of the total oil revenues accruingto 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 OrganizationRevenues Expenditures

Year (In millions of Y)

1955/56 (6 months) 26, 371956/57 86 1381957/58 113 1681958/59 150 1741959/60 176 1751960/61 189 1751961/62 201 1391962 (6 months) 113 66

Total 1,o54 1,072* actual.

50. It Ls yet too early to determine -the extent of the impact of theSuez crisis on Iran's, and thus the Plan Organization's, finiancial pros-pects. However, the situation may very likely affect Plan Organizationexpenditures as well as revenues. kbout one-half of Iran's oil was shippedthrough the Suez Canal immediately prior to the crisis.

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

Million $ Equivalent

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

Total 4.8

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Million $ Equivalen-t_

Credit:Bank NIelli advances Rls. 1,100.00 million 14.7IMF drawings US$ 12.00 12.0Suppliers' credits US$ 14.31 14.3Uncovered letters E 1.90 5.3

of credit US$ 0.12 001

Total 46.4

Since Auguast 20, 1956, the Organization has obtained some additionalresources but in view of a monthly rate of expenditure amounting to theequivalent of approximately $10 mi.llion it continues to operate on a sm.alcash balance. In September 1956, the Organization received a rial cred:itfrom the Bank Melli equivalent to the recent drawing of $5.5 million by Iranon 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 paymentsare due until about mid-January, ].957.

52. The Plan Organization's financial position and prospects thereforenecessitated a reconsideration of the scheduling of its development expendi-tures and the desirability of obtaining a more satisfactory method of financ-ing any deficit occurring in the initial years of the Second Seven-Year PlanPeriod.

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

Year Millions of Rials Dollar Equivalentin millions

1955/56 (6 months) 2,025 27 l1956/57 8,250 11019157/58 10,,125 135

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

54. Taking account of these adjustments in the schedule of expendituresprogrammed by the Plan Organization, there is now areasonable prospect ofan over-al:l balance between expenditures and revenues over the entireperiod 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.

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

Excess orYear Expenditures Revenues Deficit

(in millions of dollars)

1955/56 (6 months) 27 26 - 11956/57 110 86 .241957/58 135 113 -.221958/59 174 150 -241959/60 175 176 + 11960/61 175 189 4141961/62 139 201 +621962 (6 months) 66 113 +47

Total 1,001 l,054 +53

55. These figures also indicate that during the later years of the SecondSeven-Year Plan the Plan Organization would have surplus revenues, over andabove the expenditures naw contemplated,sufficient to repay any creditrequired in the earlier years.

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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 actionabout 30% of total Government revernes were derived from taxes and royaltiespaid by the Anglo Iranian Oil Company. These payments, which were paid insterling, p:Lus the Company's purchases of rials to meet local currency ex-penses in Iran, accounted for more than 60% of the total foreign exchangereceipts. 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 theeconomy of lhe loss of these receipts is clearly indicated in the financialdata for the ensuing years. During 1951/52 and 1952/53 Government debt to theBank 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 1951to $173 million in i'iarch 1953, and the exchange rate depreciated substantial-ly; the free market selling rate for the ria j / rose from an average ofRls. 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 farfrom sufficient to offset the expansionary effects of the budget deficit, andthe money supply rose by las. 3,930 million (28%). The official price indexesreacted after some time lag. Over the two years ending March 1953 wholesaleprices rose about 7% and the cost of living about 10%. Much larger increasescaime 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 re-mained urnchanged at Nls. 32.00 and 32.50 per dollar respectively. The offi-cial rate, however, has been applied to very few transactions. The mostimportant application was with res.Dect to foreign oil companies which, priorto November 1954, were required to purchase rials needed for local expendi-tures at the rate of Ri1s. 32.00 per dolar. Since i4ovember 1954, however,the oil companies have obtained rials at the rate prevailing for commercialtransactions (Rls. 75.00 per dollar). There are a few subsidy rates suchas for remnittances for students expenses abroad. Most transacticons, i.e.commercial exports and imports, take place at a higher rate composed af theofficial rate pl-as a certificate rate. Exporters receive, in addition torials at the official rate of Rls. 32.00 per dollar, exchange certificatesdenominated in foreign exchange. These are sold to importers who in makingimports are required to surrender certificates in addition to rials at theofficial rate. Up to June 1953 the certificate market was essentially afree market, although the Bank Melli entered it from time to time on boththe buying and selling sides, thus limiting short-term fluctuations in thecertificate rate. In mid-1953 a policy of appreciation of the rial wasundertaken, and the rate has been controlled since that time.

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58. The low point in the financial situation came in 1953/54. Gold mndforeign exchange reserves hit a low of .168 million in July 1953. The freemarket selling rate for the rial rose from 87 per dollar in March 1L953 to124 in June 1953. Wholesale prices jumped by appro:dmately 30% betweenMarch and December 1953, and the cost of living index increased by about152O during the same period.

59. Since 1953/54 the situation has substantially improved. The Agreementreached with- the Consortium in October 1954 paved the way for the resumpt;ionof oil production and exports. Of more iimnediate consequence were the arrange-ments, also concluded in October 1954, to obtain substantially more economicaid from the United States, in addition to the technical assistance receivedsince 1951. lth the help of rising foreign exchange receipts, the Governmentwas enabled to carry out its decision, talcen in June 1953, to appreciate therial in order to slow do' ,n the increase in the cost of iiving. The sellingrate, set at Pas. 100.5 per dollar in June 1953, was gradually reduced to90.5 by the end of December 1953 and has been fu;^ther reduced on three dif-ferent occasions -- to 84.5 in August 1954, to 79.5 in February 19,55 andfinally to 76.5 in .ugust 1955. The buyinF. rate has been Rls. 75.0 perdollar 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 theBank %Melli from Rls. 3,400 million in 1952/53 to Rls. 1,664 million in1953/54 and to Els. 1,288 million in 1954/55 (see Table 6). The increase inforeign exchange receipts resulting from foreign aid was augmented by anaooreciable rise in commercial exports (which had remained relatively stablefrom 1950/5-: to 1952/53) and by the resumption of oil exports on a substan-tial scale after the conclusion of the 1954 Oil Agreement. (2,455,0co tonsin 1954/55 compared with only 239,000 tons in 1953/54.) In 1953/54 a consi-derable part of the increased foreign exchange receipts was used to rebuildthe 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 foreignexchange receipts was used to finance addititional imports.

60. MIoney supply continued to rise rapidly in 1953/54 (23%), but in1954/55 the increase tapered off to 7%. The major factor which led to thesharp rise during 1953/54 was the build-up of foreign exchange reserves incolmr.binationr with the continued, though reduced, Government borrowing fromBank IIelli. Moreover, cduring both 1953/54 and 1954/55 bank credit to theprivate sector, which had remained relatively stable between March 1951 andMarch 1953, increased considerably and partially offset the deciine in therate of Government borrowing. Price increases, after the sharp accelerationin 1953/54, also tapered off in 195.4/55. The wholesale price index increasedby 3% (compared to 32% in. 1953/54) and the cost of living index by 10% (com-pared to 16% in 1953/54). The improvement in the price situation in 1954/55was probably due largely to increased supplies of imported goods, combinedwith the falling off in the rate of increase in the money supply. The declinein rial costs of imported goods resulting from the appreciation of the rial didnot become evident in the official price indexes until 1955/56.

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61. The easing of the financial strain which became evident in 1954/55has 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 reservessteady. Monev supply increased by 5.57% due mainly to bank credit expansionto the private sector (see Tables 9 and 10) probably largely for financingimports. The wholesale price index was stable, with some increase in pricesof domestically produced goods offset by a decline in prices of importedgoods; the cost of living index rose by 3%.

62. It should be noted that the easing of the financial strain is due inno srmiall measure to the budget suoport provided by the U.S. Government. In1954/55 and *955/5 6 U.S. aid financed resnectively Rls. 3,580 million ($46Tmillion) and Rls. 4,140 million ($55 million) of the Government's over-allrequirements (see Table 11). Iran accordingly faces the problem of making her-self progressively less dependent on U.S. aid for budget support and keepingthe general budget deficit within such limits that there would he no needeither for (1) government borrowing from the Bank Melli on a scale likelyto generate serious inflationary pressures, or (2) a diversion of oil revenuesfrom the Plani Organization to the general budget. The general budget is sup-posed to provide for the normal operating functions of the Government exclud-ing, for example, the development activities of the Plan Organization and theoperations of' various independent Government agencies or enterprises such asthe National Iranian Oil Company.

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

General B-udget Summary(in millions of rials)

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

Revenue 7,063 11,227 14,666Expenditure 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, butin 1956/57 estimated oil revenues are included (see Table 12). The actualdeficit for 1956/57 may well prove substantially smaller than that indicatedabove because revenues appear to have been underestimated and expendituresoverestimated. Oil revenues may be larger than estimated since crude pro-duction will probably exceed the guaranteed minimum, and income accruing fromthis production was not included in the budget estimate. Ioreover, certainfiscal measures put into effect during the current year are likely to yieldmore 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 ratesof Rls. 45.75 and Rls. 32.25. Also, the Government's selling price for sugarand 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 fromcustoms receipts and profits from tobacco and sugar. Assuming these favor-able trends continue, non-oil revenues in the current year might reach aboutRls. 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 reducedover the next three or four years by cutting expenditures. A substantial por-tion of general budget outlays appears to be rather inflexible. Security out-lays amount to about one-third of the total outlays and have increased roughl-yin proportion to the growth of the general budget during the last three years.It -<ould be unrealistic to assume any substantial reduction in defense orinternal security expenditures at the present time. Further, if expendituresfor education and health, two very high priority categories, are also con1-sidered in the relatively inflexible category, the total covers about 604 ofgeneral budrget expenditures. Another factor which makes any reduction in go-verniment expenditures improbable is that a very large proportion of totaL ex-penditures is for wages and salaries of government employees. While most ob-servers would agree that substantial over-staffing exists, the problem of al-ternative employment is also very clifficult, and exceptionally strong pressuresprevail against personnel reduction on any sizeable scale. As the developmentprogram picks up momentum, there may be some shift out of employment compen-sated by the general budget into activities financed by the Plan Organization.H-owever, this saving-r,oay be largely offset by higher salaries for governmentworkers generally. Significant increases in salaries, particularly at higherlevels, should be provided if the Government is to attract and hold competentworkers and if the corrupting influence of the present very low scale ofremuneration is to be checked. A iAfrther consideration making questionableany assumption of a cut in expenditures is the small amount now provided formaintenance of roads and other public works, and the increasing need formaintenance and upkeep expenditures as the development program increases thesocial capital of the country.

65. The probability that expenditures will continue to rise makes itimperative to raise mQre revenue. The Ministry of Finance cannot look to higheroil revenues, since after 1957/58 itt will no longer be entitled to 10% of thetotal oil income, and after 1958/59 it will not be entitled to oil revenueaccruing from production in excess of the guaranteed minimum. The FinanceMinistry's share will be confined to that portion of the National IranianOil Company's share (20%) which the Company does not need to cover its owninvestment requirements and possible losses on its oil operations. It isdifficult to forecast what the Company's needs will be, but in the tablebelow 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 mil-lion (Rls.1,020 million) by 1961/62 or no more than the amount it w,as budgetedto obtain from the National Iranian Oil Company in 1956/57. In addition, itis possible for the Ministry of Finance to obtain 5% of total oii revenues ifa special commission rules that this is essential in view of the financialsituation. If such a claim were recognized, an additional 413.4 million(Rls.1,005 million) would become available to the general budget. Even thetotal of these two sums (Rls.2,025), however, is about Rls.l,OOO million Lessthan the amount estimated as accruing to the general budget in 1956/57.

Estimated 5% of totalexcess of Iranian oil

Year NbOC needs revenues(in millions of dollars)

1959/60 7.4 11.81960/61 10.4 12.61961/62 13.6 13.41962(6 months) 10.2 7.5

66. It is therefore imperative to raise more non-oil revenues. Indirecttaxes including customs duties, other commodity taxes and monopoly profitson sugar, tobacco and opium, account for roughly 80% of the general budget'snon-oil revernues. As already indicated, certain increases in taxes and monop-oly selling prices were put into effect in 1956/57. While it may be diffi-cult 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 importsmay 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 bebalanced without a major shift of emphasis towards direct taxation. Thegeneral income tax as such requires accounting, deposit banking and similartechniques, the lack of which makes evasion relatively easy in Iran. There-fore, while the returns from this tax should increase as national incomegrows with economic development, it probably cannot be relied upon as aprincipal source of government income for a long time to come. This andother considerations have led the Government to consider recommendations forthe reform and intensification of property taxes on cultivated land and realestate and particularly the assessment of such taxes on a capital value ra-ther than on an income basis as at present.L/ It is estimated that cultivatedland, while producing over 50% of Iran's national income, contributes not.more than 4% of the Governmentts budget revenue. While many problems such asre-assessment, small-holder exemptions or rate reduction, etc., would beassociated 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 directtaxation might rise from about Rls. 1,300 million at present to Rls. 4,00)million, although it is problematic whether this goal could be achievedwithin a three or four year period.

68. It seems apparent also that there is much room for improvement oftax administration which, over a number of years, might be exoected to bringabout a sizeable groTwth in income. It is unlikely, however, that this factorwill 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 apossibility of meeting a part of the higher maintenance outlays referred toabove.

69. Altogether it is evident that the balancing of the general budgetposes a serious problem for the Iranian Government and one which requiresprompt and vigorous action. For the time being the Government continues toenjoy 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, whetherfrom central bank financing of government deficits or from bank credit ex-pansion to the private sector, is the fact that the bank Melli operates asthe central bank of the country and at the same time does about 80% of thecommercial banking business. Although owned by the Government, the BankIMIelli has pursued a reasonably independent policy in the past and continuesto operate under legislation severely limiting its own poTwers to expand themoney 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 notmore than $30 million equivalent (Rls. 967.5 million at the above rate) maybe added to the initial coverage. Since the latter has not changed signifi-cantly because currency circulation has remained virtually stable, there isstill scope for an increase in the note issue by Rls.2,400 million (about20%) 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(dand foreign exchange reserve of the Issue Department of the Bank l.lelli, thepossibilities of expanding bank credit to the Government or to private bu::i-ness are limited. Even though expEansion of bank credit may take the forminitially of creating deposit money, it is bound to result also in a pro-portionate or nearly proportionate rise in the amount of currency in circu-lation.

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

- 27 -

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

- 28 -

V. EXTERNAL FINANCE

74. Another element reinforcing the financial stability of Iran is thecountry'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 fcreignassets are held as currency reserve (64% of the total) or committed againstletters of credit or to Government agencies, there is a large and growingforeign exchange income available to meet foreign requirements. Since thebeginning cif 1954 foreign assets have remained relatively stable despite anexpanding volume of imports stimulated by the appreciation of the rial. Itis anticipated that foreign exchange receipts and expenditures in 1956/57will be approximately in balance, provided the gap between Plan Organizationexpenditures and revenues is filled by a loan in foreign exchange and theexpected U.S. aid of about $42.5 million in cash and commodities is received.

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

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

77. Given reasonably stable economic and political conditions, oilrevenues (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 lat-ter is convertible by special agreement with the United Kingdom, to meetnecessary dollar payments. Thus, while this arrangement obtains, no seriouscurrency problem should arise out of the fact that Irants trade with thedollar area shows a large deficit (see Table 15).

78. The table below shows the foreign exchange which it is estimated willbecome available from oil revenues for external debt service and other currentpayments, after meeting the estimated foreign exchange expenditures of the

- 29 -

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

A B C D Eistimated "'stimated .0 e NIOC Service on Available for

iranian Oil Foreimn x.xchange Present Other CurrentYear RTevsnue Expenditures v/ A-B External Debt Payments

(millions of dollars equivalent)

1956/57 156 76 80 6 741957/58 188 83 105 23 821958/59 206 93 113 26 871959/60 237 94 143 21 1221960/61 252 95 157 19 138

a/ NIOC foreign exchange expenditures are estimated at $21 million for1956/57 (see Table 14) and rising at $1 million per year thereafter.Foreign exchange expenditures by the Plan Organization are estimatedat 50% of total programmed Plan expenditures in 1956/57, 45% in 1957/58and thereafter at 40%.

79. It will be seen from column C that the foreign exchange remainingavailable for other purposes, including service on the existing externaldebt and imports other than those of the Plan Organization and the NationalIranian 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 andits agencies as of June 30, 1956 was reported by the Bank Melli at theequivalent of $233 million (see Table 16). However, the Mission was infonrvedof additional suppliers' credits, not included in the Bank Melli estimate,which have been contracted by various; Government agencies, and which mightbring the total debt to around $240 million. This amount excludes a secondsterling credit of L 10 million which, however, may never be utilized.

81. The service on the debt as reported by Bank Melli ($233 million) wiLlrise to a peak of around $26 million in 1958/59 and decline to about 1`19million by 1960/61 and to $11 million by 1965/66 (see Table 17). These amountsdo 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 pastdue. The United States and Iranian Gcovernments have not reached agreement asto the settlement of these credits.

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

- 30 -

provide Ir,an with an adequate growth in foreign exchange income over thelonger run. However, if the Plan Organization were to attempt the level ofexpenditures set forth in the table on page 20 without securing foreignexchange to cover the gap in the program, Iran's position would be difficultin the early years of the Plan period. To accomplish that level of Planexpenditures, credit would have to be obtained from the Bank llelli in theamount of about $2hL million equivalent in 1956/57. Also amounts of the sameorder would be required in each of the following two years. To compensate forthe inflationary impact of this credit expansion, either private credit wouldhave to be shiarply curtailed, which would not seem feasible, or foreignexchange 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 abovetable would be, of course, to increase the availability of foreign exchangcfor other goods and services in the early years of the Plan period when theloan was beizg disbursed and thus obviate the need for Iran to draw down herreserves. In the later years, the availability of foreign exchange for suchpurposes would be reduced by the amount of the service paynents on the loan.However, the projected increases in oil revenues arc such that even afterthese adjustments Iran would have an increasing flow of foreign exchangeavailable for other goods and services during the Plan period.

84. In addition to the expected expansion of oil revenues, other factorsmay contributze to a more favorable ioreign exchange position in the longerrun. There arc some projects in the Second Seven-Year Plan which will resultin the substitution of domestic products for imports and thus may relcaseforeign exchange for alternative iriports that may be required as the nationalincome rises. To important exammples are sugar and cotton textiles. Sugarranks 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. Sugarbeets can be grown in most arable places in Iran and production has increasedabout L00% since 1939. Less than 1% of the arable land is now used for bectproduction. The Plan Organization has included funds for now sugar factoriesin the program. Better seed, teaching of improved cultivation raethods andthe 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 millionbetween 1952/53 and 1955/56 but these imports stiLll cost Iran about $18 milliona year. The Mission observed some of the problems of the local textileindustry but reached no conclusion regarding the desirability of furtherexpansion with a view to import substitution. Since Iran exoorts raw cotton,the foreign exchange saving resulting from more textile production and reducedcloth imports would be partially offset by lower exports of raw cotton. Easedon experience elsewhere, the net saving might perhaps be 501% to 60% of thereduced 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 throughthe expansion. of domestic output, it is in theory possible -to increase importsother 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 expertis raw cotton, which in recent years has accounted for about one-fourth oftotal export proceeds excluding petroleun products (see Table 19). However,production and exports of this commodity can probably be raised only in thelong run with the realization of irrigatiorn projects and better agriculturalpractices. The same is probably true of fruits and rice which in the lastthree 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, navenot 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 exportexpansion.

87. By and large it does seem likely that the rise in imports (other thanthose of the Plan Organization and the National Iranian Oil Company) madepossible iby the expansion of oil revenues will be sufficient, consideringthe probablp development of some domestic import substitutes, to rmeet theexpected rise in money incomes. This conclusion, however, is likely to besound onlv if Iran can progressively balance her general budget without in-flationary financing.

- 32 -

STATISTICAL APPEfTIK

Table 1

ESTIMATED LAND UTILIZATION IN IRAN

(Thousand Hectares)

% of % ofTotal Cultivated

Area (1954) Area Land

1. Land in Farms

Cropland: Wheat 2,300 50.6Barley 800 17.6Rice 251 5.5Sugar Beets 40 0.9Beans 34 0.7Cotton 225 5.0Tobacco 17 0.3Fruits and. Nuts 688 15.1Other Crops 245 5.3Fallow 12,500

Total Cropland 17,000Other 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 20.1Forest 19,000 11.6Grazing land 10,000 6.1Desert, nmountain 81,000 49.4Other (cities, roads, etc.) 2,000 '1.2Total 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 1948-1950Annual AVWrage Annual tvcrae 1_955

1000 1000 1000 1000 1000 1000Hectares 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 statisticsfor these items, and possibly others, are about 60,000tons, indicating that practically all of these mineralsare exported. Total value of eyports of mineral products(other than oil) probably does not exceed 03 to $4 milliona year.

Sources: Production data prepared in consultation with theGeneral iMines Co. of Iran. These data are roughapproximations only.

Table 4

PRINCIPAL INDUSTRIAL PRODUCTS

(1955j~56j % oa - % Increase

1950/51. Ownership Employment Domestic since FutureProduction 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 PLANAS 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, Irrigationand Multi-purposeIrrigation 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 1,152Plant Disease and

Pest Control 26 154 180 172 191 160 160 76 1,119Forestry h 100 160 220 220 200 176 88 1,168 1Rural 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 703Meteorology 15 19 22 25 28 - - 109

Cooperatives etc. -14. 30 25 26 25 25 6 181Silos (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.) % of1955/56 1956/57 1957/58 1958/59 1959/60 1960/61 1961/62 1962/63 Total Program

2. Transportatiorn ar.dCcrur,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 6,741Airports 79 362 370 328 181 125 130 73 1,648Ports 47 614 588 489 546 562 562 300 3,708Telecommunicatior,s 67 210 305 345 325 166 91 91 ',600Cartography 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 - - - 1,807Sugar 125 268 70 97 180 500 14OO 1400 2,040 wCement 22 394 448 301 267 350 350 180 2,332Steel -- 300 600 800 1,009 300 - 3,000Chemicals 2 25 18 18 2 1 1 - 67Industrial Credit 7 305 405 237 - - - - 954Fisheries - 24 19 15 10 10 10 11 99i4ining (mainly coal

and salt) 17 109 90 10 6 30 26 - 288Other 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.) % of1955/56 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 6,175Education 125 438 443 438 407 351 348 181 2,731Electricity forProvincial Towns 30 347 351 230 306 370 3LtO lO 2,0o44Hydro and steam tur-bines (maj.producers) - 6 50 120 350 790 750 319 2,385Urban Development 92 598 500 501 405 1,180 1,303 710 5,289Other 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 MillionDollar 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 June20 20' 20 20 20 20 21

1951 1952 1953 1954 1955 1956 1956

Governmentliabilityto IssueDepartment 1,400 2,664 4,224 5,784 7.187 7,187 7,187

Credits toGovernment 1/ 4,995 5,011 5,398 4,819 4,083 4,239 3,886

Credits toGovernmentAgencies 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 depositsand claims onBank 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-Ader2/ 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 Ratesfor 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 rialsfor local expenditures at the official rate (rials 32 perdollar). Since November 1954 these purchases have beenat 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 butnot Exported Goods 90 92 101 128 129 :133

Source: International Financial Statistics

- l42 -

Table 9

MONEY SUPPLY

(Ilillions of Rials)

Private Time andCurrency in Demand SavingsCirculation Deposits Total Deposits

195

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

1955

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

1956

Mirch 20 11,160 13,780 24,940 3,950June 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 2,182Other Government 9/ 877 3,953Oil Consortium 893 3,502

Sub-total 2 ,107 9,637

Net sales of rials for other currentinvisible payments _300 2/ 300

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

Increase in Bank Loans and Advances

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

Total of factors tending to expandmoney supply 4,560 11,467

Trade deficit involving foreign exchangetransactions 3,000 10,500

Increase in money supply 1,550 1,110Statistical 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)

1956/571954/55 1955/56 Ist Quarter

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

2. Less increase in cash balances(adjusted from change in cashbalances 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 Governmentand 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 Budget19514/55 1955/556 19677 (Est.)

Taxation

Income and property taxes2/ 915 1,207 1,340Inheritance tax 37 80 30

Direct taxes 952 1,287 1 370Tax on petroleum produlets O 600Customs 2,500 4,200 14,875Other indireclt taxes and duties 63 363 165

Indirect taxes 3,043 6 190Total Taxes 3,995 7,050 7,560

Monopolies

Tobacco2/ 1,772 2,760 1,14l01Opium 150 150 98Sugar - - 450Sale of Industrial Alcohol 213 300 440

Total Mlonopolies 2,__135 3,210 _9

Oil Revenue

Income tax - - 2,025From 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 onthe basis of income produced.

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

- 46 -

Table 12 (Contld.)

EX P: TITUR S

(Millions of Rials)

Actual Actual Budget

1954/55 1955/56 1956/57

National Defense 1,878 2,111 3,684Internal Securi.ty 1,710 1,981 2,461

Sub-Total 3,588 4,092 69145

Education 2,163 2,563 4,219Health 459 530 595

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

Agriculture - Irrigation 306 368 445Transport and Communications 905 911 1,329Other regular expenditures 3,385 5,378 5,20o4

Sub-Total 10,806 13,845 17,937

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

Total 10,906 13,987 18,722

SUMMARY

Total Revonue 7,063 11,227 14,666Total 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 TotalForeign 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 67.0 204.0II 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.hIV 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 73.0 211.0II 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 62.1 200.1IV 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 71.0 209.0II 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 65.0Imports (other tham NIOC and P.O.) 2O9.8 264.0

Deficit (commercial a/c) 1io.o 199.0Non-commercial transactions (net) 4.o 5.0NIoc Forei.gn fchange Expenditures 6.1 20.5r.o. Fnreign Exchainge Expenditures 30.3 57.0

Financing Required 168o4 281L5

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

Total Rece!ipts from oil economy 138.7 186.0US 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 2Net 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 isexpected to make more substantial paynents of rials to the Consortiumfor oil products.This assumes a repurchase of about half or $4.4 million of the drawvingof $8.75 million made in 1955 under the automatic repurchase provisionsof 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 thePlan 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 -

Table 16

EXTER'AL DEBT - GOVERNMIENT AND GOVERNHENT GUARANTEED

June 30, 1956

(Thousands of' US Do:Llars)

In US Dollars1/

Export-Import Bank Loans

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

Other US Government Loans

ICA loans 42,O00Surplus property credits 24,216 66,216

IMF Drawings

Drawn in :L955 8,750Drawn in :L956 17,500 26,250

Sub-total 112,246

In Sterling2.1

Owing to British Petroleum Company 70,000Exports 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 millionremains unallocated. $5,780,000 of the $I19,780,000 allocated has not yetbeen disbursed.

- 51 -

Table 16 (Contld.)

/ Payment to be made by Iran to the successor to the Anglo Iranian OilCompany as provided in the Iranian Oil Consortium Agreement of October29, 1954. L 28 million equivalent to be paid in ten equal amount install-ments starting in 1957 without interest. These payments will be deductedfrom 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 drawnduring the current Iranian fiscal year is not known. The entire credithas been allocated among various Iranian Government agencies.

Bank Melli has estimated outstanding suppliers' credits guaranteed as torepayment or transfer at $23.2 million. The Mission was informed of someadditional commitments of Iranian Government agencies which were not in-cluded in, the Bank Melli estimates. The total amount of these is notknown 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 4,6001957/58 22,941 1,021 13,720 8,2001958/59 25,552 3,4h6 13,496 8,6001959/60 20,966 5,9!?4 13,272 1,7001960/61 19,314 6,6166 13,o48 1001961/62 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 repurchaseof 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 changetity tity tity tity value in %Value 1000 Value 1000 Value 1000 Value 1000 1952/53- ChangeRank Mile M.Tons Mil, §3N M,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 +88.8Cotton Goods 2 26.4 8.2 23.4 11.5 21.7 11.2 6 18.3 8.7 -30.7 +6.1Tires and Tubes 3 11,3 6.3 9.7 6.3 10.2 6.9 7 12.5 6.6 +11.1 +4.8N<.chinery 4 9.9 6.6 10.8 10.1 i5.6 13.8 5 20.9 15.2 +111.1 +130.3 tChenicals andDrugs 5 8.3 6.9 6.2 9.7 8.5 8.4 8 9.7 12.6 +16.9 +82.6Iron and Steel 6 7.6 21.8 12.2 58.8 15.5 86.2 3 23.5 124.0 +209.1 +l68.9Tea 7 4.6 2.6 4.4 3.3 9.5 4.6 4 22.0 10.1 +378.2 +288.4Edible Oiland Fats 8 4.3 6.8 2.8 7.3 3.3 13.5 11 3.4 12.4 -20.9 +82.3Paper Products 9 4.0 9.7 4.2 18.8 3.8 16.1 9 4.1 17.2 +2.5 +77.3AutomotivcL-quipment 10 2.9 2.7 5.0 3.8 28.8 23e6 2 25.9 20.5 +793.1 +659.3yt,res 11 2.2 3.2 2.1 3.4 2.7 4.4 10 3.8 5.9 +17.3 +84.3Glassware 12 0.8 2.1 1.2 6.4 1,6 7.7 12 2.0 6.5 +150.O +209,5Other 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.)%Z Change1953/54 to

1953/54 1954/55 1955/56 1955/56Quantity 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.1products 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 millionOil Consortium - $221.14 million

Source: Annual Customs Statistics of Iran.