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Foreign Exchange Gap, Structural Constraints, and the Political Economy of Exchange Rate Determination in Iran

Published online by Cambridge University Press:  29 January 2009

Sohrab Behdad
Sohrab Behdad
Affiliation:
Department of Economics, Denison University
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Extract

Foreign currency transactions have come under stringent controls in postrevolutionary Iran. This is a relapse into the prevailing conditions in the years preceding 1974, before the increase in oil revenues eliminated the foreign currency gap. Initially, the Islamic Republic of Iran (IRI) imposed exchange controls to stop the postrevolutionary capital flight. Soon, however, exchange controls became an integral policy instrument of the government for rationing the existing supply of foreign currency in the face of a widening foreign exchange gap.

Type
Articles
Information
International Journal of Middle East Studies , Volume 20 , Issue 1 , February 1988 , pp. 1 - 21
Copyright
Copyright © Cambridge University Press 1988

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References

NOTES

Author's note: The final version of this article was completed in May 1987. 1 would like to thank Richard Lucier, James Pletcher, and the anonymous referees for their helpful comments. I am responsible for the opinions and remaining errors.

1 The Iranian currency, rial, is pegged to SDR (I SDR = 92.30 rials). For details of the exchange control measures in Iran, see International Monetary Fund, Exchange Arrangements & Exchange Restrictions, Annual Report 1986 (Washington, D.C., 1986), pp. 297–98.Google Scholar

2 Although the Iranian calendar year starts on March 2, I refer to any particular year in this calendar by using the corresponding Gregorian calendar year. Thus I write, for example, 1974 for 1353 and not 1974/75, which some authors prefer.

3 Some restrictive measures were applied to foreign currency transactions in the months before the fall of the Shah's regime.

4 Initially the Planning and Budget Organization (now a ministry) proposed the devaluation policy in the intergovernmental debates in 1982. This view has been opposed by the Central Bank (Bank Markazi).

5 Lautenschlager, Wolfgang, “The Effects of an Overvalued Exchange Rate on the Iranian Economy, 1979–84,” International Journal of Middle East Studies, 18, I (02 1986), 31–52.CrossRefGoogle Scholar

6 Ibid., 50.

7 Ibid., 49.

8 Ibid., 43. The article does not provide the basis of the suggested “one-third” potential growth in industrial output.

9 Ibid., 49–50.

10 Ibid., 50.

11 Lautenschlager's analysis is based on a simplified version of the exchange rate determination model of international monetary theory. This model is explained in many international economics texts; see, for example,Kreinin, M. E., International Economics: A Policy Approach, fifth edition (New York: Harcourt Brace Jovanovich, 1983), chapters 3, 6, and 7.Google Scholar For a survey of literature and debates on balance of payments adjustments in the underdeveloped countries, see:Krueger, Anne D., Exchange-Rate Determination (New York: Cambridge University Press, 1981), chapter 8;Google Scholar andCline, William R., “Economic Stabilization in Developing Countries: Theory and Stylized Facts,” in Williamson, John, ed., IMF Conditionality (Washington, D.C.: Institute for International Economics, 1983), pp. 175–222.Google Scholar Carlos F. Diaz-Alejandro's work on Colombia (with coffee as its main export) is an appropriate guide for the study of multiple exchange rates and the foreign currency problems of countries with a single important export commodity.See his Foreign Trade Regime and Economic Development in Colombia (New York: National Bureau of Economic Research, 1976).Google Scholar

12 The oil dependence of the Iranian economy is examined inClawson, Patrick, “Capital Accumulation in Iran, in Nore, P. and Turner, T., eds., Oil and Class Struggle (London: Zed Press, 1980), pp. 143–77;Google ScholarPesaran, M. H., “The System of Dependent Capitalism in Pre- and Post-Revolutionary Iran,” International Journal of Middle East Studies, 14, 4 (09 1982), 501–22, especially 509–11;CrossRefGoogle Scholar andKatouzian, Homa, The Political Economy of Modern Iran, 1926–1979 (New York: New York University Press, 1981), especially pp. 242–53.CrossRefGoogle Scholar

13 Iran, similar to other oil exporting countries, benefited from the appreciation of the U.S. dollar prior to mid-1985. From then on, the depreciation of the U.S. dollar has accentuated the fall in the nominal price of oil by causing a decline in the real value of oil earnings.

14 The sudden jump in non-oil exports in 1979 is explained by the fourfold increase in the noncommercial rug exports as a form of wealth transfer. In 1981, the IRI put a stop to the noncommercial exports of rugs.

15 For some of the Iranian export items only the latter is true because, as a small source of supply, Iran does not affect the international price of these products.

16 SeeUnited States International Trade Commission (USITC), News (July 3, 1986) and USITC, In-Shell Pistachio Nuts From Iran: Determination of the Commission in Investigation No. 731- TA -287 (Final) Under the Tariff Act of 1930, Publication No. 1875 (Washington, D.C.: USITC, 1986). Between 1984 and 1985 the volume of Iran's pistachio nut exports to the United States increased by sevenfold, accompanied by a 43 percent price reduction (ibid., p. A-39).

17 The increase in the domestic price of exports in the case of small exporting countries (which are price takers in the international market) limits the export expansion effects of a devaluation by reducing exporters' profits. For the analysis of the effects of domestic price increase on export performance in the Indonesian case, seeKincaid, G. Russell, “A Test of the Efficacy of Exchange Rate Adjustments in Indonesia,” IMF Staff Papers, 31, I (03 1984), 62–92.CrossRefGoogle Scholar

18 The export merchants, supported by most of the maraji⊂-e taqlid (sources of imitation) argued that there is no Islamic justification for the state to require exporters to surrender their exchange earnings to the Central Bank. The Central Bank gradually retreated by allowing exporters to use their export earnings for importing products (Official Notification no. T/7000 Bank Markazi, dated February 1, 1983–Bahman 12, 1361), and later, to sell them to importers (see note 19 below). Another element in this exchange-control liberalization measure was allowing the private owners of foreign exchange abroad to sell their foreign currency to importers or others at any price that they came to agree upon (Official Notification no. NA/11600/14 Bank Markazi, dated July 4, 1982—Tir 16, 1361).

19 Articles 22 and 23 of the 1986 Export-Import Law, Kayhan (March 19, 1986—Esfand 28, 1364). This was the formalization of what has been taking place as an extension of the Central Bank's exchange-control liberalization for exporters.

20 The premium for “export foreign exchange” (arz-e saderati) fluctuated between 300 and 500 rials per dollar in 1985–1986. The official rate for the U.S. dollar has been about 80 rials.

21 Kayhan (air edition, May 7, 1986—Ordibehesht 17, 1365).

22 According to the latest estimate, Iran's export earnings reached 750 million dollars in 1986. Ettela⊂at (March 30, 1987—Farvardin 10, 1366). Iran has been negotiating to resume natural gas exports to Soviet Union, starting from “a small amount building up by 1990 to the former level of 350 billion cubic feet a year,” New York Times, August 26, 1986. These revenues were 248.5 million dollars in 1978, Bank Markazi, Economic Report and Balance Sheet (Gozaresh-e eqtesadi va taraznameh) for 1978 (1357), p. 134. If potential earnings from exports of natural gas are added, the total non-oil export earnings will not exceed $1 billion.

23 Capital inflows are not discussed because there has been practically no capital inflow to Iran in the postrevolutionary period, and the outflow of private capital takes place through the nonofficial market.

24 See Bank Markazi, Economic Report, various issues.

25 An editorial in Kayhan (“Exports of Services,” June 3, 1986—Khurdad 13, 1365) suggests that the “3 million unemployed” Iranian workers form a potential source of exchange earnings. According to this editorial Libya should be encouraged to “expel workers from reactionary countries and to attract revolutionary Muslim workers from Iran.” This will cause the expelled workers “to become instruments of pressure and opposition against the reactionary regimes.” Moreover, “with the unofficial decline in the value of the rial, Iranian workers will be ready to work at wages much lower than the wages that the South Korean, Pakistani, or Egyptian workers receive.”

26 Bank Markazi, Economic Report, for 1982 (1361) and 1979 (1358).

27 Lautenschlager, “The Effects of an Overvalued Exchange Rate …,” 38.

28 Ibid., 43. It must be pointed out that the comparison between the “effects of a high dollar in the U.S. economy” and the situation in Iran is theoretically improper because (1) the U.S. dollar is a floating currency, therefore, its value is the market equilibrium price; (2) imports to the United States continued to increase in absence of general quantitative restrictions. In fact, the most staunch protectionists in the United States would be overjoyed by the implementation of a much milder import restriction measure than that enforced in the Iranian case.

29 Bank Markazi, Economic Report, for 1979 (1358), p. 139.

30 Based on author's estimates in a forthcoming study on income inequality in postrevolutionary Iran.

31 Bank Markazi, “Price Index of Consumer Goods and Services in the Urban Regions of Iran” (Shakhes-e beha-ye kalaha va khademat-e masrafi dar manateq-e shahri-ye Iran), mimeo February/March 1986-Bahman 1365, Table 2.

32 Lautenschlager, “The Effects of an Overvalued Exchange Rate …,” 45.

33 In 1984, government revenues from selling foreign exchange at a rate above the “established” price amounted to 206 billion rials (5 percent of government revenues). The most important sources of these revenues were from sales of foreign exchange for imports of “special goods.” Revenues from oil constitute 11.6 percent of government's income in 1987 (53.6 percent in 1979). The Parliament (Majles-e Shoura-ye Eslami). The Budget Law of 1985 (Qanun-e budje-ye sal-e 1354 koll-e keshvar) (1985-1364), and Kayhan (air edition, March 18, 1987-Esfand 27. 1365). Any devaluation of the rial will increase the oil revenue component of the government's budget. Because a large proportion of exchange earnings are, however, used by the government (62 percent in 1983) the full budgetary impact is less than it initially appears.

34 SeeParvin, Manouchehr and Zamani, Amir N., “Political Economy of Growth and Destruction; A Statistical Interpretation of the Iranian Case,” Iranian Studies, 12, 1–2 (Spring 1979), 64–65.CrossRefGoogle Scholar

35 Daftari, Farhad, Multinational Enterprises and Employment in Iran (Geneva: International Labour Office, 1976).Google Scholar

36 Behdad, Sohrab, “The Pattern of Structural Transformation in the Iranian Economy (1953–79): A Historical Review,” mimeo, 1985, 20.Google Scholar

37 Bank Markazi, Economic Report, for 1982 (1361) and 1983 (1362).

38 Instead of looking at this general trend, Lautenschlager (p. 45) attributes the industrial output growth in 1982 to a decline in the value of imports in that year. Much of the fall in imports of primary and intermediate goods in 1982 (16 percent) was compensated for by the inventory buildup of these imports in the previous year (32.0 percent increase in imports of these goods) and the increase in imports of primary and intermediate products in the following year (57 percent). If Lautenschlager's reasoning were correct, the industrial output in 1983 must have declined sharply as the imports of primary and intermediate products and consumer goods increased 42.7 percent. It did not. In fact, in that year the non-oil GDP and all indicators of industrial output show a significant growth (Table 2). According to my analysis, however, the 56.5 percent increase in imports of primary and intermediate products was a necessary condition for the impressive growth rates.

39 Bank Markazi, Economic Report, for 1983 (1362), pp. 156–57.

40 On the nominal and effective tariff rates of Iran, seeFahim-Nader, Mahnaz, “Import-Substitution Industrialization in Iran,” unpublished Ph.D. thesis, Department of Economics, University of Maryland, 1978, p. 68.Google Scholar

41 Statistical Center of Iran (Markaz-e Amar-e Iran), National Statistical Yearbook 1983 (Salnamehye amari-ye keshvar 1362) (1984/1363), pp. 434–35.

42 Estimated from the value added by enterprises with ten or more workers in 1982 (ibid., p. 401) and total manufacturing value added in Iran in that year (Bank Markazi, Economic Report, for 1982 [1361], p. 134).

43 For a formal analysis of foreign exchange black market, seeNowak, Michael, “Quantitative Controls and Unofficial Markets in Foreign Exchange: A Theoretical Framework,” IMF Staff Papers, 31, 2 (06 1984), 404–31.CrossRefGoogle Scholar

44 Total official sales of foreign exchange for travel, medical, and student expenses in 1983 was $460 million (Economic Report, for 1983 [1362], p. 206; compare with $1897 million in 1977, Economic Report, for 1977 [1356], pp. 232–33). According to the prime minister's 1987 budget report to the Parliament, official payments of foreign currency for travel in 1985 were $337 million. This figure was reduced to $90 million in 1986. Student expenses in 1984, 1985, and 1986 have been reported to be, respectively, $155 million, $132 million, and $110 million. See Ettela'at (December 2, 1986–Day 7, 1365).

45 See note 18.

46 SeeBehdad, Sohrab, “Political Economy of Islamic Planning in Iran, 1979–1986,” in Amirahmadi, H. and Parvin, M., eds., Post-Revolutionary Iran (Boulder, Colo.: Westview Press, forthcoming).Google Scholar

47 The biographical sketches given at the time of presenting new cabinet members to the Parliament often exaggerate the educational backgrounds and technocratic abilities of the candidates.

48 Some did enter this privileged position. Haji Barkhordar, Yasini, and Khayyamis, among others, were merchants of bazaar origin who became industrialists. Obviously, not all merchants could enter this highly monopolistic realm.

49 This assertion is based on my own observations. No empirical study has yet been conducted on this issue.

50 Ayatollah Khomeini's speech on the occasion of ⊂ld-e Fitr, Kayhan, June 10, 1986-Khordad 20, 1365.

51 Ayatollah Montazeri's speech in a meeting with newspaper editors, Kayhan, June 25, 1986– Tir 4. 1365.

52 The few political allies of the IRI are in no position to extend financial assistance to Iran. Syria itself is a borrower with debts to Iran, and Libya's foreign exchange reserves have been depleted in the oil glut of the past few years.