Iran Financial Policy

By | December 16, 2021

Benefiting from a new spike in the price of crude oil on international markets (which occurred following Iraq’s invasion of Kuwait), between 1990 and 1993 the Iranian economy recorded high growth, with a change in GDP in real terms of 7, 5 % on annual average. The sharp increase in revenues from oil exports has led commercial banks (under the pressing demand of foundations and other entities that enjoyed free access to the currency market) to take out an increasing volume of short-term debt to finance a unprecedented expansion of imports. Exports not related to oil also showed a moderate improvement in the same period, but this proved insufficient to compensate for the effects of the new decrease in the price of crude oil which took place between 1992 and 1993. The sharp contraction in foreign exchange reserves led to an accumulation of delays in the payment of external debt in late 1993 to over $ 23 billion. Having lost the confidence of the international financial markets, Iran it was soon faced with a disruption in foreign funding which quickly reflected on the real side of the economy. The need to contain imports was in fact accompanied by a decrease in internal investments, causing the closure of numerous companies and factories, with a consequent fall in the growth rate of GNP (which fell below 1 % in 1994) and a sharp increase unemployment. Since the end of 1993, the management of the financial crisis has strongly influenced the conduct of economic policies, compromising the developments of the reform process. For Iran public policy, please check

To deal with the crisis, the authorities have followed two paths. The first consisted in seeking bilateral agreements for the renegotiation of the debt with the main creditor countries (first of all Germany, Japan and Italy). The positive outcome of the negotiations made it possible to convert short-term debts into medium-term bonds for a value of approximately 14 billion dollars and to obtain a postponement of the payment of the new installments to 1996. The second path, on the other hand, entailed greater problems, as it was aimed at finding a difficult compromise between the need to buffer the effects of the crisis on the living conditions of the population and the need to proceed with economic recovery through more rigid fiscal measures and monetary.

The revival of a tug-of-war between the government, promoter with the Second five-year plan (19952000) of an austere economic policy program, and the opposition of conservative groups within Parliament has resulted in government intervention with uncertain and contradictory characters. The program for the removal of subsidies on basic necessities (oil, gas, electricity, and various foodstuffs), which represented the pivot of the financial recovery maneuver, has been repeatedly revised by Parliament to the point of making it very little incisive. The measures taken to reduce inflation, consisting in the application of strict controls on the growth of the prices of hundreds of products combined with a restrictive monetary maneuver implemented by the Central Bank, have produced minor effects. In fact, the

The difficulties that arose in the foreign exchange market represented one of the most serious consequences of the crisis on the process of economic reforms. To curb the sharp fall of the riyal, which began in the second half of 1993, the authorities were forced, starting in November of the same year, to introduce new currency restrictions, canceling part of the liberalization measures adopted a few months earlier. However, the rise in inflation had caused a fall in riyāl on the free market also in the following years, prompting the government and the Central Bank to accompany the corrective measures with more drastic measures, even of a repressive nature. In fact, having introduced in 1995 rules that obliged exporters to deposit their holdings in foreign currency with the Central Bank, in order to obtain them no earlier than six months and only to carry out imports, the government proceeded to suppress the black market that had been created outside the commercial banking circuit and the arrest of unauthorized operators. In May 1995, after a further decline in the market exchange rate, which dropped to 6300 riyāl per dollar, the monetary authorities set a new ratio of 3000 riyāl per dollar and set the official exchange rate at 1750 riyāl.per dollar. The prospect of unification of the two rates, which was to represent the culminating phase of the currency reform process, was thus postponed to the end of the century.

Despite the reduced incisiveness of the government initiative in the economic field, in 1996 the economy of the Iran it recorded a new growth of the GDP (+ 4.8 %), supported also this time by the favorable conditions of the oil market (in 1996 the income deriving from crude oil exports increased by 20 %). Thus the Iran it was able to meet the payment of the new installments of the foreign debt on time, restoring much of the credit capacity lost following the 1993 crisis ; nor was the new economic recovery threatened by the sanctions decided in 1995 from the United States Congress (see below: History). In fact, a significant improvement in public accounts was associated with a substantial current account surplus and a strong inflow of capital. However, since 1997 the rate of increase in GDP showed a slowdown, continued also in the first half of 1998, due to a new reversal in oil prices.

Overall, the country’s economic situation remains characterized by a climate of uncertainty, largely linked to the stock of foreign debt (still more than $ 13 billion at the end of 1998) and the outcome of the completion of the reforms (even though the new President H̠atamī declared that he wanted to continue), especially as regards the privatization of the industrial sector, which ran aground following a law that in fact concentrated in the hands of restricted privileged groups the control of the most profitable companies, and the removal of the system of subsidies which, still in the second half of the nineties, absorbed almost all of the revenues deriving from the export of oil.

Iran Financial Policy