Free Web Hosting Provider - Web Hosting - E-commerce - High Speed Internet - Free Web Page
Search the Web

Iran's Major Macro Economic Variables in the Third Development Plan

Khordad (Daily)
Sunday, Oct. 31, 1999, No. 260

Summary: During the Third Five Year Economic, Social and Cultural Development Plan, the average growth of investment required for the five years has been estimated at 7.1 percent. The estimate for total import of goods and services needed for the plan, too is estimated at 112.4 billion dollars. Out of the total general revenues, 47 percent will go to oil, 32 percent to taxes, and the rest to other sources of income.

Text: The economic growth of six percent per annum sounds to be an acceptable growth rate. As a matter of fact all efforts should be made during the years of the Third Economic Plan to make this ambition come true. The realization of this objective, considering the economic growth rate in the years of the Second Plan which was about 3.2 percent, calls for special requirements in the fields of economic, social, political, administrative, and judicial systems of the country. Judicious attention paid to the aforementioned requirements is of paramount importance to attain the goals of the Third Plan.

The average growth in the needed aggregate investments, during the years of the Third Economic Plan, is estimated to be around 7.1 percent. Comparing this rate with the average investment rate of the Second Plan, which stood at 1.8 percent, indicates the significance of the volume of the resources that must be mobilized. In order to realize the requirements of the aggregate investment, the private sector's annual investment growth should reach 8.5 percent, while that of the public sector's should grow at 5 percent per annum. To make the bulk of this sort of investment to materialize, apart from requiring the liquidity picture and anticipated inflation in the plan to hold out, entails the mobilization of the public savings through the establishment of a safe atmosphere together with economic security and the winning over of the public confidence regarding the macro-economic policies of the government. This will in fact direct the private sector's resources towards productive economic activities. Another requirement is to do away with the obstacles in the way of the growth of investments by the private sector, which can be achieved by amendments to the laws and regulations, development of financial and banking establishments, and political reforms in order to make economic activities ever more competitive. The objective participation of people in the administration of the affairs for the favorable realization of the government responsibilities must also receive due attention. This can be achieved by provision of opportunities for the people to take charge of non-governmental duties, privatization of those publicly owned economic units and activities that can be transferred to the private sector and co-operative units, and abolishment of laws and regulations which encourage unnecessary monopolies in the fields of manufacturing and distribution of goods.

All these activities must be within the context of envisaged policies for the Third Development Plan and can lead to securing the needed resources for investment as well as a stable non-inflationary growth.

The aggregate import of goods and services in the Third Plan is estimated to be around 112.4 billion dollars. The sources for the necessary hard currency in the Third Plan must be identified while considering the forecasts made as regards the oil sector as well as the commercial policies of the Third Plan. The exports of the crude oil and oil by-products is about 34.8 billion dollars, exports of services stand at 6.7 billion dollars, while other revenue generating sources are predicted to bring in a total of 6.8 billion dollars. These finances must be secured through international financial resources and within the framework of the priorities and policies of foreign investments in the Third Plan.

The aggregate public revenues in the Third Plan are supposed to be a total of 796,495 billion rials. The average annual growth rate of the government revenues, during this period, is predicted to be 19.5 percent. Out of the aggregate revenues, 47 percent of the revenues is generated through the sale of oil (including proceeds from the sale of foreign currency), 32 percent consists of tax revenues, and 21 percent of the revenues come from other sources. The tax revenues with an average growth rate of 23.2 percent during the life of the Third Plan enjoy the highest rate of growth among the sources of the government revenues. This growth rate is based on the assumption of stabilization of the ratio of tax revenues to the Gross National Product (GNP) at 6 percent. The aforementioned assumption can come true through the implementation of the following policies which have been anticipated in the Third Plan:

• a) Abolishment of tax exemptions
• b) Implementation of Value Added Tax (VAT)
• c) Improvement of the tax levying techniques and improvement of the administrative - organizational systems for tax revenue collections.

The average growth rate of other government revenues during the Third Development Plan is estimated to be at 13.3 percent per annum. From the total of other government revenues, 33,047 billion rials come from the increase in the price of domestic energy consumption. The main motive behind the hiking of the price of the domestic energy is not to make more money. The government intends to restructure the economy, specially in the energy sector, protect the resources of the country through creation of better consumption habits, and stop the destruction of the environment. In addition to the policies in connection with rectifying the prices of the domestic energy consumption, the government is in the process of making up policies related to the improvement of the technology, and consumption of energy. The rectification of the domestic prices for energy consumption will not only lead to the conservation of energy, but will also influence the budget allocation of the government. It will also promote the national objective of scaling down the growth of consumption, and improve the chances of using the conserved energy resources to bring the objectives and priorities of the Third Plan to pass. In line with this objective, a part of the revenues generated by the price hike in the domestic energy consumption will be used to create job opportunities and strengthening the purchasing power of low income families and vulnerable groups.

The aggregate government expenditures during the Third Plan is estimated to be around 804,080 billion rials, of which 73.5 percent is for the current expenditures, and the remaining 26.5 percent is set aside for structural expenditures. The average growth rate of the current expenditures, during the life of the plan, will be 18.8 percent. Out of the anticipated aggregate current expenditures in the Third Development Plan, 27,160 billion rials is to offset the government subsidies for the increase in the prices of the domestic energy consummations, and 41,480 billion rials is allocated to the special expenditures to improve government services. These latest expenditures will be mainly used to improve the quality of the government services in those sectors which are entrusted with the task of enforcing the sovereignty of the government. Irrespective of the expenditures related to the subsidies for the energy prices, and those related to the improvement of the government services, the average growth rate of the current expenditures is limited to 15 percent. In other words, as far as other current expenditures are concerned, it is assumed that these expenditures will stabilize into fixed costs.

The structural expenditures during the Third Plan are deemed to enjoy a growth rate of 21.4 percent. Out of the aggregate structural expenditures during the life of the plan, 16,360 billion rials is allocated to improving energy consumption patterns and 22,100 billion rials have been foreseen for special expenditures on job creating projects.

It must be noted that the difference in grand totals of the figures for expenditures and revenues, an amount of 7,585 billion rials has been brought forward from the returns originating from previous years expenditures. Hence, while predicting the improvement of the quality of government services and carrying out structural expenditures suitable for an economic growth rate of 6 percent, the government will be blessed with a balanced budget during the life of the Third Plan.

The supplementary policies to the government's financial policies to create economic stability are the monetary policies. With the implementation of the anticipated monetary policies, the grounds would be prepared to zero in on the rate of inflation and to draw up time programs to gradually take the edge off the inflation rate. Within the framework of the implementation of the plan's monetary policies and in keeping with the continuation of balance in the government's public budget as well as the realization of the forecast picture, the growth, investment, and average rate of the inflation is predicted to be around 15.9 percent during the life of the plan. The comparison of the expected inflation rate during the years of the Third Plan with that of the last five years, which has stood at 26.5 percent, is indicative of a major direction taking in the Third Plan towards the objective of creating economic stability. Another significant socioeconomic objective of the Third Plan is to wind down the increasing rate of unemployment. Forecasts based on the changes in the population age pyramid as well as other assumptions regarding the participation rates of the manpower go to indicate that the average yearly manpower supply during the life of the Third Plan would be around 676 to 735 thousand people. During the period for the Second Development Plan, the same annual average stood at 479,000 people. With due attention to the economic growth and job creating policies of the plan, it is estimated that, during the years of the Third Plan, about 3,800,000 new job opportunities will become available. That is to say a yearly average of 765,000 new jobs would be at hand. Naturally, it is predicted that the unemployment rate, in the final year of the Third Plan, would be around 10.5 percent. It goes to show that creation of so many jobs in the future years vitally depends on the accurate implementation of the plan and the realization of the anticipated economic activities. It has now become too clear that the continuation of the present trend and sticking to the contemporary attitudes and structures are at loggerhead with the national interests. The fact is that if production and investments do not grow, there is no way to lessen the increasing rate of the unemployment.

Assumptions and requirements for the quantitative realization of the anticipated picture in the plan:

1) Production and investment sector
a) Assumptions:

• A 6 percent average annual growth rate of the GNP.

b) The requirements and the needed directions to be taken:

• Annual growth rate of the investments in the private sector and public sector, based on the fixed prices, must be at 8.5 and 5 percent respectively. In order to realize the needed growth of investment in the plan they must be at least 7.1 percent.
• Procurement of the needed goods and services within the framework of the plan's picture for foreign trade.
• Realization of the forecast monetary and inflationary picture of the plan.
• Modification of the economic management structure, and reviewing the role and duties of the government.
• Improvement of the manpower investments and promotion of productivity.
• Revamping of the public saving structure, creation of a safe atmosphere together with economic security, establishing of confidence in the public as regards macro-economic policies of the government in order to direct the private sector's resources towards productive economic activities.
• Promotion of the private sector's and co-operatives' investments and removing obstacles to the expansion of production within the framework of general directions in the Third Plan, such as:
• Modification of the laws and regulations (such as private property rights, solicitation and attraction of the investment sources as well as those of the foreign participation).
• Rehabilitation and expansion of the essential foundations (financial and banking foundations, the investment market, specialized and managerial foundations)
• Political reforms (such as making economic activities competitive, absence of the administrative price control of goods and services, except the natural monopolies and subsidized items, establishing uniform rates of interests for credit facilities).
• Promotion of the public participation in the administration of the affairs, together with the realization of the sovereign duties of the government through preparation of the grounds for assigning the charge of all non-sovereign affairs to the public. Avoidance of taking charge of these affairs by the government and reinforcing local and non-governmental organizations to reduce the volume of responsibilities of the government and relinquishing of all non-essential governmental responsibilities to these organizations.
• Reviewing the duties of the government in order to promote its strategic roles and responsibilities, beefing up of the sovereign aspects, policy making, planning, support, supervision, and rehabilitation of governmental organizations, while stressing the omission of the non-essential parallel organizations.
• Privatization of those governmental units and activities that can be assigned to the private sector and cooperatives, with the general objective of promoting productivity and efficiency among the human and material resources of the society and in order to make the government efficient in the realm of policy making and preparing the ground for the promotion of the private sector's and cooperatives' capabilities.
• Abolishment of the laws and regulations which encourage monopolies in the production and distribution of goods and investment services, as well as establishing new respect for laws in order to create a competitive atmosphere.
• Reviewing those policies that protect production and investment through enacting tariffs and preferential rates as well as those that establish special preferences.

2) Foreign trade sector

a) Assumptions

• The average annual hard currency generated from the sale of oil, and petroleum by-products is about 12.8 billion dollars.
• Increasing export of non-oil products up to 8.8 billion dollars in the final year of the plan.
• Stabilization of the official foreign currency rates for importation amounting to 5.5 billion dollars to protect infant industries.
• The growth of the GNP and stabilization of the inflation rate in OECD countries at 2.5 to 3 percent per annum.

b) Assumptions and direction taking

• Realization of the anticipated figures for production, export, and crude oil prices in the plan.
• Creating stability in foreign currency revenues generated from the export of oil through establishment of foreign exchange saving account.
• Achieving a marked boost in exports through the application of a strategic trade policy, directed at utilization of the extant relative advantages and promoting the creation of relative advantages.
• Establishment of a more active foreign trade in the country and utilization of the preferential in trade through membership in the international and regional organizations.
• Curtailing the presence of multi-tier foreign exchange rates and keeping up the stability of the real rates (those applying to exports)
• Changing of the non-tariff obstacles to equivalent tariffs and its gradual reduction.
• Permissibility of the exportation of all goods and services unless there are exceptions.
• Preparing the necessary grounds for taking advantage of strategic location of the country in the realm of international exchange, facilitating the transit of goods and its expansion, active presence in regional markets.
• Attraction of foreign investments, with priority given to direct foreign investment.
• Giving priority to export industries at the time industrial policies are made.
• Provision of insurance and guarantee services to exporters of goods and services by the Export Guarantee Funds.
• Formulating active foreign policies related to the realization of the objectives of the plan, while safeguarding the principles and values.
• Offsetting the deficits in current accounts through investment accounts anticipated in the plan.

3) Government budget sector

Tax revenues

a) Assumptions

• Bolstering the tax revenue share in the government revenue portfolio (exclusive of energy taxes) from the annual 28.2 percent to 34.7 percent in the final year of the plan.
• Stabilization of the ratio of tax revenue share to the GNP at a six percent per annum.

b) Requirements and direction taking

• Expansion of taxable sources
• Abolishment of tax exemptions and tax rebates
• Establishment of Value Added Tax (VAT)
• Making punctual tax payments mandatory and stabilizing it during the life of the plan
• Simplifying the laws and regulations of taxes
• Rehabilitation of the tax establishments and organizations in order to centralize policy formulations, decision making, and executive affairs

Oil revenues

a) Assumptions

• An average price of 14 dollars for each barrel of crude oil during the life of the plan.
• An average annual hard currency revenue of 12.8 billion dollars from the sale of oil and its by-products.
• Changeability of an average 53 percent of the hard currency revenue generated by the sale of oil into rial revenues at the official rate of exchange and the remaining 47 percent at the rate computed for export proceeds settlement certificates.

b) Requirements and direction taking

• Boosting the production capacity up to 4.4 million barrel per day in the year 2004.
• Securing the input of the domestic refineries at 1.6 million barrel per day during the life of the plan.
• Securing the needed investments, both in rials and hard currency, for the oil sector.
• Conservation of energy through better ways of consumption and making energy more efficient.
• Creation of stability in rial based prices for oil through the establishment of saving accounts in both foreign exchange and rials.

Other revenues (including energy taxes)

a) Assumptions

• Continuation of the present policies to generate revenues
• Acquisition of the anticipated rial resources resulting from modification of the subsidized prices for energy.

b) Requirements and direction taking

• Gradual modification of the subsidized prices for energy during the life of the plan in order to make substantial savings, safeguarding of the national resources, attaining financial self sufficiency, and creating incentives for the non-governmental sectors to participate in the administration and investment.

Current and structural expenditures

a) Assumptions

• Stabilization of the current expenditures at fixed prices (exclusive of subsidized costs to modify the energy prices and those costs related to governmental sector structure).
• Growth of the structural expenditures at annual fixed prices and at an average of 4.6 percent.

b) Requirements and direction taking

• Distribution of the proceeds resulting from the increase in subsidized energy prices in the form of compensating costs, costs to improve the government offered services, costs for the improvement of consumption of energy, special credits, job creating loans, and assistance of the current budget as well as investment in the energy sector according to the enclosed chart.
• The priority of securing the needed investment resources and current affairs related to enforcing the sovereign duties of the government originating from public revenues by stressing the promotion of efficiency and improvement in the quality of the offered services.
• Carrying out of commercial activities through companies and prohibiting governmental organizations (ministries, governmental organizations) from taking charge.
• Administration of social organizations through the public participation, public non-governmental establishments, and government payment from the source of the general budget in the form of transfer payments.
• Creation of profit making projects from domestic sources, government companies, and in special cases from the sources of the general public budget in the form of loans.

The financial sector and inflation

a) Assumptions

• Decreasing the deficits of the saving account for commitments until the account balances out from the year 2002.
• Reduction of the remaining compulsory facilities at a rate of 10 percent per annum.

b) Requirements and direction taking

• Controlling the unrestrained growth of liquidity and keeping it at a yearly average growth rate of 16.4 percent.
• Realization of economic growth picture by making the necessary investments.
• Abolishment of the executive impediments of monetary laws and the country's banking system as well as separation of the monetary policies from the fiscal and budget policies.
• Prohibition on the government to make up for its budget deficit through borrowing from the Central Bank of Iran (CBI).
• Setting of guidelines for those needed fiscal policies to control the inflation rate during the life of the plan, and using indirect tools to control the volume of money, as well as encouraging saving in the country and expanding the financial markets.
• Flexibility in setting interest rates for demand deposits in order to offset the inflation and creating incentives for people to save their money as well as mobilizing the financial sources to make investments.
• Expansion of competition among domestic banks while encouraging and facilitating establishment of the private sector, non-banking credit institutions.
• Making the interest rate of credit facilities consistent in the different economic sectors and extending assistance to economic sectors and policies in the form of subsidized interest rates, preferential credits and accepting to guarantee the repayment within the framework of the annual budget.