Iran Economic Policy

By | December 15, 2021

The evolution of the Iranian economy is deeply intertwined with the political events that have marked the recent history of the country. The 1979 revolution, international isolation, the prolonged conflict with Iraq have not only slowed down the development of the Iran, but also conditioned the economic policy choices of the Islamic government. The original attempt of the political-religious summit to establish an economic system modeled on the law of the Koran – based on economic self-sufficiency and on the attenuation of the bonds of dependence on imports and capital of Western countries – has repeatedly clashed with the emergence of financial and macroeconomic difficulties, and has undergone various reform attempts. Thus, the developments in Iranian economic policy, while moving towards greater openness to the market and a resumption of economic relations with foreign countries at the end of the 1980s, were found to be contradictory and uncertain. The progress of the reforms, in fact, has found a serious obstacle in the dualism of powers in the management of the economy, with a contrast between the conservative class of religious, guarantor of the supremacy of Islamic law, and the government, traditionally more attentive to evolution of the economy.

A first phase in the implementation of the economic policies of the post-revolutionary regime took place in the late 1970s, with the nationalization of large sectors of industry, insurance companies and the banking system, with the introduction of strict regulations on international trade and with the blocking of financing from abroad. The construction of the new economic order was however halted by the drop in revenues from oil exports, which occurred following the outbreak of the war with Iraq, which had led, in the two-year period 198182 alone, to a contraction of the Gross National Product (GNP) in real terms by around 20 %. For Iran business, please check

The enormous expansion of the public deficit (the expenditure for the conflict absorbed 30 % of the state budget) and its financing through highly inflationary measures contributed to making the internal economic situation particularly serious. Precisely the rise in the price level (which had reached values ​​ranging between 20 and 30 %), associated with a situation of widespread scarcity of primary and instrumental goods, had prompted the authorities to accentuate interventions in the sphere of the economy. To mitigate the effects of inflation on living standards and alleviate the shortage of goods, a complex system of rationing and subsidies was introduced for a large number of goods, while the shortage of foreign exchange was bridged by the application of strict controls to imports and the establishment of a mechanism of multiple exchange rates (there were up to twelve), devised to direct resources towards the sectors considered to be priority. Finally, a new five-year plan was introduced (198388) which, however, after being revised several times according to the needs of the war economy, in fact was never operational.

At the end of the conflict, in 1988, the economic framework of the Iran presented numerous critical points. The huge costs for the financing of the war (estimated at between 5 and 8 billion dollars a year), the expenses for the reconstruction of the plants destroyed by the Iraqi bombings (equal, according to official estimates, to about 40 billions of dollars), the drying up of foreign exchange reserves and the shortage of internal capital, had caused a fall in production indices and a sharp rise in the unemployment rate. To this situation must then be added the serious distortions caused by the administrative system of management of the economy, strengthened during the war, accompanied by a continuous increase in inflation and the public deficit.

However, the chronic insufficiency of the industrial sector was at the root of the country’s economic turmoil. Import restrictions, introduced to control foreign exchange flows, had repeatedly prevented the supply of raw materials and the purchase of machinery, reducing the operational capacity of companies to around 30 % of production potential. The inefficiency of public enterprises was also particularly serious. These were placed under the direction of the foundations (or bunyād, the semi-governmental bodies, created after the revolution to manage the assets requisitioned from the shah), real alternative centers of economic power, detached from government control and linked to the theocratic regime by family and clientelist relationships. Lastly, the situation of private enterprises was not too dissimilar, almost entirely controlled by the commercial bourgeoisie of the Bazaar faction, more inclined to the exploitation of rents than to the realization of productive investments.

The fragility and instability of the internal economic conditions were at the origin of the new economic policy direction promoted by President Rafsanǧānī after his election in the summer of 1989. The new course was preceded by important institutional innovations – which conferred greater powers on the president in managing the economy – implemented after, in 1989, āyatollāh Khomeini himself had admitted the possibility of derogation from the Koranic law in situations in which they were at stake. vital interests of the country. At the end of a phase of negotiations and compromises, the Parliament approved in 1990 the first five-year plan of the Islamic Republic of Iran (199095), the document which outlined the program of structural reforms consisting of a package of measures ranging from the privatization of public enterprises, to the opening of the country to foreign investment, to the dismantling of controls and licenses for imports, up to the revision of the subsidy system and the liberalization of the foreign exchange market. The priority objectives of the reforms were the reduction of inflation and unemployment, the consolidation of the country’s infrastructural systems (transport, energy), the support of government action for productive initiatives of the private sector, as well as the strengthening of the school sector.

While there was no lack of opposition from the more conservative sectors of Parliament, the technocrats of the foundations and the Bazaar (which saw their positions threatened by the process of economic deregulation), between 1990 and 1993 the implementation of the plan proceeded rapidly, with the opening of new credit lines by foreign financial institutions, the liberalization of controls for particular categories of imports (machinery, raw materials and semi-finished products) and the general approval of an important law aimed at encourage the participation of foreign investors in the share capital of companies undergoing privatization.

The most important reform of this period, however, was the liberalization of the system of exchange controls, which was not only incompatible with opening up to foreign capital, but also an obstacle to the process of industrial modernization and the growth of private investments. Along this line, the government decided, in 1991, to loosen the constraints on foreign currency transactions and to reduce exchange rates to two, establishing an official rate for imports of materials and spare parts for industries (set at a ratio of 1540 riyāl per dollar) and a market rate, applied to private investments and imports of finished products (with an initial value of about 1600 riyālper dollar). In 1993, however, the free convertibility of the riyāl at the market rate was announced, and some categories of importers (first of all foundations) were granted ‘preferential’ access to the foreign exchange market through the abolition of quantitative restrictions on the demand for currency.

Iran Economic Policy