The disparity between the economic promises of the shah's regime and the results as perceived by the majority of Iran's citizens contributed to a revolutionary climate in the late 1970s. When the revolutionary regime came to power in 1979 (on the heels of the economic downturn of the late 1970s), it claimed that modernization and Westernization had nothing to offer Iran, as the recession had made evident. Islam, not economic planning, was cited as the basis for correcting the perceived ills of Iranian society stemming from the alleged excesses of the shah. The regime came to power criticizing Mohammad Reza Shah's failed agricultural policies and promising self-sufficiency and economic independence. The government adopted an emphasis on agriculture as the foundation of its program. To consolidate power quickly among the rural poor, the Khomeini regime capitalized on popular resentment of the shah for having largely ignored the agricultural sector.

All six of the development plans designed under the shah aimed at economic development the Sixth Development Plan, intended for 1978-83, was never implemented because the Revolution occurred in early 1979. The First Development Plan of the Islamic Republic (1983-88) proclaimed that its goals were to establish Iran's economic independence through self-sufficiency in foodstuffs and to reduce the country's dependence on oil exports.

The first "republican" plan focused on five points: expanding education, representing the interests of the mostazafin (the disinherited), achieving economic independence, diversifying the economy to lessen the dependence on oil and gas exports, and developing agriculture. The development plan did not include a factor for defense expenditures. Criticism of this plan resulted in its revision in 1984, although the changes were not approved by the Majlis until January 1986. The revision included an increase in the investment in agriculture (from 15.5 to 16.7 percent of the national budget) and a smaller investment in non-oil industry (the share fell to 52 percent). Projected oil revenues in this version of the plan were based on the lower oil price prevailing in 1985.

The budget for the first republican plan was US$166 billion, but the allocation of funds was delayed because of political and economic pressures. The political pressures came from newly empowered groups and individuals interested in using the social disruption caused by the Revolution to create their own financial empires, free of state control. The war with Iraq also affected funding for the first republican plan. Oil revenue shortfalls caused the first republican plan to be revised again in early 1987. The shortfalls, in combination with the expenses associated with the Iran-Iraq War, resulted in nearly half the budget being allocated to military goods. Imports of consumer products were cut in half, and projects under the development plan were given low priority (see fig. 6). Austerity measures and increased unemployment resulted.

Gauging the relationship between government economic policy 1000 y and actual operation of the economy subsequent to the Revolution of 1979 is difficult because official economic policy has been obscured by religious and ideological themes. Iran's financial system began adhering to Islamic principles after the Revolution, a process that accelerated in the 1980s. Although the Planning and Budget Organization prepared budgets, in coordination with several other ministries, the Majlis, the majority of whose members were Muslim religious leaders, was responsible for ratification (see The Majlis , ch. 4).

The budget presented a financial outline within which outlays were planned for military purposes, education, and other government activities. There was an increasing discrepancy between budget estimates for the war and actual costs. Whereas the government claimed in 1982 that 13 percent of the total budget was spent on defense, independent analysts claimed that the figure rose from 11.5 percent of the budget in 1979 to 46.9 percent in 1982. However unreliable the Iranian claims about defense spending, one thing was increasingly clear: the Iranian government dedicated virtually all foreign exchange resources, including both advance drawings on revenues and uncollectible receivables (which were counted as assets) to prosecution of the war.

Inflation was a serious issue in the mid-1980s. The increase in prices, which was beyond the control of the monetary authorities and the Central Bank--founded originally in 1960 as Bank Markazi Iran and renamed Central Bank (Bank Markazi) of the Islamic Republic of Iran in December 1983--began in the 1970s with the rapid rise in oil revenues and equally rapid increases in government expenditures. The latter had a multiplier effect on the money supply and added to the demand for goods and services, thereby inducing price rises. The monetary authorities attempted to minimize the multiplier effect by increasing the cost of borrowing and tightening credit. Imports increased as a result of lower duties, relaxed quotas, and an increase in government purchases of foreign goods. Bottlenecks at the ports and elsewhere in the transportation system limited the capacity of imports to satisfy demand, however.

Efforts to reduce inflation date to 1973, when a serious price control program was initiated. The government took additional measures to curb inflation in May 1980 by linking the rial to the Special Drawing Rights (SDRs--see Glossary) of the International Monetary Fund (IMF) instead of the United States dollar and by encouraging investment in the private sector and growth in non-oil industries. In addition, subsidies on basic goods were increased to keep their prices down. Nevertheless, a 30- percent inflation rate persisted, a black market rate on the United States dollar flourished, and foreign exchange controls continued.

Inflation was continually understated by the government. The government asserted that the inflation rate had fallen from 32.5 percent in FY 1980 to 17 percent in FY 1983 and to 5.5 percent in FY 1985 independent analysts, however, claimed that a more accurate inflation rate for 1985 was 50 percent. As essential goods grew scarcer in the wartime economy, import controls fed inflation. Prices of basic foodstuffs and consumer goods increased faster than the Central Bank admitted. The increasing cost of rental property in urban areas and continued subsidies for consumers on basic foods reflected a serious inflationary problem in the mid-1980s.

To the surprise of many, the Majlis increased the FY 1986 budget in March 1986, even though oil revenues were projected downward. The increase went mainly to finance military spending and the steel and nuclear industries. The rising costs of the war, coupled with falling oil prices in 1986, led to the use of non-oil exports to generate revenue because oil income was no longer a guaranteed source of foreign currency (see ">Non-Oil Exports , this ch.). To finance short-term debts, Iran drained its small reserve of foreign currency by allowing advance drawing on revenues.

The FY 1987 budget also reflected the priority of the war effort. The government again promised to curb inflation, to continue to subsidize basic foodstuffs, and to make available to the import sector a revolving fund of US$7 billion, presumably for consumer use.

Data as of December 1987