Report No. 22953-IRN
Iran
Trade and Foreign Exchange Policies in Iran
Reform Agenda, Economic Implications and Impact on the Poor
November 1, 2001
Social and Economic Development Group
Middle East and North Africa Region
Document of the World Bank



Currency Equivalents
Currency Unit = Iranian Rial (Rls)
Official Exchange Rate: US$1 = Rls 1,750
Tehran Stock Exchange Rate (TSE): US$1 = Rls 7,970
Iranian Fiscal Years end March 20
Princinal Abbreviations and Acronyms Used
CAS                   Country Assistance Strategy
GDP                   Gross Domestic Product
DFI                   Foreign Direct Investment
EDBI                  Export Development Bank of Iran
EPZ                   Export Processing Zones
FTZ                   Free Trade Zone
FYDP                  Five-Year Development Plan
IBRD                  International Bank for Reconstruction and Development
10                    input-output
LIBOR                 London Interbank Offered Rate
ISIRI                 Institute of Standards and Industrial Research of Iran
MENA                  Middle East and Norht Africa
MPO                   Management and Plan Organization
NTB                   Non-Tariffs Barriers
RIs                   Iranian Rials
TSE                   Tehran Stock Exchange
WBI                   World Bank Institute
WTO                   World Trade Organization
This report was based on a mission to Iran in October and November 2000 led by Habib Fetini (Middle East
and North Africa, Social and Economic Development Group). The report was written under the direction of
David Tarr (Development Economics Research Group). The team included George Fane (consultant); Dorsati
Madani (Poverty Reduction and Economic Management Network, Economic Policy Division); Jesper Jensen
(consultant); Krisztina Mazo and Alexandra Sperling (Middle East and North Africa, Social and Economic
Development Group) were responsible for the processing of the report. The team wishes to thank numerous
government agencies and organizations in Iran who provided advice and support including: the Ministry of
Finance, Ministry of Commerce, Central Bank, Customs Department, Export Development Bank of Iran,
Export Guarantee Fund of Iran, Ministry of Industry and Mining. The mission was hosted by the Institute for
Trade Studies and Research, to its Management and Staff goes our sincere gratitude for their skillful help and
their hospitality. The team gratefully acknowledges the support provided by the government of the United
Kingdom, Department for International Development, through a trust fund established with the Development
Economics Research Group.
Vice President:           Jean-Louis Sarbib
Director:                 Mustapha K. Nabli
Task Team Leader:         David Tarr



CONTENTS
List of Tables, Figures  and  Boxes ......................................................................... iii
Executive Summary .........................................................................                                                                                                   iv
1. The Need for Reform  and the Government's Reform  Agenda .............................................................1
1.1 The Case for Lowering Barriers to Trade: Iran's High Barriers Reduce Growth ......................................1
1.2  Earlier Efforts  at Reform   in  Iran  .........................................................................3
1.3  The  Government's Current Reform   Agenda  .............................                                             .............................................4
2. Iran's Import Regime ..............5................................................5
2.1  Import Licensing  Regulations .........................................................................5
2.2  Quantifying  Tariff  and  Nontariff Barriers to  Imports ..........................................................................                                          9
The Magnitude  of Iran's Explicit Taxes on  Imports ..........................................................................                                               9
The Magnitude  of Iran's Nontariff  Barriers  to  Imports .........................................................................    11
Trade  Taxes and  Subsidies Implicit in  the Dual Exchange  Rate System  ..............                                                    .................................. 13
2.3  Other Indirect and  Direct Taxes .........................................................................  14
Sales Taxes .........................................................................                                                                                      14
Direct Taxes .........................................................................                                                                                     15
2.4  Policy  Recommendations .........................................................................  16
3. Foreign Exchange Markets in Iran ............................................................. 18
3.1  The Current System   of Multiple Exchange  Rates ..........................................................                                              ............... 18
3.2 The Tehran Stock Exchange Market for Foreign Exchange and the "Negotiated" Rate ......................... 19
The  Tehran  Stock Exchange Market and  the  "Export"  Rate .................................................................... 19
The Negotiated  Rate ..................................................................... . .. 20
3.3  The  Government's  Foreign  Exchange Budget ....................................                                               ..................................... 20
3.4  Policy  Recommendations ......................................................................... 22
4. Iran's Export Regime .............................................................                                                                                                         23
4.1  Checks and  Controls on  Exports .........................................................................  23
Export Licensing and Bans .........................................................................                                                                        23
Surrender of Foreign  Exchange ......................................................................... 25
Compulsory Export Quality Standards .........................................................................                                                              26
4.2  Duty-Free  Access to  Inputs by  Exporters .........................................................................                                                       28
Drawbacks and  Exemptions ......................................................................... 29
Free-Trade  Zones ......................................................................... 32
Special Economic Zones .........................................................................                                                                           35
4.3  Export Finance, Insurance, and  Guarantees .............................                                              ............................................ 37
The Export Development Bank  of Iran  ......................................................................... 37
The Export Guarantee Fund of Iran .........................................................................                                                                39
4.4  Policy  Recommendations .............................................. .                                                               ......................... 40
Eliminating Exchange Controls .........................................................................                                                                    40
Setting  Export Quality  Standards and  Technical Regulations on  Imports ...................                                                     ............................ 40
Improving Duty Drawbacks and Exemptions .........................................................................                                                          40
Reducing the Distortions Caused by Export Credits, Guarantees, and Insurance ................................... 41
Developing a New Strategy for the Free-Trade and Special Economic Zones ......................................... 42
Annex  4A. Iran's Free-Trade  Zones: Kish, Qeshm, and  Chahbahar ....................................                                                  ........................ 43
5. Quantifying the Gains from  Trade and Exchange Rate Reform  in Iran ........................................... 47
5.1. Data  on Tariffs, Nontariff Barriers, and  Subsidies .........................................................................                                              47
Data on Tariffs .........................................................................                                                                                  47
Tariff Equivalence  of Nontariff Barriers .........................................................................  49
Data  on  Centrally  Allocated  Foreign  Exchange .........................................................................                                                50
5.2. The Model .........................................................................                                                                                        51



5.3. Results and Policy Implications ................................................ 56
Tariffying Nontariff  Barriers ..................................................                                                                   57
Unifying the Exchange Rate .................................................. 60
Lowering  Tariffs and Introducing  Competition ..................................................                                                   62
Setting a  Uniform  Tariff of 15 Percent ....................... ...........................                                                        63
Adopting Integrated Pricing Reforms ..................................................                                                              63
Reforming Petroleum Prices ..................................................                                                                       66
Combining  Trade and Exchange Rate Reform  ........................................ .                                                   ........ 66
Combining  Energy and Exchange Rate Reform  ........................................ .                                                   ........ 66
Combining  Trade, Energy, and Exchange Rate Reform ..................................................                                               66
Annex SA. Data and Model Construction ................................................ 68
Annex  Sb: Compensating  The Poor For The Removal Of ............                                         .............................. . .... 70
Price Subsidies On The Consumption  Of Essential Goods ............                                        .............................. . .... 70
6. Sequencing Reforms ...........................................                                                                                                    72
Appendix: Trade Data for Iran ...........................................                                                                                            75
References ........................................... 79
ii



LIST OF TABLES, FIGURES AND BOXES
Tables
Table  1.   Estimated  Gains from  Reform  (percent of consumption) . ......................................................................... vii
Table 1.1 Average Unweighted Tariff Rates for Countries with Highest Tariffs and Selected Other Countries,
1996-98 ...................................................................................2
Table 2.   Recommended  Sequencing  of Reforms ..............................                                     .................................................... xi
Table 2.1. The Positive List ...................................................................................5
Table 2.2. Average Collected Import Tax Rates, 1999-2000 ..................................................................................   10
Table 2.3. Estimated Unweighted Average Rates of the Commercial Benefit Tax Needed to Compensate Producers
for Tariffication of Items Subject to Ministry of Industry Licensing Requirements ................................. 12
Table 2.4. Estimated Minimum and Maximum Rates of the Commercial Benefit Tax Needed to Compensate
Producers for Tariffication  of Items Subject to Ministry of Industry Licensing Requirements ........                                              ....... 13
Table 3.1 Oil Revenues at Various Exchange Rates, 1995/96-1999/2000 ................................................................. 21
Table 4.1  Banned Exports and Exports Requiring Permits Issued by the Ministry of Commerce in 1998/99 ........ 24
Table 4.2    Exports Requiring Permits in  1999/2000 ..................................................................................                                 25
Table 4.3    Policies in Iran's Free-Trade and Special Economic Zones ...................................                                  ................................. 36
Table 4.4.   EDBI Loans by Industrial Sector, 1992/93 and  1998/99 .................................................38...............I...... 38
Table 4A. 1. Performance of the Kish Free-Trade Zone, 1998-99 ............................................................................. 43
Table 4A.2. Performance of the Qeshm Special Economic Zone, 1993 and 1998                                                                    .             .             45
Table 5.1. Import Protection of Sectors Included in the Model .................................................................................. 48
Table 5.2  Expenditure Shares by Household Type ..................................................................................                                      56
Table 5.3. Impact of Trade and Exchange Rate Reforms: Welfare and Macroeconomic Effects ............................... 58
Table 5.4. Impact of Trade and Exchange Rate Reforms on Domestic Output, Prices, and Exports by Sector... ...... 59
Table 5.5. Impact of Trade, Exchange Rate, and Energy Pricing Reforms  ...........................                                        .................................... 64
Table 5.6. Impact of Trade, Exchange Rate, and Energy Pricing Reforms on Domestic Output, Prices, and Exports
by Sector ..................................................................................                                                            65
Table SAI. Estimated Domestic and International Prices for Petroleum  Products, 1999/2000 .................................. 69
Table Al. Iranian Exports by Major Partner, 1989-99 .75
Table A2. Iranian Imports by Major Partner, 1989-99 .76
Table A3. Iranian Export Structure and Major Products, 1989-99 .77
Table A4. Iranian Import Structure and Major Products, 1989-99 .78
Figures
Figure 5.1  Production and Allocation  of Output in Iran .........................................................                                                       52
Figure 5.2 Crude Oil Production  and Allocation in Iran  ......................................................... 53
Figure 5.3 Energy Sectors Production  and Allocation in Iran ......................................................... 54
Figure 5.4 Consumer Demand in Iran .......................................................... 55
Box
Box 4.1. Increasing Export and Employment through Free Trade Zones FTZs ........................................................ 32
iii



EXECUTIVE SUMMARY
This report describes Iran's trade and exchange rate policies, proposes and expl;ins a reform
program, and develops a computable general equilibrium of fran's economy to estimate the gains -to the
economy as a whole and to the poor-likely to accrue from various reform options. Thie report also
recommends a program for sequencing the reforms.
Government Domination of the Economy and the Retreat from Economic Reform
For the past two decades, Iran's economy has been dominated by the government. During this
period overall economic performance has been disappointing. Per capita GDP was 16 percent lower in
1998 than in 1979, and inflation averaged 20 percent a year over the two-decade period (II4F 2000). In
the decade between 1988 and 1998, per capita GDP growth was at least positive, but averaged just 3
percent a year.
The government began to liberalize its economic policies during the First Five-Year Development
Plan (1990191-1994/95), under which GDP growth rose to an average annual rate of 6 percent. Faced
with the slump in oil prices in the mid-1990s, the U.S. embargo on trade and investment, the bunching of
scheduled debt repayments, and the inability to obtain new foreign financing, however, the government
interrupted the reforms. In response to the fall in foreign exchange receipts, it tightened import licensing
controls and allowed the rial to become increasingly overvalued at the official exchange rale. Queues for
foreign exchange developed, the premium of the open market exchange rate over the official rate
increased dramatically, the annual inflation rate rose to 19 percent in the period 1989--94 and to 40
percent in 1994-95, and annual GDP growth slowed to 4 percent in the period 1994-98.
Progress on Reform and the Government's Current Reform Agenda
The election of President Khatami in 1997 strengthened the reform movement and allowed Iran to
improve its relations with the rest of the world. The upturn in world oil prices that begaun in 2000 has
allowed Iran to reduce its foreign debts and reinitiate a reform program. These developmenms have helped
the government make very substantial progress toward reform in the past three years. In 2000 arrears on
official debts were cleared, and foreign exchange reserves rose substantially. The macroeconomic
situation has been stabilized, and both the fiscal balance and the balance on the current a.ccount of the
balance payments are positive. In addition, significant trade and foreign exchange refor:ns have been
implemented:
1. Substantial progress has been made toward eventually unifying Iran's multiple exchange rates. The
multiple exchange rate system now operates mainly as a way of subsidizing imports of "essential"
goods, prices of which are controlled.
2. Many nontariff barriers on imports have been replaced by their tariff equivalents. Restrictive import
licensing requirements required by the Ministry of Industry were lifted on 781 produc:s during 2000.
Another 114 items were exempted from the restrictive licensing requirements of other line ministries,
bringing to 895 the total number of items from which nontariff barriers have been removed. At the
same time, import taxes on many of these items were increased in an attempt to compensate domestic
producers for loss of protection. As of October 2000 no restrictive licensing conditions applied to
2,795 of the 5,113 six-digit Harmonized System of product codes used in Iran.
iv



3. Import licensing requirements have also been eased by expanding the "positive list" of items that can
be imported relatively easily by firms that earn their foreign exchange by exporting or that buy
foreign exchange on the Tehran Stock Exchange. At the time of the foreign exchange crisis of
1998/99, the positive list included just 31 broad categories of importable items. By early 2000 it
contained 41 items, and the number was raised to 77 in November 2000.
4. Licensing restrictions on exports have been eased.
5. Customs procedures for both imports and exports have been simplified and delays reduced.
6. Many redundant compulsory export standards have been eliminated.
7. Exporters have been given improved access to imported inputs at world prices. The government has
used duty drawback and temporary exemption schemes, free-trade and special economic zones, and
export finance agencies to encourage exporters, albeit with limited success.
8. Part of the anti-trade bias of the indirect tax system has been removed by raising the sales tax rates on
some domestic products to approximate parity with those on the corresponding imported products.
When a value-added tax is introduced, the remaining anti-trade bias of the indirect tax system will be
completely removed.
The govemment has already made significant progress in implementing trade and foreign exchange
reforms, but it intends to do much more. The ambitious plan of reform outlined in the Third Five-Year
Development Plan (2000/01-2004/05) calls for unifying the multiple exchange rate system and abolishing
exchange controls on the current account, removing nontariff barriers to trade and gradually reducing
tariffs, and encouraging the growth of nontraditional exports. International experience suggests that these
reforms will benefit most Iranians and help the poor if appropriately targeted. They will also help Iran
gain membership in the World Trade Organization (WTO).
Estimating the Benefits of Reform
Changes in trade and foreign exchange policy affect both the economy as a whole and the poor as a
group. To estimate the effects on both groups, we develop a multisector computable general equilibrium
model of the Iranian economy.
The estimated welfare gains from adopting trade and foreign exchange reforms in Iran are
extremely large (table 1). Constant returns to scale numerical modeling estimates have often found that
trade liberalization increases the welfare of a country by only about 0.5-1.0 percent of GDP. In contrast,
in Iran we find welfare gains of as much as 50 percent of household consumption or about 19 percent of
total GDP.' These very large estimated gains reflect the unusually high level of distortions at the starting
point of the reform. Our results also indicate that the proposed reforms are pro-poor.
In addition, all the reforms discussed in this report generate revenue for the government. As
summnarized in table 1, we estimate that the government's budget surplus will increase by 1.4 percent of
GDP from tariffication of non-tariff barriers alone, by 5.3% of GDP from removal of foreign exchange
subsidies alone, and by 13.3 percent of GDP from removal of energy subsidies alone.
1 Household consumption is about 37 percent of GDP. Unless otherwise noted, we report estimates as a percent of
household consumption, rather than a percent of GDP. Welfare results as a percent of GDP are therefore 37 percent
of the values reported as a percent of household consumption.
v



Tariffying nontariff barriers increases aggregate welfare and helps the poor
Based primarily on Ministry of Industry estimates, we estimate that the tariff equivalence of
nontariff barriers in Iran is about 17 percent of the value of imports. Assuming that thc rents from
nontariff barriers are dissipated through rent-seeking, we estimate that tariffication of nontariff barriers
will lead to an increase in aggregate welfare of 3.4 percent of the value of household consumption in the
benchmark equilibrium. This gain in welfare is generated from the reallocation of the resources wasted on
obtaining import licenses.
The impact on the poor is strongly affected by what the government does with the additional
revenue it receives. We assume that the government distributes the additional revenue it receives back to
households in equal amounts. Even though the poor are not targeted by this distribution mechanism, the
poor will gain substantially from this policy reform. Because they have such small incomes, even small
transfers can represent a significant portion of the income of the poorest households. In fact the income
of the poorest rural household type is estimated to rise 23 percent, while that of the poorest urban
household type is estimated to increase 11 percent.
Setting a uniform tariff rate of 15 percent helps the poor more than setting a maximum
tariff rate of 25 percent
Both setting a maximum tariff rate of 25 percent and establishing a uniform tariff rate c of 15 percent
result in significant increases in welfare, but the poor gain much more from uniform tariffs. The uniform
policy helps the poor more because it generates greater revenue for the government. Lowering tariffs to
15 percent or less is also likely to be a requirement for admission to the WTO. The favorable experience
of other developing countries with uniform, or near uniform, tariffs is summarized in section '2.4.
Eliminating foreign exchange subsidies disproportionately helps the poor, especially if the
gains are distributed as lump-sum payments
Subsidies to foreign exchange represent more than 6 percent of Iran's GDP. We estimate that
eliminating these subsidies and distributing the gain as lump-sum payments would increase aggregate
welfare by 6.9 percent of consumption. Moreover, although some of the subsidies for purchases of
imports are intended to assist the poor, it is the poor who would disproportionately gain from i his policy.
If instead of distributing the gain as lump-sum payments the govemment were to provide
consumption subsidies for essential commodities, the welfare gain to the poor would be slightly lower
(6.7 percent). More interestingly, the welfare gains to the poor would be much lower (46 percent of the
value of consumption instead of the 72 percent gained under a lump-sum payment). These results show
that well-intentioned policies for the poor can have perverse effects. Even though the direct income
payments we consider are not targeted at the poor, they do a better job of improving the welfare of the
poor than commodity subsidies, which are perceived to target the poor.
As a practical matter, efficient safety mechanisms for the poor are difficult to implement. The
World Bank and the government of Iran have agreed to a followup study on the efficient distribution of
the fiscal surplus from subsidy reduction and tariffication of non-tariff barriers. The mechanism we
assume, however, does allow us to assess and quantify the distributional consequences, including on the
poor, of the existing pattern of subsidies and licenses.
vi



Combining trade and exchange rate reform results in a welfare gain equal to more than 12
percent of consumption
Tariffying nontariff barriers, unifying the exchange rate, and setting a uniform tariff rate of 15
percent yields a combined welfare gain of 12.3 percent of consumption. If tariffs are completely
eliminated, the welfare gain rises to 12.7 percent of consumption. The poor gain enormously from these
combined policies but, interestingly, they gain more from the 15 percent uniform tariff than the zero
tariff, which leaves less fiscal surplus to distribute.
Eliminating petroleum subsidies doubles or triples the incomes of the poorest household
types
Petroleum prices in Iran are only about 10 percent of world prices, and subsidies on petroleum
products cost the government an estimated 18 percent of GDP. If the fiscal surplus from eliminating the
petroleum product subsidies is transferred back to households in equal amounts, the income of the poorest
urban household type doubles, while that of poorest rural household type increases by more than 200
percent. Adopting both energy and exchange rate reform yields even larger gains. Under this strategy, the
income of the poorest urban household type rises 116 percent, while that of poorest rural household type
rises 239 percent. All households gain, but the percentage gains decrease with the income level of the
household.
Combining trade, energy, and exchange rate reform generates the largest welfare gains
The largest welfare gains accrue from adopting tariffication, tariff reduction, exchange rate
unification, and energy pricing reform. Under this scenario, the gain to the Iranian economy is estimated
at about 50 percent of the value of consumption following the combined reforms.
Table 1. Estimated Gains from Reform (percent of consumption)
Marginal   Total rise in real   Total increase in real income due  Change in
rise in real   income due to  to all steps up to and including this  Government
income due   all steps up to             onea                Fiscal Surplus from
Policy step        to this     and including    Poorest rural   Poorest urban    this Policy Step (%
policy step    this one     household type   household type      of GDP)
Tariffication of nontariff  3.4            3.4           23.3             11.1               1.4
barriers
Reduction of tariffs to 25  0.7            4.1            15.6             8.3               0.7
percent
Reduction of maximum        1.4            5.5           20.2              10.9              1.0
tariff from 25 percent to
15 percent [
Removal of exchange rate                                                                     5.3
subsidies to "essential"   6.9             14.0          95.6             44.3
imports
Removal of fuel subsidies  32.9           50.1          292.2            143.1              13.3
Source: Authors' estimates.
vii



Suggestions and Recommendations
Our analysis of Iranian trade and foreign exchange policy suggests that the govermment could
increase the welfare of the nation as a whole while improving the relative welfare of the poor by adopting
the following reforms:
Replacing nontariff barriers by equivalent tariffs and reducing tariffs
* We strongly support the government's policy of replacing nontariff barriers by their tariff
equivalents. Once all restrictive import licensing conditions have been removed for almost all
goods other than those banned for noneconomic reasons, there will be no need for any list of
goods that may or may not be imported using a particular source of foreign exchange Moreover,
we recommend continued efforts by the government to remove non-tariff barriers Ln technical
regulations on goods and sanitary and phytosanitary standards on agricultural imports. The
economy will benefit over the long-term with continued movement toward regulatory regimes
which are centered on streamnlined requirements, including acceptance of manufacturers
declarations of conformity to import requirements in all but the most sensitive areas of health,
safety, or environmental regulations.
*  The static inefficiencies caused by high trade barriers and the cross-country evidence that
openness promotes economic growth suggest that reducing import taxes, rather than merely
replacing nontariff barriers by their import tax equivalents, makes sense. We recommend that the
government aim at achieving a uniform tariff of 15 percent by 2005-with an eye. perhaps, to
eventually abolishing tariffs altogether.
*  In Annex 5A, we explain how a system to compensate the poor for the removal of price subsidies
on the consumption of essential commodities can be implemented, based on the system Iran has
in place for the distribution of ration coupons for edible oils, sugar and cheese.
Reforming taxation
* We strongly support the government's plans to replace the current system of pieceme al and anti-
trade biased sales taxes by a trade-neutral value-added tax.
* We do not support the current policy of granting income tax exemptions to income earned from
exporting.
Eliminating fuel subsidies
The substantial subsidies provided for fuel in Iran place a burden on the fiscal budget and introduce
serious distortions into the economy. For these reasons, the government may want to continue eliminating
these subsidies.
Unifying the exchange rate
We strongly support the government's plans to unify the multiple exchange rates. P'rovided that
alternative ways of compensating the poor can be devised and administered, there is also a case for
removing subsidies on the consumption of items currently imported at the official exchange rate. Making
viii



recommendations on how best to help the poor is outside the scope of a review of trade policy, however,
and should be dealt with by specialists on the design of social safety nets.
Promoting exports and reducing anti-export bias
Iran's duty drawback and exemption schemes mitigate some of the adverse effects of its import
barriers. So too do its free-trade and special economic zones. We therefore support these programs, but
suggest ways in which they might be improved.
*  Drawhacks and exemptikns. To improve the system of duty drawbacks and exemptions, the
authorities could consider setting up a specialized unit within the Customs Department to administer
both schemes. They could also reduce the period within which exporters can claim duty drawbacks to
three months after export and require all firms that receive exemptions from duties on imports to be
used as inputs into exports to place bank guarantees for the full amount of the duty, but no more.
*  Free-trade and s,pecia economic zones. To achieve its aim of transforming the free-trade and
special economic zones from import-processing zones into true free-trade zones, the government
could accompany reductions in the economywide barriers to imports from foreign countries with the
abolition of the preferential treatment of imports into the customs territory of Iran from the free-trade
zones and special economic zones. Specifically, it could abolish the $80 allowance of duty-free
imports from the free-trade zones for domestic shoppers and reform the "value-added rule," which
currently allows limited amounts of duty-free imports from the zones to the mainland. Exports from
the zones to the mainland should be subject to the same regulations and duties that apply to imports
from foreign countries. The government could also speed up the administrative procedures for
approving requests by investors to shift funds into or out of the zones.
*  Export credits, guaraantees, alnd insurance. In our view, there is no good economic case for
preserving, let alone increasing, Iran's subsidies to export finance. Such schemes are used by almost
all countries around the world to subsidize manufactured exports, however, and it appears almost
inevitable that they will be retained in Iran. To improve the functioning of these mechanisms, the
government could ensure that the amount and form of the subsidies provided by the Export Guarantee
Fund of Iran and the Export Development Bank of Iran are consistent with the limits on export
finance subsidies contained in the WTO's Agreement on Subsidies and Countervailing Measures and
in the conventions of the Berne Union. It could also allow other financial institutions to engage in
export finance on whatever terms they choose by deregulating lending to exports. The proportion of
each bank's loans that must be allocated to export lending could also be deregulated, thus allowing
banks to lend as much, or as little, as they wish.
a  Compulsory export slandardzs. We support the government's plan to adopt a system for product
standards that covers health and safety issues but steps back from attempts at full export quality
control. The standards system should rely upon market-driven and private sector-led product and
process standards. Firms should lead in design and implementation of these voluntary standards. The
competitive forces of international market competition will drive quality improvements over time.
Sequencing Reforms
Announcing a credible plan for reform would help minimize uncertainty. The Third Five-Year
Development Plan represents an excellent step in this direction, but still more information is required. The
abrupt removal of subsidies to "essential imports" and of protection of domestic manufacturers of most
ix



other imports may cause dislocations to existing firms, particularly state-owned enterprises, and perhaps
raise the already high level of unemployment.
To avert such consequences, we recommend a gradual sequencing of reforms, based on the
following guidelines (table 2):
* During the first two years of the reform program, the government could adopt export promotion
measures.
*  The government could aim to complete the process of transforming nontariff barriers into their tariff
equivalents and unify exchange rates by March 2002.
*  It could aim to phase out partial compensation for the loss of subsidies to "essential imports" (those
previously imported at the official exchange rate), apply a uniform tariff rate of 15 percent on all
items, and eliminate fuel subsidies by March 2005. Once a low uniform tariff has been achieved, the
government could replace the existing commercial benefit tax and customs duties by a tariff at the
new rate.
x



Table 2. Recommended Sequencing of Reforms
Date                                                                          Duty drawbacks, temporary
reform                                                                       admissions, and free-trade and  Additional export
completed    Exchange rate     Nontariff barriers        Trade taxes            special economic zones      facilitation measures    Fuel subsidies
September                   Eliminate nontariff   Raise commercial benefit   Announce reform of free-trade and  Align Export     Convert all
2001                        barriers on at least half  tax on all items that are  special economic zones, including   Guarantee Fund  oil revenues at Tehran
of all six-digit     tariffied (about 2,000   the elimination of the tourist  programs and          Stock Exchange rate.
harmonized system    harmonized system codes)  shopping allowance and the     incentive schemes of
code items.          to compensate for        realignment of export policy with   the Export        Retain real fuel subsidy
removing nontariff      that of the mainland through a   Development Bank      rates, but include them
barriers.                national trade policy reform, which  with WTO Agreement  explicitly in the budget.
would take effect the following  on Subsidies and
March.                         Countervailing
Measures and Berne
Create a special unit in the   agreements.
Customs Department for handling
duty drawback and temporary    Continue to move
admissions of imported items for   toward standards
re-export or for use as inputs into    which are private
exports.                       sector developed and
remove government
Reduce duty drawback claim     controls. Institute
period from three to two years;  system for technical
reduce export claim period to a  regulations and SPS
maximum of three months; reduce   measures over imports
temporary admission collateral  which removes
requirements to international norm.  discriminatory,
duplicative
requirements.
March      Unify all        Complete process of    Reduce commercial benefit Reform free-trade and special  Continue to move     Raise domestic fuel
2002       exchange rates at  tariffication of   tax across the board by   economic zones policy incentives   toward standards   prices to at least 40
managed floating   nontariff barriers,  enough to leave total   by eliminating tourist allowance    requirement based on   percent of world prices.
rate (the Tehran    subject to exceptions   effective trade taxes  and realigning exports to mainland   health and safety.
Stock Exchange    on religious and     unchanged when imports    with national trade policy reform.
or the negotiated   national heritage  are valued at the Tehran
rate).           grounds and a few     Stock Exchange rate for    Perform cost-benefit analysis of
special economic     tax purposes. Reduce     port and electricity plant for Kish
Bring existing   cases.                maximum trade tax rate to  and Qeshm.



Date                                                                              Duty drawbacks, temporary
reform                                                                           admissions, andfree-trade and     Additional export
completed    Exchange rate      Nontariff barriers          Trade taxes             special economic zones       facilitation measures      Fuel subsidies
implicit subsidies                       100 percent and average   Pursue implementing Automated
to debt repayment,                      rate to 30 percent.        System of Customs Data.
defense, essential
imports, and
infrastructure
projects on-
budget.
March      Reduce subsidies                          Reduce average tariff to 25                                                        Raise fuel prices to 60
2003       to debt repayment                         percent, with a maximum                                                            percent of world prices.
to 50 percent.                          tariff of 60 percent.
March      Reduce subsidies                          Reduce the average tariff                                                          Raise fuel prices to 80
2004       to debt repayment                        to 20 percent, with a                                                               percent of world prices.
to 25 percent.                           maximum tariff of 40
percent.
March      Eliminate                                 Unify all import duties at                                                         Remove all remaining
2005       remaining                                 15 percent. Replace                                                                fuel subsidies.
subsidies to debt                        commercial benefit tax and
repayment.                               customs duty by a single
Maintain managed                        import tariff.
floating exchange
rate.
xii



1. THE NEED FOR REFORM AND THE GOVERNMENT'S REFORM AGENDA
1)    Iran's economic performance in the last two decades has been very disappointing. This is
highlighted by the fact that per capita GDP was 16 percent lower in 1998 than in 1979. However, the
most import single reason for this poor performance was not any domestic economic policy, but the long
and costly war with Iraq. Fluctuations in oil prices and the US embargo also adversely affected the
economy. Once the war with Iraq had finished, economic performance began to improve slowly; in the
decade ending in 1998 per capita GDP growth was positive, although it averaged only 3 percent per year.
Although less important than the war with Iraq, Iran's domestic economic policies have not been
conducive to rapid economic growth. Economic performance has been and still is hampered by
administered prices; large, poorly targeted subsidies; multiple exchange rates (which remain important,
despite recent progress in reducing disparities among them); trade restrictions; and state domination of
economic activity. All banks in Iran are state owned, and most large firms are owned by the state or by
the quasi-public religious foundations (bonyads).
2)     The government tried to liberalize the economy during the First Five-Year Development Plan
(1990/91-1994/95), but its plans collapsed under the pressures of a fall in oil prices, the U.S. embargo on
trade and investment, and a tight debt repayment schedule. Instead of adopting a policy of fiscal and
monetary restraint, the government imposed nontariff barriers on imports, tightened exchange controls,
and expanded domestic credit. The result was stagnation, inflation, and a debt crisis.
1.1 The Case for Lowering Barriers to Trade: Iran's High Barriers Reduce Growth
3)    Iran's nontariff barriers are much higher and more pervasive than those of most other developing
countries. One study of 43 developing countries for which data were available for the period 1995-98
found that restrictive licensing conditions applied to just 10 percent of imports and prohibitions applied to
another 2 percent (Michalopoulos 1999).2 In contrast, even after the October 2000 replacement of many
nontariff barriers by their tariff equivalents, restrictive licensing conditions still applied to 45 percent of
six-digit harmonized system codes in Iran. Of the 43 countries in Michalopoulos's data set, only India (at
94 percent) had more pervasive import licensing.
4)     The unweighted economywide average of the tariff equivalents of Iran's existing tariff and
nontariff barriers is about 30 percent, according to the estimates we present in the next section. Between
1996 and 1998 only 7 of 150 developing and industrial countries for which estimates of average tariffs
were available for at least one of the years 1996-98 had average tariffs than exceeded 30 percent (table
1.1). Of course, a much larger number of countries may have had combined tariffs and nontariff baffiers
that exceeded 30 percent. Nevertheless, since nontariff barriers have fallen greatly in many developing
countries in the past decade and average tariffs in most countries have fallen further since 1996-98, these
data suggest that Iran has one of the highest rates of protection in the world.3
5)     Historical experience conclusively demonstrates the massive economic costs of all-encompassing
govemment intervention in economic affairs. The period since World War II provides several examples
2 Nontariff barrier coverage in Michalopoulos's study is measured as the proportion of two-digit harmonized system codes to
which nontariff barriers apply.
3Michalopoulos (1999) argues that following the 1994 Uruguay Round Agreements, the use of nonautomatic licensing, quotas,
tariff quotas, voluntary export restraints and price control measures such as variable charges, minimum prices, and voluntary
export price restraints is at its lowest level in more than 50 years.



of pairs of countries that began with similar living standards, factor endowments, institutions, and cultures
and which, as a result of historical accidents over which they had no control, chose radically different
economic strategies (Hungary and Austria, the German Democratic Republic and the Federal Republic of
Germany, the Republic of Korea and the Democratic People's Republic of Korea). These comparisons
come very close to meeting the conditions for controlled experiments in the natural sciences and remove
all reasonable doubt over the fact that countries with relatively free market economies outperlfOrm those in
which the state exercises rigid control over the economy.
Table 1.1 Average Unweighted Tariff Rates for Countries with Highest Tariffs and Selecited Other
Countries, 1996-98 (percent)
Countrv                                  1990        1996         1997         1998      Average 1996-98
Countries with average tariffs of more t an 30 percentt
Pakistan                                     64.8        41.7           --                           41.7
Morocco                                        --          --         36.7            _              36.7
Cambodia                                       --        35.0           --            --             35.0
India                                        81.8        38.7         35.0          30.0             34.6
Bahamas                                        --        32.0                                        32.0
Burkina Faso                                  _          32.2         32.2          31.1             31.8
Egypt                                                --               35.5          26.8             31.2
Selected other countries                       _           _--                        --               --
Algeria                                        --          -            --          24.2             24.2
Argentina                                   20.5         11.2         11.3          13.5             12.0
Brazil                                       32.2          --          11.8         14.6             13.2
Chile                                        15.0          --          11.0         11.0             11.0
China                                       40.3         23.6         17.6          17.5             19.6
Indonesia                                   20.6         13.2           --           9.5             11.4
Malaysia                                       --         8.7          9.1            -               8.9
Mexico                                       11.1        12.6          12.6         13.3             12.8
Nigeria                                      35.7          --         24.4          23.4             23.9
Philippines                                  27.8        14.3          13.4         10.7              12.8
Saudi Arabia                                   --        13.0           --            --             13.0
South Africa                                 11.0         8.8          8.7           5.6              7.7
Thailand                                     39.8          --           --          20.1             20.1
Tunisia                                      27.41                      --          29.9             29.9
Turkey                                         --          -           13.5         12.7             13.1
Average developing country (n =127)         32.9         18.6         17.0          17.5             13.8
Average industrial country (n = 23)           7.9         5.3          5.0           4.4              4.9
-- Not available.
Note: All tariff rates are based on unweighted averages for all goods in ad valorem, or applied. rates, or most favorcd nation rates,
whichever data were available for a longer period. The full data set (available at
http://www  .worldbank.org/wbiep/trade/TR Data.html) contains 150 countries.
Source: WTO, IDB CD ROM database and Trade Policy Review - Country Report, Various issues, 1990-2000; U.i<CTAD,
Handbook of Trade Control Measures of Developing Countries - Supplement, 1987 and Directory of Import Reginr:es, 1994;
World Bank. Trade Policy Reform in Developing Countries since 1985, WB Discussion Paper #267, 1994, The Uruguay Round:
Statistics on Tariffs Concessions Given and Received, 1996 and World Development Indicators, 1998-99; OECD, Indicators of
Tariff and Nontariff Trade Barriers, 1996; IDB, Statistics and Quantitative Analysis data, 1998.
6)      Many econometric studies of developing countries have also found a significant relationship
between openness and growth.4 Whether trade openness is essential for rapid growth or is simply
4 See in particular Edwards (1992, 1993, 1998); Dollar (1992); World Bank (1993); Harrison (1996); and Sacls and Warner
(1995).



correlated with other variables that are harder to measure, such as the scope for private enterprise, cannot
be determined from these studies. The question of which elements in a reform package are most important
is of only secondary importance to a country contemplating a broad program of reform, however.
Moreover, comrnon sense suggests that each piece of a reform package enhances all other pieces:
removing tariffs is unlikely to help growth much if all trade is controlled by the state, and opportunities
for profitable intermational trade cannot be readily exploited if investment is controlled by restrictive
licensing arrangements. Sirnilarly, no modemrn market-based economy can function efficiently without an
efficient financial sector and a secure legal framework. The most important question facing a country
contemplating a package of across-the-board reforms is thus whether adopting the entire package will
promote growth. On this question there are no reasonable grounds for skepticism: relatively free and open
market-based economies outperforrn rigidly controlled and closed ones.
7)    The evidence that extensive government interference in the economy reduces growth seems
unequivocal. In addition, as the simulation results of our computable general equilibrium model show,
reducing government interference could both help the poor and strengthen the government's budgetary
position.
1.2 Earlier Efforts at Reform in Iran
8)    In Iran's first attempt at reform-the First Five-Year Development Plan (1990/91-94/95),
initiated after the end of the war with Iraq-the govemment embarked on a large infrastructure
reconstruction program that included total investment of 30-35 percent of GDP. During this period the
government also pursued an aggressive agenda of economic policy reform, decontrolling domestic prices,
removing many trade restrictions, liberalizing the foreign exchange system, and initiating the privatization
of public enterprises. Together with the reconstruction program and an expansionary fiscal policy in
support of an ambitious social program, these policies resulted in an impressive 7 percent average annual
growth rate during the Plan period. Social indicators also improved significantly, placing Iran in the ranks
of the best performers in its income category and region.
9)    The government's over expansionary fiscal stance resulted in large macroeconomic imbalances,
however. Given Iran's limited access to longer-term extemal financing, the large current account deficit
was financed by a surge in short-term debt and excessive drawing on foreign exchange reserves. In 1994,
when the bunching of short-term debt coincided with lower than expected oil prices, an external payments
crisis emerged. Large payment arrears led to a series of policy reversals, including the reinstitution of
multiple exchange rates and the halting of the privatization process as the unemployment and social
situation worsened.
10)   During the Second Five-Year Development Plan (1995/96-1999/2000), the economy's
performance deteriorated and the average rate of growth was less than 2 percent per year-far
below the projected 5.1 percent projected in the Plan. In addition to structural impediments,
growth was constrained by the excessive compression of imports (reaching up to 50 percent in
some years) needed to make room for external debt repayments as Iran's access to external
financing remained restricted. Management of the unstable macroeconomic situation left little
leeway to address structural reform issues. Macroeconomic instability was further heightened
when the United States announced the extension and intensification of economic and financial
international sanctions (the 1996 D'Amato Act). Passage of this act dampened expectations and
triggered a run on foreign exchange and consumption goods markets that induced a sharp
depreciation (of about 50 percent) of the free exchange rate to 6,200 rials per U.S. dollar. In
April/May 1996 consumer prices rose 14 percent, bringing annual inflation to 59 percent. In yet
3



another attempt to control the foreign exchange crisis, the authorities raised to 100 percent the
export repatriation and surrender requirement and ordered all foreign exchange transactions to go
through the banking system, effectively ending the nonbank foreign exchange inarket. The
bunching of repayments of rescheduled debt was exacerbated again by the sharp drop in oil
prices in 1998/99, inducing a second external payment crisis, another bilateral rescheduling, and
a fiscal deficit of 6.7 percent of GDP, despite drastic cuts in capital expenditures and delays in
implementing public investment projects.
1.3 The Government's Current Reform Agenda
11)    Prospects for the reforms Iran so badly needs have recently improved. Since his election in 1997,
President Khatami has demonstrated his intention to reform the economy by opening it up to the rest of
the world in order to achieve a higher level of investment and growth while continuing to build on the
excellent social progress achieved to date. Plans for reform have been greatly assisted by the recovery of
oil prices, which helped stabilize the macroeconomic situation. Iran's budget registered a surplus of I
percent GDP in 1999/2000-up from a deficit of 6.7 percent the previous year-and a similar surplus is
expected in 2000/01. Balance of payments difficulties have also eased significantly since 1998/99, and the
current account registered a surplus of 5.1 percent of GDP in 1999/2000. Perhaps the most positive
development in Iran's macroeconomic situation is the fact that it has cleared its arrears on external debts
and built up its official foreign exchange reserves. As a result, the annual cost of servicing external debts
has fallen, and will continue to fall over the next few years.
12)    Since 1998 Iran has made considerable progress in reforming many areas of economic policy. It
has reduced the disparities among the various exchange rates produced by exchange control regulations,
granted exporters much easier access to inputs at world prices, removed most barriers to exports, and
replaced a large number of nontariff barriers to imports by tariffs. The government has also applied for
membership in the World Trade Organization (WTO) and, with passage of the law for the Third Five-
Year Development Plan on April 5, 2000, committed itself to the use of the market mechanism as a means
of regulating foreign trade. Article 115 of the Third Five-Year Development Plan indicates the
government's plans to eliminate nontariff barriers to foreign trade and substitute tariff barriers at their
equivalent level.
13)    The process of tariffication of nontariff barriers-an essential step for WTO membership-is
proceeding rapidly. Of the 5,313 tariff lines in the Iranian code, nontariff barriers have been removed on
almost 1,900 tariff lines, and the decision has been made to remove nontariff barriers on another 895 tariff
lines. An intergovernmental committee led by the Ministry of Commerce determines the timing of
converting tariff barriers on particular products and recommends the equivalent tariff level.
14)    The government also recognizes the need to introduce foreign competition in the Iranian
marketplace. Thus following tariffication, it is expected that tariff levels will be lowered. Thii will also be
an important step in the process of gaining admission to the WTO, which has required low to moderate
tariff barriers in acceding countries in recent years.
15)   The Third Five-Year Development Plan also commits the government to liberalizing financial
controls, removing most remaining restrictions on exports, and replacing the very inefficient system of
piecemeal overlapping sales taxes with a value-added tax. Several economics ministers hope to move
beyond the reforms outlined in the Plan to reduce fuel subsidies, privatize some state-owned enterprises,
unify the exchange rates completely, and rapidly complete the process of replacing nontariff barriers by
tariffs.
4



2. IRAN'S IMPORT REGIME
16)    The main restrictions on imports are licensing requirements and exchange controls. There are two
main taxes on imports: customs duties and the so-called commercial benefit tax, which acts just like a
customs duty, but has grown in importance because it can be changed by administrative decree. The rates
of both these taxes are low. In addition, domestic sales taxes and income tax have minor implications for
trade because they are applied at different rates to domestic activities and international trade. This section
quantifies and analyzes these policies and suggests how they might be reformed.
2.1 Import Licensing Regulations
17)    Iran's system of import licensing is governed by three overlapping classifications of goods. The
first classification is set out in the import and export regulations of the ministry of commerce, which lists
the ministries whose perrnission is needed to obtain a license to import the goods corresponding to each
of the 5,113 six-digit harmonized system codes used in Iran. The second classification is the list of goods
that can be imported with foreign exchange earned from non-oil exports (henceforth the "positive list"),
which contains 77 broad categories of goods (table 2.1). The third classification, defined in Sub-Article
29 of the Budget Law for 2000/01, is the subset of the positive list that is exempt from the requirement
that imports of goods on the positive list must be paid for with foreign exchange earned from non-oil
exports.
Table 2.1. The Positive List
1. Raw materials, parts, and spare parts for industrial mining sectors
2. Equipment and machinery for industrial and mining sectors
3. Agricultural equipment and machinery and spare parts
4. Raw materials, equipment, and spare parts for irrigation systems
5. Various kinds of chemical fertilizers
6. Hybrid seeds of vegetables, grass, micro-elements, and peat moss
7. Yarn
8. Packaging equipment and harvest machinery for tea and olives
9. Packaging paper for compounds and potassium carbonate powder
10. Stretch films
11. Equipment for packaging and packaging of agricultural products
12. Meat
13. Butter
14. Cheese starter (whey)
15. Fish meal
16. Eggs, larvae, hatchlings, and other requirements for aquatic species
17. Fishing equipment, including buoys and other navigation equipment
18. Cold storage equipment and facilities for fishing, slaughterhouses, and poultry
19. Milk and cheese packaging equipment
20. Fertilized eggs and chicks for all types of poultry and ostriches
21. Frozen semen and cattle embryos and cattle and containers for transporting nitrogen
22. Wool and yarn for carpets and materials for washing, preparing, and packaging carpets
23. Burlap and jute yarn and cloth
24. Tires (for light, semi-light, and heavy vehicles)
5



Table 2.1 (continuation)
25. Black cloth for women's veils and cliadors
26. Iron and steel
27. Medical, hospital, and laboratory equipment and machinery spare parts
28. Paper and cardboard
29. Tea
30. Poultry meat and feeding stuffs for poultry
31. Electric instruments and hand tools
32. Spare parts for all types of automobiles and roadmaking equipment
33. Industrial and marketing services
34. All types of seeds, cuttings, saplings, bulbs, and plants
35. Raw materials, spare parts, ad other requirements of the agricultural sector
36. Equipment and supplies for office machines
37. Gas-operated coolers
38. Spectacle lenses and frames (excluding sunglasses and fashion wear)
39. Spare parts and household appliances
40. Photographic film
41. Powdered milk for infants
42. Models designed for educational purposes
43. Paints, dyes, and coloring for industrial use
44. Pumps and fire extinguishers
45. Stationery and instruments for mechanical drawing
46. Glass for watches and clocks
47. Locks and padlocks
48. Grains (peas, beans, lentils etc.)
49. Office machinery
50. Medicinal soaps
51. Life vests, life belts, and safety helmets
52. Facsimile machines and teleprinters
53. Cellular phones
54. Cinematographic equipment
55  Sports equipment and parts and accessories thereof
56. Desalinators
57. Flasks
58. Tamarind
59. Grass and hay mowers
60. Gloves (surgical, industrial, protective, sports, and other)
61. Cigarettes
62. Wristwatches
63. Hand-operated sewing machines
64. Photographic cameras
65. Automobile accessories
66. Coffee and cocoa
67. Sewing and knitting needles, scissors, and shears
68. Electric filament or discharge lamps
69. Various types of lamps and light fittings
70. Nail tiles and hair clippers
6



Table 2.1 (continuation)
71. Closed circuit TV cameras
72. Chillers
73. Pumps used at filling stations
74. B uckles
75. Adhesive tape
76. Anti-explosive lights
77. Thermostats
Souirce: Ministry of Commerce.
18)   In addition to licensing, imports are also subject to quarantine controls. These controls do
not appear to be misused to provide protection from foreign competition. Iran also imposes
mandatory quality standards on imports, which are sometimes used to protect domestic
producers.
19)    Some goods on the positive list do not correspond exactly with the classification of items in the
import and export regulations, and the existence of overlapping classifications complicates import
licensing arrangements. Nevertheless, goods that are treated liberally under one classification are usually
treated liberally under the other. It is thus possible to summarize the licensing system in a way that is
approximately correct. At least when the world price of oil is high enough to provide the government with
buoyant foreign exchange receipts, licenses to import goods on the positive list can usually be obtained,
often with only minimal registration formalities. In contrast, licenses to import goods that are not on the
positive list are very difficult to obtain. Other than by smuggling, the most practical way of bringing these
goods into Iran is to import them into the free-trade zones (within which importing is possible without a
license) and then use the procedures by which limited quantities of goods can be legally imported without
licenses from these zones into the customs territory of Iran (see section 4).
20)   In Iran, as in some other developing countries, free-trade zones provide two loopholes in the
import licensing procedures. First, as explained in more detail in section 4, firms in the zones can export
some of their output to the mainland without obtaining import licenses. Second, the import regulations
allow small but often commercially viable quantities of any goods (other than the very small number
subject to outright bans) to be imported by travelers from the zones into the customs territory of Iran. The
mission did not obtain detailed information on these procedures from the officials who actually administer
them. We were informed, however, that even goods loaded onto trucks can sometimes be imported from
the zones, provided that they are accompanied by groups of workers or other passengers-each of whom
is entitled to import up to $80 of goods a year-on whose behalf they are supposedly being imported.
Passengers and workers often import goods for their own use, and they are also regularly hired to import
the kinds of appliances that are light enough to be carried by an individual, checked in as passenger
baggage at a port or airport, or transported in the back of an automobile.
21)    The overlapping import licensing lists interact in complicated ways. Imports of some products
that correspond to some of the harmonized system codes listed in the import and export regulations, such
as pork and alcoholic beverages, are permanently banned (given a classification of "0"). Others products
can be imported as long as the importer satisfies the registration formalities of the Ministry of Commerce
and pays the appropriate import taxes and charges. These products are designated by the classification
22)    Goods are classified with ratings from 0 to 9, with many goods having multiple classifications.
The most common of these designations is a 1, 2, which means that to obtain a license importers must not
7



only satisfy the registration formalities of the Ministry of Commerce (classification 1) but. obtain the
approval of the Ministry of Industry (classification 2). Other classifications indicate that approval must be
obtained from other line ministries. In terms of import licensing requirements, the most important of these
ministries are the Ministries of Industry, Mines, and Agriculture.
23)    None of the many officials with whom the mission met was able to give an example of a good not
on the positive list that has a classification of 1 (rather than a multiple classification) in the import and
export regulations; if there are examples of such goods, they are extremely rare and of negligible
importance. Although all, or almost all, goods classified as 1 are on the positive list, the converse is not
true: many goods on the positive list have restrictive classifications, such as 1,2, meanirng that the
permission of the relevant line ministry is required to obtain a license to import these items. The intention
of the officials in charge of implementing the process of converting nontariff barriers to tarift'f is that, as
imports are liberalized by changing classifications such as 1, 2 to 1, the goods will also be added to the
positive list, if they are not already on it.
24)    One of the main criteria used by the Ministry of Industry (and the other line ministries) in
deciding whether to grant an import license is whether or not the good is produced locally. This is not a
simple test to apply, since price and availability, as measured by the supplier's estimate of the time to
delivery, are also relevant. So, too, is the question of whether similar locally produced ;Loods have
specifications that match, or roughly match, those of imported goods. In practice, the line ministries are
strongly influenced by whether or not the good to be imported is on the positive list. Since the Ministry of
Industry sees its role as promoting the domestic industrial sector and most of the goods Jow on the
positive list are types of capital equipment, raw materials, or other intermediate inputs used in domestic
production, the Ministry of Industry is much more likely to grant licenses to import a good if it appears on
the positive list. Even in the case of applications for licenses to import consumption goods on the positive
list that require the approval of line ministries-goods such as tea, cigarettes, meat, powdered milk for
babies, optical glasses, and film-the fact that the good is on the positive list influences the line ministry
in favor of granting the license. In contrast, where the special approval of a line ministry is required,
success in obtaining licenses to import items on the positive list is not ensured, and the proct ss is often
slow even when it is eventually successful.
25)    Since the categories of the positive list are broad and somewhat ambiguous, there is scope for
importers to argue that an item they wish to import is indeed covered by one of the positive list categories.
A taxi operator, for example, may argue that a fully assembled imported passenger vehicle is an
intermediate input into his business. To deal with such problems, the Customs Department is in the
process of adopting 8-digit, or in some cases 10-digit, harmonized system codes.
26)    Importers who wish to import goods that are not on the positive list and who do not plan to make
use of the loophole provided by the free-trade and special economic zones may apply to the relevant line
ministries for licenses, but such applications are not likely to be granted. A special committee, whose
members represent the main economic ministries and the Central Bank of Iran, has the power to grant
import licenses in special circumstances, but this mechanism does not provide the basis for regular
imports in commercially viable quantities.
27)    Imports of goods on the positive list may be constrained by the source of the importer's foreign
exchange and the payment method by which the imports are to be financed. Until the abolition of the
export exchange rate in March 2000, what was traded on the Tehran Stock Exchange market as foreign
exchange was really a composite bundle comprising both foreign exchange and import certificates: by
surrendering export proceeds to the Central Bank, exporters obtained the import certificates needed by all
applicants for licenses to import goods on the positive list. These certificates could be obtained only by
8



exporting or by buying them, together with some foreign exchange, on the Tehran Stock Exchange
market from an exporting firm that did not wish to use all its export proceeds to pay for imports on its
own account. In addition, holders of certificates to import goods on the positive list had to finance their
imports by letter of credits issued by Iranian commercial banks. By ensuring that imports of most of the
goods that could be imported were financed in this way, the Central Bank was able to limit demands on
its foreign exchange reserves and retain control over importing firms' foreign exchange liabilities, most of
which were guaranteed by the government.
28)    Both these restrictions have been eased. Bank drafts can now sometimes be used in place of letter
of credits, and some imports can be made without obtaining the foreign exchange needed to pay for them
by exporting or by purchasing it from exporters on the Tehran Stock Exchange market. Under Article 29
of the Budget Law for 2000/01, importers using "external source" foreign exchange (as described in
section 3.2) can import a subset of the items on the positive list, subject to the approval of the Ministry of
Industry. The most important items in this subset are machinery; completely knocked down kits for
assembling manufactured products, such as automobiles; and spare parts for such products. The most
important items on the positive list that are excluded from this subset are raw materials and consumption
goods.
2.2 Quantifying Tariff and Nontariff Barriers to Imports
29)   Iran's trade barriers take three main forms: explicit taxes on imports, in the form of customs
duties and the commercial benefit tax; licensing; and the dual exchange rate system. The trade taxes and
subsidies to which the dual exchange rate system is equivalent can be clarified by noting that exchange
rate unification with full compensation would be completely neutral. If all transactions now conducted at
the official rate were moved to the open market rate and full compensation were provided, the domestic
prices and the equilibrium level of the open market rate would not change; the levels of consumption,
production, and imports and exports of every activity would therefore also remain unchanged. The import
and export taxes that would result from unification with full compensation can therefore be used to
provide a transparent description of the status quo. The first subsection below presents estimates of the
size of Iran's explicit taxes on trade. Transparency can be taken a step farther by assumning that all
nontariff barriers are replaced by their tariff equivalents. The second subsection below presents estimates
of the importance of these nontariff barriers. The third subsection uses the analytical device of unification
with full compensation to describe the taxes on trade that are implicit in Iran's dual exchange rate system.
The Magnitude of Iran's Explicit Taxes on Imports
30)   Iran does not have an import tax that corresponds directly to the word tariff. Instead, it imposes
two main taxes on imports: customs duties and the commercial benefit tax (import registration fees are
also charged, but they are of minor importance). While the schedule of customs duties can be amended
only by an act of Parliament, the rates of the commercial benefit tax can be changed by the government.
Both taxes are payable in rials as percentages of the c.i.f. value of imports in rials, converted at the
official exchange rate, which is now only about one-fifth the free market rate. Since Iran's customs duties
were always relatively low, even relative to the official rate, and it was difficult for the government to
change them, the gross overvaluation of the rial at the official rate resulted in customs duties becoming
largely irrelevant. A duty of 20 percent at the official rate is now equivalent to a duty of only about 4
percent at the free-market rate; in the early and mid-1990s the rate would sometimes have been equivalent
to a duty of only about 1 percent. In what follows, the sum of the commercial benefit tax and the customs
duty is referred to as the total tax, or sometimes, for brevity, the tariff. Unless otherwise stated, all tax
rates are expressed here based on the Tehran Stock Exchange rate, not the official rate.
9



31)    The commercial benefit tax has become the most important tax on imports, in terms of both size
and flexibility. As the government begins the process of replacing nontariff barriers by their tariff
equivalents, only the commercial benefit tax is being raised to compensate producers foi the loss of
nontariff protection. Tariffication of nontariff barriers will therefore further increase the relative
importance of the commercial benefit tax.
32)    Total collected taxes on imports are very low in Iran (table 2.2), a reflection of the fact that the
main instruments of commercial policy have been nontariff barriers and the system of multiple exchange
rates rather than explicit import taxes. The average collected rate of tax on imports is only 2.7 percent,
and the only sector on the positive list for which the collected rate exceeds 6 percent is garments, for
which the average collected rate is 14.2 percent.
Table 2.2. Average Collected Import Tax Rates, 1999-2000
Total tax,   Commercial       Tariff,          All
collected rate   benefit tax,  collected    collectedtaxes on    Imports
(percent)    collected rate    rate          imports       (millions of
Sector                             (percent)     (percent)   (billions of rials)  US$)
Agriculture                        0.8            0.7           0.1              113        1,626
Petroleum products                 0.1            0.1           0.0                5          510
Food, beverages, and tobacco       0.5            0.4           0.1               20          465
Mining                             1.6            1.1           0.5               18          136
Chemicals                          2.0            1.7           0.3              393        2.356
Furs, skins, and leather           4.1            3.6           0.6                0            1
Pulp and paper                     3.0            2.4           0.7               91          367
Thread and yarn                    3.8            2.8           1.1              123          393
Cloth                              2.6            2.3           0.4               19           90
Garments                          14.2           11.1           3.1                 1           1
Nonmetal products                  5.7            4.9           0.8               84          183
Iron and steel                     3.5            3.1           0.4              257          901
Metal products                     5.9            4.9           1.0              264          549
Machinery and nonelectrical        2.7            2.1           0.6              656        2.990
products
Electrical appliances              5.5            4.2           1.2              408          915
Electrical machinery               0.5            0.4           0.1                4           96
Vehicles                           3.4            2.1           1.4              199          712
Boats and aircraft                 0.8            0.6           0.2                4           70
Other manufactures                 3.4            2.9           0.5               89          322
All imports                        2.7            2.1           0.5            2,751       12,683
Unweighted average'                6.1            5.1           1.0              n.a.         n.a.
n.a. Not applicable.
Note. US$ = 8,175 rials.
a.  Unweighted average rates are the arithmetic means of the collected tax ratios for the 3,063 harmonized system
code items for which there were imports in 199912000.
Source: Data collected by Customs Department and supplied to the mission by the Central Bank of Iran.
33)    Exemptions from import duties are provided for most items of capital equipment, for imports of
essential items at the official rate, for imports for public investment projects, and for exporters under the
temporary admission and duty drawback schemes (see section 4). Estimating the quantitative importance
of exemptions would require data on the legal rates of import taxes on the same basis as the data in Table
2.2 on collected rates, that is, data on the legal rates for each item, weighted by total imports of each item.
Unfortunately, such data are not readily available. Some approximations can be constructed, however.
10



34)    The Ministry of Industry has estimated that the simple unweighted average of the sum of the legal
rates of the customs duty and the commercial benefit tax for the roughly 3,000 items for which it has
licensing responsibility is about 35 percent of the value of imports at the official rate (US$ = 1,750 rials)
and about 7.5 percent of the value of imports calculated at the Tehran Stock Exchange rate (US$ = 8,175
rials).
35)    The remaining 2,000 items in the six-digit harmonized system code schedule are subject to
customs duty and commercial benefit tax at rates that are lower on average than those under the
responsibility of the Ministry of Industry. The mission obtained a hard-copy Farsi version of the customs
duties and commercial benefit tax rates for each of the 5,113 items in the six-digit harmonized system
code. It did not obtain an electronic version of these schedules and did not estimate the economywide
average of the total legal rate of import taxes. If we assume that the legal import tax rates on items not
under the control of the Ministry of Industry are one-third of the rates applied to items that are under its
control, the unweighted average for all 5,113 items identified in Iran's six-digit harmonized system code
would be about 5.5 percent at the Tehran Stock Exchange exchange rate.5
36)    This estimate of the average legal rate is about twice the average collected rate of 2.7 percent, as
reported in table 2.2. However, it would not be legitimate to deduce from the ratio of the average
collected rate to the average legal rate that roughly half of all imports are exempted from import taxes,
because the two averages are not strictly comparable: the 5.5 percent average legal rate is a very rough
estimate of unweighted legal rates for all 5,113 harmonized system items, whereas the 2.7 percent average
collected rate is, by definition, an import-weighted average of the collected rates for the 3,063 harmonized
system items actually imported in 1999/2000.
37)    Import-weighted tariff averages are generally lower than simple unweighted averages, because
relatively high tariffs generally result in relatively low imports. In the last row of table 2.2, the
unweighted average of the collected rates for the 3,063 imported items was 6.1 percent. This is
remarkable because not only is it much higher than the corresponding imported-weighted average of 2.7
percent, it even exceeds the unweighted average of the legal rates for all 5,113 items. If, as one might
have expected, the 2,000 harmonized system codes for which no imports were recorded are ones for
which import taxes are relatively high, the paradox of the average collected rate being higher than the
average legal rate would be all the greater. It may be, however, that the government has never bothered to
raise the commercial benefit tax rate for items Iran does not import and that the legal rates of these duties
are therefore relatively low. Whatever the explanation, the mere existence of this paradox suggests that
exemptions are not as widespread, nor as important, as is sometimes suggested.
The Magnitude of Iran's Nontariff Barriers to Imports
38)    The mission managed to obtain quantitative estimates of the size of the average nontariff barriers
to trade for eight broad sectors, covering 3,000 harmonized system codes, for which import licenses are,
or were, controlled by the Ministry of Industry. Although about 2,000 more harmonized system codes
were never subject to the Ministry of Industry's control, nontariff barriers on these items are widely
reported to be much less important than those for which quantitative estimates were obtained.
5 These assumptions imply an average legal rate (relative to the border price of imports at the official exchange rate) of 25.7
percent (0.6 x 35 + 0.4 x 35/3). Multiplying this rate by the ratio of the official to the Tehran Stock exchange rate gives an
average rate of 5.5 percent relative to the border value of imports at the Tehran Stock Exchange rate.
11



39)    In March 2000 import regulations on 781 of the roughly 3,000 items under the (ontrol of the
Ministry of Industry at tne start of the year had been liberalized, in the sense that approval c-  the Ministry
is no longer required. More precisely, the classification of these items in the import and expcrt regulations
has been changed from 1, 2 to 1. Most of the 781 items that were deregulated were raw naterials and
completely knocked down kits for local assembly. About 200 other items have been conditionally
approved for liberalization in 2001/02 (table 2.3). These items are included in table 2.3 in the group of
items to be liberalized in 2001/02, although some of them may be liberalized in 2000/01.
Table 2.3. Estimated Unweighted Average Rates of the Commercial Benefit Tax Needed, to
Compensate Producers for Tariffication of Items Subject to Ministry of Industry Licensing
Requirements
Items liberalized in   Items to be liberalized in   Items libe -alizes in
l___________  2000/01              2001/02              2000/01 and 2001/02
New                       New                       Vew
commercial                commercial              I commercial
Number of   benefit tax   NVumber of   benefit tax    Number of   benefit tax
Itemn           items       (percent)      items       (percent)     items       (percent)
Food and                                                                              t
pharmaceuticals            106          24.5           21           30          127         25.4
Nonmetal products           88          i9.0           29         28.7   1      117         21.4
Chemicals                  500           8.5           60           14          560           9.3
Textiles and clothing        0             -          913         74.2   1      913  I      74.2
Metals and appliances       50           3.5          298         21.4          348  I       18.8
Electrical equipment         I1          1.1          280         24.9          291         24.0
Vehicles                      1          6.4          164         34.2          165         36.0
Machinery                   25          11.3          413          15.9         438          15.2
Total                      781          11.3        2,178         44.1         2959          35.4
Source: Ministry of Industry.
40)    The unweighted average rate of the commercial benefit tax needed to compensate producers for
the removal of the protection from imports provided by the Ministry of Industry's licensing requirements
was about 35 percent at the Tehran Stock Exchange exchange rate, according to the Ministry of Industry
(table 2.3). This estimate is based on the assumption that the existing rate of customs duty, which
averages 2 percent at the Tehran Stock Exchange rate for items under the Ministry of Indusitry's control,
would remain in place. The estimated tariff equivalent of the tariff and nontariff barriers that were in
place in March 2000 for the 3,000 items then under the Ministry of Industry's control is therefore 37
percent. Even if the rates in tables 2.3 and 2.4 underestimate the size of existing nontariff barriers, they
nevertheless measure the rates that the Ministry of Industry has recommended using to replace nontariff
barriers after 2002.
41)    The estimates provided by the Ministry of Industry represent the percentage rates of the
commercial benefit tax estimated to be needed to compensate producers for the removal of nontariff
barriers if imports are valued for tax purposes at the Tehran Stock Exchange rate, which was about US$ =
8,175 rials in November 2000. Currently, imports are valued for tax purposes at the official rate of US$ =
8,175 rials. If tariffication occurs while imports are still valued for tax purposes at the oflicial rate, the
rates of commercial benefit tax would therefore need to be about five times greater than thoe in the table
in order to compensate producers for the loss of nontariff protection. In addition to the comniercial benefit
tax, imports are also subject to low customs duties, at an average rate of 2 percent relative to the Tehran
Stock Exchange rate. The Ministry of Industry assumes that these duties will remain unchanged. On
average, the total tariff equivalents at the Tehran Stock Exchange rate of existing tariff and nontariff
barriers are therefore 2 percent larger than those shown in table 2.3
12



42)    Since the nontariff barriers on the 2,000 items never controlled by the Ministry of Industry are
widely reported to be less stringent than those reported in tables 2.3 and 2.4, the economywide
unweighted average tariff equivalent to the sum of the existing tariff and nontariff barriers to imports is
less than the 37 percent (relative to the value of imports at the Tehran Stock Exchange rate) for the items
under the control of the Ministry of Industry.6 Our best guess is that the economywide average is about 30
percent, or perhaps slightly lower. This average understates the distortions created by existing barriers to
trade because it neglects the most important effects of the dual exchange rate system. In addition, as table
2.4 reveals, the average rates shown in table 2.3 conceal large differences between the maximum and
minimum rates: the maximum proposed commercial benefit tax rate for vehicles (the rate used for
passenger cars) is 90 percent and that for textiles and clothing (the rate used for garments) is 100 percent.
Both rates are estimates of existing trade barriers in rials, relative to the dollar value of imports converted
to rials at the Tehran Stock Exchange exchange rate.
Table 2.4. Estimated Minimum and Maximum Rates of the Commercial Benefit Tax Needed to
Compensate Producers for Tariffication of Items Subject to Ministry of Industry Licensing
Requirements (percent)
Item                             Minimum rate            Maximum rate
Textiles and clothing                   1                     100
Vehicles                                1                      90
Electrical equipment                    1                      75
Food and pharmaceuticals                2                      50
Metals and appliances                   1                      50
Machinery                              20                      50
Nonmetal products                       1                      40
Chemicals                               1                      40
Note: See note to table 2.2.
Source: Ministry of Industry.
Trade Taxes and Subsidies Implicit in the Dual Exchange Rate System
43)    The average level of tariffs plus the tariff equivalents of nontariff barriers is often used as an
approximate indicator of the magnitude of the inefficiencies introduced by tariffs and licensing. Caution
is needed in interpreting the average level of tariff and licensing barriers in an economy such as Iran's,
however, because large differences exist in the exchange rates applied to different categories of imports
and exports. Before 1997 part (and on some occasions all) of the foreign exchange receipts from non-oil
exports had to be converted to rials at a weighted average export rate of 3,000 rials per U.S. dollar rather
than at the much higher open-market rate. Although the export rate remained in existence until March
2000, non-oil exporters effectively received the full Tehran Stock Exchange rate after 1997. This reform
removed a very substantial implicit tax on exporters.
44)    Although the Tehran Stock Exchange rate applies to all non-oil exports, imports of "essential"
items, such as fertilizers and basic foods, are imported by the General Trading Company on behalf of the
Ministry of Commerce at the official rate of 1,750 rials per dollar and sold at controlled prices to ensure
6 In table 5.1 we present our estimates of the tariff equivalent of the nontariff barriers on all traded goods sectors. In some sectors,
such as crude oil, pharmaceuticals, essential food items, and petroleum products, imports are subsidized, so the tariff equivalent
of the licenses cannot be positive. This lowers the average. We estimate that the weighted average of the tariff equivalent of the
nontariffbarriers alone is 17 percent (where protection is calculated based on the Tehran Stock Exchange rate).
13



that consumers obtain the full benefit of the implicit import subsidies. One official informed the mnission
that unless potential exporters of essential items pay the difference between the Tehran Stock Exchange
rate and the official rate, export bans apply not only to the re-export of the physical amounts of the goods
that have actually been imported at the official rate but also to domestic production of the corresponding
items. The mission was also informed that domestic consumption and imports of these essertial items are
not rationed: the General Trading Company holds stocks against fluctuations in demand and adjusts
imports to maintain stocks at an adequate level. Essential items thus effectively receive an import subsidy
of almost 80 percent. As a result, consumption of these items is subsidized at almost 80 percent. The
overall consumption subsidy is even higher because on-budget subsidies allow flour mills to buy wheat at
even less than the border price converted at the TSE rate. However, government representatives indicated
that domestic producers of wheat and other essential commodities generally receive approximately the
border price, converted at the TSE rate. In the case of wheat, the government controlled Grains
Corporation receives on-budget subsidies to cover the losses that it makes as a result of bujying some of
the wheat needed to supply Iran's total demand at a controlled farmgate price which now usually
approximately equal to the border price at the TSE rate, and selling it to flour mills at less t[lan the border
price at the official exchange rate.
2.3 Other Indirect and Direct Taxes
45)    Iran's sales taxes and its direct taxes on corporate income and dividends are not neutral with
respect to domestic activities and international trade. This section describes the main ways in which these
taxes interact with intemational trade.
Sales Taxes
46)    Iran's current system of sales taxes is complicated and raises little revenue. Taxes are applied at
different rates to different products, and sales taxes inevitably cascade in the sense that less tax is
collected in total if all stages of production occur within a single vertically integrated firm, than if
different firms specialize in the various stages of production. The sales tax system also has an anti-trade
bias and is difficult to enforce. Recognizing these problems, the government has already drawn up plans
to replace the various sales taxes with a single value-added tax. This major reform is especially important
because it will help end the government's excessive revenue dependence on oil.
47)    Under the current system, a sales tax of 2 percent is levied on almost all imports and domestic
production, except food and pharmaceuticals. This tax is known as the education tax, because the revenue
goes to the Ministry of Education to finance universal free education. Additional sales taxes are imposed
on both imports and domestic production of many other products. Since rebates are provided, at least in
principle, if goods are subsequently exported, these taxes are equivalent to consumption taxes imposed at
the same rate on imports and domestic production. However, they generally have an anti-trade bias, since
the rates at which they are applied to imports usually exceed the rates applied to domestic pi oduction. The
most important anti-trade biases occur in the case of cigarettes and automobiles. The sales tax treatment
of some other products, such as nonalcoholic beverages, used to produce an anti-trade bias, but the sales
tax on domestic production has been raised to eliminate this bias.
48)    Customs duty and commercial benefit tax on cigarettes are imposed at a rate of 45 rials per
cigarette. In addition, imported cigarettes are subject to a sales tax, payable to the Ministry of Finance, of
10 rials per cigarette. The corresponding sales tax on domestically produced cigarettes is 5 rials per filter-
tip cigarette and 2.5 rials per nonfilter-tip cigarette. Together these sales taxes amount to about 5 percent
14



of the price of cigarettes, with a lower percentage charged, on average, for imported cigarettes, the
average price of which is more than twice that of domestic cigarettes.
49)    Imported cigarettes are also subject to an off-budget levy, from which domestically produced
cigarettes are exempt, of 30 rials per cigarette. This levy is payable to the Organization for Protection of
Consumers and Producers, which is affiliated with the Ministry of Commerce. The levy is nominally
supposed to tax, or subsidize, imports and domestic production of certain items, of which cigarettes and
automobiles are the most important, in order to equalize their domestic prices. The effect of this levy is to
raise the total import tax (customs duty plus commercial benefit tax) from 26 percent to 43 percent.7
50)    The rates of sales tax on automobiles vary by type of vehicle. A 10 percent sales tax is levied on
domestically produced passenger cars. Imported passenger cars are subject to a tax equal to 70 percent of
the c.i.f. value at the official exchange rate (about 15 percent of the c.i.f. value at the Tehran Stock
Exchange rate). The sales taxes on vans, minibuses, and motorcycles are much lower than those on
passenger cars. Although the imported vehicles pay a higher tax than domestically produced vehicles, the
differences are not important, because both tax rates are low.
51)    Imports of nonalcoholic beverages used to be subject to much higher rates of sales tax than
domestically produced beverages. However, the sales tax on domestic production was recently raised, so
that the rates on imports and domestic production are now about equal
Direct Taxes
52)    Income tax is imposed on the domestic and foreign earnings of all legal forms of Iranian
companies and partnerships and on the eamings of foreign companies and legal entities in Iran (joint
stock companies, limited liability companies, partnerships, and individual traders). Although corporate
income is taxed at 10 percent, the revenue from this tax is low because exemptions are extensive.8 These
exemptions are provided for in Articles 132 and 146 of the Law of Direct Taxation. Manufacturing and
mining activities are exempt for periods of four to eight years from  the date of commencement of
operations, and 20 percent of the profits of these activities are permanently exempt. Firms in the free-
trade zones are entirely exempt for the first 15 years of their operations, and half their profits are exempt
for another 15 years.
53)    In addition to the tax on profits, firms are legally obliged to withhold income tax on dividends
paid to shareholders. The amount of tax withheld is calculated on the provisional assumption that the
dividends paid are the shareholders' only source of income. Since income tax is progressive and rises to a
marginal rate of 54 percent, this means that the marginal rate of dividend withholding tax rises to 54
percent for those with sufficiently large shareholdings. Shareholders are supposed to pay any remaining
taxes they owe when their total income from all sources is calculated.
54)    The company tax has distorting effects on international trade because all income earned from
exports of finished manufactured goods and 50 percent of the income from all other exports of goods is
7These rates are obtained by multiplying the taxes of 45 fials and 30 rials per cigarette by 20 and expressing the resulting taxes as
percentages of the tax-exclusive price (5,000 rials - [20 x 75] rials) of a pack of 20 cigarettes. Indirect taxes payable to the
Ministry of Finance are ignored, because they are small and because the ad valorem rates for imported and domestic cigarettes
are not very different.
International Monetary Fund, 2000.
15



exempt.9 The exemption for exports applies not only to taxes on company income bui: also to the
withholding tax on dividends paid by firms engaged in exporting
2.4 Policy Recommendations
55)    We strongly support the government's policy of replacing nontariff barriers by their tariff
equivalents. Doing so would increase the transparency of the system and transform resources currently
wasted on lobbying for licenses into government revenue. Assuming that any potential government
budget surplus can be returned to households as a lump-sum payment and that the resources wasted in
lobbying for licenses are equal to the total value of these licenses, our computable general equilibrium
model predicts that this reform would increase aggregate real consumption by 3.4 percent (see section 5).
56)    Once restrictive import licensing conditions have been removed for almost all goods other than
those banned for noneconomic reasons, there will be no need for any list of goods that may or may not be
imported using a particular source of foreign exchange; the liberalized version of the import and export
regulations will suffice. These regulations would continue to identify the small number of goods whose
importation is banned for noneconomic reasons; regulations for most other goods would indicate that
importers must complete the registration formalities of the Ministry of Commerce. Even this requirement
might eventually be removed in most cases, as it already has been in some cases. If the requirement is
retained, reducing the time required to process these requests to a maximum of seven darts would help
facilitate imports. Moreover, unless licenses are processed quickly, the World Trade Organization will
classify the licensing requirement as a nontariff barrier. Moreover, we strongly recommend removal of
non-tariff baririers in technical regulations or sanitary and phytosanitary standards which discriminate
between domestic products and imports. Adopting best practice regulatory procedures in these cases and
alignment with WTO principles in the Technical Barriers to Trade Agreement and the Agreement on
Sanitary and Phytosanitary Standards is urged. Because of the large inefficiencies caused by high trade
barriers, there is a strong case for reducing import taxes, rather than merely replacing nontariff barriers by
their import tax equivalents. According to our computable general equilibrium model, the aggregate real
consumption gain of 3.4 percent from tariffying existing barriers could rise to 4.1 percent if existing tariff
and nontariff barriers were replaced by a uniform tariff of 25 percent. Setting the uniform tariff at 15
percent would increase the aggregate real consumption gain to an estimated 5.5.
57)    There are now several examples of countries with tariff structures that are uniform or almost
uniform. Estonia and Hong Kong have uniform tariffs because they practice free trade Bolivia, the
Kyrgyz Republic and Chile have virtually uniform tariff schedules of 10, 10 and 11 percent. respectively.
Singapore has a simple tariff average of 0.5 percent and a standard deviation of less than 3 percent.
Azerbaijan has a 15 percent maximum tariff and Bosnia-Herzegovina is reported to be about to move
towards a uniform tariff. A number of other countries, including Brunei Darussalam, Ecuador, Honduras
and Mexico, have tariff averages of less than 13 percent and standard deviations of less than 6 percent.
The experience of these countries demonstrates that setting a low uniform tariff is feasible, and the
econometric evidence referred to in footnote 2 indicates that doing so speeds up GDP growth by
promoting factor accumulation and technical progress. The estimates of our model, summarized above,
imply that the welfare gains at unchanged levels of technology and factor supplies would also be large.
For all these reasons, we recommend that the government reduce tariffs to a uniform rate of 15 percent by
the end of the Third Five-Year Development Plan.
9 Ministry of Commerce (1999), p.93.
16



58)   We also strongly support the government's plans to replace the current system of sales taxes by a
trade-neutral value-added tax. We do not support the current policy of granting income tax exemptions to
income earned from exporting. Because revenue from corporate income tax is currently only about 2.5
percent of GDP and the revenue from income tax on individuals yields only another 1.5 percent, the
distortions from these exemptions are not yet significant.'0 As the private sector and income tax revenues
increase in importance, however, it will become important to eliminate exemptions and create a system
based on rates and a wide base. At a minimum, it is important to ensure that any exemptions from direct
tax for exporters do not conflict with WTO principles.
59)   The best way to remove the anti-trade biases at source is by eliminating taxes and other barriers
to exports and imports, not by providing special subsidies or exemptions. One of the undesirable
consequences of turning export industries into a tax shelter is that it provides an incentive for taxpayers
paying high marginal rates to hold an excessive proportion of their wealth in such industries.
1° International Monetary Fund, 2000.
17



3. FOREIGN EXCHANGE MARKETS IN IRAN
60)    Monetary growth in Iran, particularly during the 1980s, led to the rial becoming increasingly
overvalued at the official exchange rate. Rather than devaluing the rial, or allowiing it o float, the
government set up a system of exchange controls to ration foreign exchange at various adrr inistratively
set rates and to compel exporters to surrender export proceeds at less than the rate thai they could
otherwise have obtained. This section describes the reforms to the multiple exchange rate syst-m that
occurred in the period 1997-2000 and argues in support of the government's plans to unifyv tIe exchanage
rates completely.
3.1 The Current System of Multiple Exchange Rates
61)    Between July 1997, when a market in dollar certificates of deposit was established .t the Tehran
Stock Exchange, and March 2000, when the export rate was abolished, four foreign exchainfe rates
existed in Iran:
1. The official floating rate (henceforth "the official rate"). The official rate applies to the portiwn of oil
and gas receipts earmarked to finance servicing of official external debts and imports b\ government
agencies, including specified amounts of essential goods, such as wheat and pharmaceuicak-. which
are sold at controlled prices. Since October 1995 the official rate has moved within a iarr(  band
around 1,750 rials per U.S. dollar, fluctuating from a low of 1,736 rials in August 1998; to a highi of
1,767 rials in April 2000 (IMF 2000).
2. The so-called official export rate, fixed at 3,000 rials per U.S. dollar from May 1995 until its Tbolition
in March 2000. In the mid-1990s the export rate was the effective rate received for noi -oil exports.
However, as explained below, since 1997 the rate effectively received by exporters has been the full
Tehran Stock Exchange rate. Before 1997 the export rate applied to most imports b) state-owned
enterprises. By 2000 most inputs imported by state-owned enterprises were made at the Tehran Stock
Exchange rate, although some capital goods for public infrastructure projects are still in pote d at the
official rate.
3. The official Tehran Stock Exchange rate, which was slightly less than 8.2(0) rials pe    dollar
during most of 2000. The Tehran Stock Exchange rate is a managed floating rate set bX the Central
Bank of Iran. It now applies to all legal non-oil exports and to most other legal imports, Ixce[t for the
special cases listed above, which can still be imported at the official rate.
4. The unofficial negotiated rates, the rates at which banks trade foreign exchange with one alrother or
buy "own source" foreign exchange from  their customers. These rates can varly  lightly firom
transaction to transaction depending on the bank, the customer, and the scale of the traiusact.on. The
negotiated rate was at a significant premium over the Tehran Stock ExchlanLge rate in I ite 1998 and
early 1999, when foreign exchange was rationed at the Tehran Stock Exchange ratc; sir ce mid-1999
it has been close to the Tehran Stock Exchange rate. In June 2000 the price of fcorengn exc lange in
this market was generally slightly above the price at the Tehran Stock Exchange; bv (ctobzr 20(00.
however, the Tehran Stock Exchange price slightly exceeded the negotiated ratc. TIl c small
differences between the Tehran Stock Exchange and negotiated rates in 2000 pro: abl reflect
transactions costs.
62)    Foreign exchange can also be traded by authorized agencies. In addition. there is a iAack market.
in which the proceeds of smuggled exports finance capital flight and smuggled imports.
18



3.2 The Tehran Stock Exchange Market for Foreign Exchange and the "Negotiated" Rate
63)   As the rial became increasingly overvalued at the official rate, the problems of allocating foreign
exchange became ever more severe, as did the disincentives to exporters created by having to surrender
export proceeds at the official rate, and the subsidies to those importers who were supplied with foreign
exchange at the official rate. To alleviate these problems, the Central Bank of Iran began to auction some
of the foreign exchange that it received from surrendered export proceeds and from the government's own
oil exports at the Tehran Stock Exchange. Most importers were required to buy their foreign exchange at
the Stock Exchange, and only a few categories of 'essential' imports remained eligible for allocations of
foreign exchange from the Central Bank at the much cheaper official rate. In addition, the authorities
introduced a special exchange rate for the proceeds of non-oil exports, the 'export rate', which was higher
(in rials/dollar) than the official rate, but still much lower than the rate at the Stock Exchange. Over time,
the authorities gradually shifted the rate paid to non-oil exporters to the Tehran Stock Exchange rate. This
subsection describes how the system operated in 2000.
The Tehran Stock Exchange Market anid the "Export" Rate
64)   Non-oil exporters are required to deposit the foreign exchange proceeds of their exports in an
Iranian commercial bank within eight months of bringing the goods to be exported to Iran's customs.
Once the foreign exchange has been deposited in a commercial bank, exporters have two to three months
within which to use the foreign exchange to pay for their own imports of goods from the positive list or
instruct their bank to sell it on their behalf on the Tehran Stock Exchange market to another importer for
the purchase of imports on the positive list.
65)   Before March 2000 export receipts had to be surrendered to the Central Bank of Iran at the export
rate of 3,000 rials per U.S. dollar. However, exporters also received import certificates that could be
traded on the Tehran Stock Exchange market. Each dollar of import certificates entitled the holder both to
import a dollar's worth of goods from the positive list and to buy a dollar of foreign exchange from the
Central Bank of Iran at the export rate. If, for example, the price of these certificates, together with the
right to buy foreign exchange from the Central Bank of Iran at 3,000 rials per dollar, was 4,000 rials per
dollar, then the effective foreign exchange rate received by exporters was 7,000 rials per dollar (4,000
rials per dollar paid at the Tehran Stock Exchange plus 3,000 rials per dollar paid to the Central Bank of
Iran). In effect, therefore, even before March 2000, non-oil exporters were receiving the full Tehran Stock
Exchange rate, not the export rate of 3,000 rials per dollar. The Tehran Stock Exchange rate was also the
total cost of foreign exchange to importers, who had to buy both certificates at the Tehran Stock
Exchange and foreign exchange from the Central Bank, at the export rate of 3,000 rials per dollar.
66)   Using inflation differentials, the Central Bank sets the trend rate of depreciation of the Tehran
Stock Exchange rate, intervening to smooth fluctuations around the trend. It has also made occasional
step changes in the level of the Tehran Stock Exchange rate to take account of shifts in supply and
demand. In addition to providing most of the foreign exchange supplied at the Tehran Stock Exchange
rate, the government can also control demand by tightening or loosening import licensing, since only
holders of valid import licenses are allowed to purchase foreign exchange on the Tehran Stock Exchange
market.
67)   However, since the Central Bank has not always been willing to vary supply to meet demand at
the managed rate and import licensing can be used to control demand only with a lag, foreign exchange
has sometimes been rationed even to firns that hold valid import licenses and have already purchased
foreign exchange certificates on the Tehran Stock Exchange. Such rationing was especially important
when oil prices fell in the second half of 1998. The Central Bank raised the Tehran Stock Exchange rate
19



by about 14 percent in September 1998, but the increase was not enough to reduce demand for foreign
exchange to the low level to which supply had fallen. Initially, the Central Bank was reluctant either to
run down its reserves or to depreciate the Tehran Stock Exchange rate any farther. It ther fore made
prospective importers wait their turn in a queue before allowing them to open import letters of sredit. As a
result, the premium of the parallel rate over the Tehran Stock Exchange rate rose to just over 20 percent
for most of the period November 1998 to January 1999, jumping to almost 50 percent in Februiry 1 999.
68)    To eliminate the queuing for foreign exchange, the Central Bank was forced to increase supply to
the Tehran Stock Exchange market by running down its foreign exchange reserves and to raise the Tehran
Stock Exchange price of certificates in two steps-by about 20 percent in March 1999 and b'; another 16
percent in May 1999. Together with the ongoing gradual depreciation of the Tehran Stock Exchange rate,
these step changes resulted in an overall depreciation of the Tehran Stock Exchange rate of 412 percent in
1998/99 and another 20 percent in 1999/2000.
69)   From June 1999 until March 2000 buoyant oil prices allowed the Central Bank to increase the
supply of foreign exchange to the Tehran Stock Exchange market while increasing its price very
gradually, from just below to just above 8,000 rials per dollar. As a result, the premium of the parallel
market rate over the Tehran Stock Exchange rate gradually fell during this period, from ju,st under 20
percent to almost zero.
The Negotiated Rate
70)   In addition-and partially separate from-the Tehran Stock Exchange market is tlf market in
which banks and their customers can trade foreign exchange. Residents can open accounts in which they
can deposit foreign exchange without declaring its source, which could be remittances or even smuggled
exports or repatriated capital flight. Nonresident travelers must declare the amount of foreiEn exchange
they bring into Iran; having done so, they can open a nonresident account for the declared arr:ount. Up to
$1,000 per person per trip can be withdrawn from these accounts for up to three trips a year. an prrnciple.
the funds can also be used to import goods not on the positive list, although in practice it is very hard to
obtain import licenses for such goods. Until recently, these accounts could not be used to import goods on
the positive list-indeed the official Farsi title of the positive list indicates that it is the list of goods that
can be imported with foreign exchange obtained by exporting. The Central Bank now appt ars to have
largely given up the attempt to separate the Tehran Stock Exchange market from the marker for foreign
exchange at the negotiated rate, however, and the two rates have been within about I percent of each
other since the Central Bank stopped rationing foreign exchange at the Tehran Stock Exchange rate. One
reason why the two rates now differ by only negligible amounts is that Article 29 of the Budget Law for
2000/01 permits some goods on the positive list to be imported without using foreign excharge obtained
by exporting or purchasing it from exporters on the Tehran Stock Exchange market. If the Tehran Stock
Exchange rate and the negotiated rate differ, all importers would try to buy their foreign exchange from
the market in which it was cheapest, thereby driving up the price in that market, and depressing the price
in the other.
3.3 The Government's Foreign Exchange Budget
71)   The foreign exchange proceeds of the government's oil revenues are deposited with- the Central
Bank of Iran and divided into portions that are used to supply foreign exchange to the offi-ial mnarkets
listed above. Each portion is converted at the corresponding rate. Govemment oil revenues are the only
source of foreign exchange converted at the official rate. Foreign exchange sold at the officia; rate is used
for four main purposes: defense, public development projects, debt service, and imports of essential
goods. Government oil revenues were also the main source of source foreign exchange at the export rate
20



until its abolition in March 2000. The Central Bank estimates that the portion supplied to the Tehran
Stock Exchange market in early 2000/2001 amounted to about 60 percent of the total supply of foreign
exchange to that market. The remaining 40 percent comes mainly from non-oil exports and foreign direct
investment.
72)    Because part of the government's oil revenues are converted at the official and export rates, its
on-budget revenue from oil exports greatly understates their value at the Tehran Stock Exchange rate. In
1999/2000 the value at the Tehran Stock Exchange rate was 92.7 trillion rials-almost twice the level of
recorded on-budget revenues of 44.5 trillion rials. The difference corresponds to off-budget import
subsidies to state-owned enterprises, government agencies, and consumers of oil and price-controlled
essential imports. In addition to these off-budget subsidies, there are on-budget subsidies to fuel
consumption, which reduce its domestic price to about 10 percent of its border price at the Tehran Stock
Exchange rate.
73)    The proportion of the government's foreign exchange sold at the official rate fell from 96 percent
in 1997/98 to 72 percent in the planned budget for 1999/2000 (table 3.1). The decline is due in part to the
large increase in total revenue, which is itself due to the rise in oil prices: when its total foreign exchange
revenue rises, the Central Bank increases the supply of foreign exchange to the Tehran Stock Exchange
market; when total revenue falls, as it did in the period 1996/97-1998/99, the Central Bank cuts back the
supply to the Tehran Stock Exchange market. In part, however, the decrease in the proportion of foreign
exchange converted at the official rate also reflects the fact that types of transactions that used to be
financed at this rate were moved to the export rate and, since the abolition of the export rate in March
2000, are now made at the Tehran Stock Exchange rate.
Table 3.1 Oil Revenues at Various Exchange Rates, 1995/96-1999/2000
1999/00    1999/00
Item                            1995/96    1996/97    1997/98    1998/99  (estimated)  (actual)a
Total revenue (billions of US$)      15.0       19.3       15.5       9.9         14.8
Revenue, at Tehran Stock              0.0        0.0        0.0       0.0
Exchange rate (trillions of rials)                                                92.7
Revenue ,at rates used in
conversion (trillions of rials),    29.4        39.1       36.4      22.6         44.5
Share of dollar revenue converted
at various rates (percent)
US$ = 1,750 rials                    83.4       77.6       96.1      95.5         71.9       72.5
US$ = 3,000 rials                    16.6       22.4        3.9       4.5         10.1        10.0
Tehran Stock Exchange rate            0.0        0.0        0.0       0.0         18.0        17.5
-. Not available.
Note: The proportions of revenue converted at the official, export, and Tehran Stock Exchange rates in 1999/2000
are derived from Central Bank of Iran estimates that the amounts converted were 29 percent, 4 percent, and 7
percent, respectively, of the sum of imports and exports.
Source: Central Bank of Iran.
74)    State-owned enterprises used to obtain most of their foreign exchange for fixed investment and
purchases of raw materials at the official rate. The ability to buy machinery and raw materials at one-fifth
the price charged to private firms obviously gave these enterprises a huge competitive advantage over the
private sector. Gradually, some of these items were shifted to the export and Tehran Stock Exchange
rates. All purchases of raw materials by state-owned enterprises are now made at the Tehran Stock
Exchange rate; the official rate for investment by state-owned enterprises applies mainly to infrastructure
projects in which there is no direct competition between private and state-owned enterprises.
21



Nevertheless, the decisions of state-owned enterprises, government agencies, the military, and other
entities involved in public development projects are presumably strongly distorted by their ability to buy
imported capital items at about one-fifth the market price. The demand for outputs cf state-owned
enterprises is also distorted by these subsidies, which artificially reduce the cost of outputs produced by
state-owned enterprise.
3.4 Policy Recommendations
75)    A strong case can be made for unifying the exchange rates and making the rrmilitary and the
managers of public development projects face the full international prices of the goods they currently
import at the official rate. If, following exchange rate unification, compensation for the loss of the
subsidies currently received through pricing foreign exchange at the official rate is given to these
institutions, it could be provided in a lump-sum form through budgetary allocations. Provided that
alternative ways of compensating the poor can be devised and administered, there is also a case for
removing subsidies on the consumption of items currently imported at the official exchange rate in order
to subsidize consumption of the poor. (Recommendations on how best to help the poor are outside the
scope of a review of trade policy, however, and should be left to specialists on the design of social safety
nets.) According to our computable general equilibrium model simulations, if in addition to applying a
uniform tariff of 15 percent the government were to eliminate subsidies to essential imports and
distribute the government's revenue gains to all households in a lump-sum manner, aggregate real
consumption would rise an estimated 12.3 percent-6.8 percentage points higher than the 5.5 percent
increase achievable by limiting reform to imposition of a uniform tariff.
22



4. IRAN'S EXPORT REGIME
76)   Iran's Third Five-Year Development Plan highlights the need to promote exports to enhance
economic growth, and the government has already taken important steps to do so. It has removed some of
the most serious direct barriers to exports and is in the process of greatly reducing those that remain. At
the same time, it is trying to provide exporters with duty-free access to imported inputs by means of duty
drawbacks, duty exemptions, and tariff-free zones. It has also reinvigorated two specialized financial
institutions, the Export Development Bank of Iran and the Export Guarantee Fund of Iran, which provide
subsidized credits, guarantees, and insurance to exporters of manufactured products. The next step may
be to examine three remaining kinds of restrictions on exports:
*  Exports are still bound by the Central Bank's foreign exchange surrender rules and by the setting of
minimum prices for exported products. These restrictions have recently become less serious and will
presumably be removed altogether when exchange controls are removed from all current account
transactions.
*  Exports are subject to mandatory standard certification procedures. Authorities justify this
requirement on the ground that the reputation of Iranian products in world markets is a shared good
that affects all exporters. In many countries, however, quality controls act as nontax barriers by which
established members of an association of exporters restrict competition from new entrants to the
export trade. Such measures are subject to abuse and increase costs to producers and exporters,
reducing their competitiveness. Moreover, quality improvements through standards which succeed
are driven by firms close to market forces. Government mandated standards which are imposed by
public sector entities are often outdated, inefficient, and impose unnecessary costs on exporters.
*  Some export bans and licensing requirements on primary products are still used to assist domestic
manufacturers who use these products as inputs.
4.1 Checks and Controls on Exports
77)   The main controls that are applied to Iranian exports are bans, licensing, minimum quality
standards and surrender requirements on foreign exchange. We think that some of these controls do more
harm than good, but that others are effective ways of achieving important national objectives that are
sometimes non-economic. In this section we argue that the export bans and licensing requirements that
genuinely serve religious, cultural, environmental and genetic objectives could be retained if not used for
protective purposes. However, we argue that the surrender requirements on foreign exchange should be
removed. So too should bans and licensing requirements on exports of primary products that are used to
protect domestic users of these products. Finally, we recommend making sure that export standards only
address health and safety requirements and are not used as a covert replacement for explicit bans and
licensing
Export Licensing and Bans
78)   In 1998/99 export restrictions-in the form of either outright bans or licensing by the Ministry of
Commerce-applied to 32 categories of goods in Iran (table 4.1). In 1999/2000 this list was reduced to
seven categories (table 4.2).
23



79)    Comparison of tables 4.1 and 4.2 shows that a substantial part of this apparently larg( reduction is
due to aggregating relatively narrow categories of goods into broader ones. Some export restrictions were
lifted, however: eggs, poultry; onions, potatoes, lentils, detergents, soaps, glass, and tires are no longer
banned or subject to licensing.
80)    By the end of the Third Five-Year Development Plan, the export of only three categories of goods
will be restricted: essential goods imported using govemment subsidies, antiques and items banned by
Islamic law, and exports banned for environmental or genetic reasons. This reform marks a significant
step in enhancing the environment for exports in Iran. To achieve the goal set out in the P'lan it will be
necessary to remove the current restrictions on exports of such products as un-sawn tirmber and live
animals. Appropriate controls and certification procedures for the export of such items as sturgeon, caviar
and rare birds and animals are needed to outlaw poaching. However, restrictions on exports of some
unprocessed items (for example, live animals and un-sawn timber), combined with the absence of
analogous restrictions on exports of the same items in processed form (meat, sawn timber and fumiture)
shows that these restrictions are being used to assist slaughterhouses and sawmills at thlv expense of
farmers, foresters and consumers.
81)    It is important that the products subject to bans based on environmental or genetic considerations
are based on principles of sound science, risk, and other transparent criteria
Table 4.1 Banned Exports and Exports Requiring Permits Issued by the Ministry of Commerce in
1998/99
Banned exports                                 Exports requiring permits
Basic goods covered by Sub-Article 5 of the Budget  Edible eggs
Law of 1998/99
Feed for livestock and poultry                      One-day old chicks
Barley and maize (except peeled barley)             Bulbs and roots of pasture plants
Live sheep and goats                                Timber of various forest and planted trees
Raw hides of goats                                  Ash cement and its clinkers; copper, zinc, and lead
ingots; copper alloys; copper anodes and cathodes;
aluminum ingots; iron angles, shapes, sections, and
bars; steel sheets
Raw skins of goats, sbeep, cows, and lambs          Wild animals and birds
Chicken meat                                        Onions and potatoes
Wood of walnut trees                                Oil derivatives, such as thinners, sol vents, engine
oils, and propylene
Fuel wood and wood charcoal                         Urea and various animal and chemical fertilizers
Oil seeds                                           Writing and printing paper and stationer_
Metal scrap and waste                               Flour and domestically produced tea
Lentils                                             Detergents and soaps
Arms and explosives                                 Beans and seeds for vegetable oils
Antiques                                            Pharmaceuticals and milk powder for infants
Cotton products listed under code f201 of the'
harmonized system, plus polyester and acrylic treads
Goods forbidden by Islamic law                     Paned glass
Tires
Source: Decision No. 19226T/80698, March 15, 1998
24



Table 4.2 Exports Requiring Permits in 1999/2000
Subsidized goods, including wheat,a sugar, detergents, insecticides and seeds other than vegetable seeds; writing
and printing paper; human and animal vaccines; heavy tractors, combines and buses; fertilizers and animal feed
Animal and vegetable items that are important for genetic or environmental reasons
Pharmaceutical herbs and pasture plants
Timber in logs
Walnut wood in logs
Fuel wood and charcoal
Caviar and meat of sturgeon, except by the government fisheries company
Live sturgeon
Live sheep, goats, horses, camels, heifers, and buffaloes
Antiques and cultural artifacts
Cotton; raw skins (goats, sheep, cows, lambs); hides (goat, lambs, cows); and raw goat hair
Oil derivatives and petrochemicals
Iron and steel sections, copper ingots, copper alloys, copper anodes and cathodes; steel and aluminum ingots; zinc
concentrate; scrap and waste metal
Barley, oil seeds, poultry feed, injection ampoules, and syringes
Note: Carpets, pistachios, saffron, sheep skins, and live animals can be exported only by registered traders and are
subject to foreign exchange obligations.
a. Export of flour is allowed subject to the provisions of Sub-Article 2 of the 2000 Budget Law, which specifies that
the exporter must pay the government the equivalent of the subsidy on imported wheat
Source: Government Circular No. 200.3691 of March 12, 1999.
82)    Several other export restrictions are also used to subsidize domestic manufacturing activities that
process restricted products. Important examples are the ban on exports of ore, scrap metal, metal sections,
and ingots and skins and hides. Restricting exports of basic metals helps provide cheap inputs for the
engineering and assembly sectors; restricting exports of skins and hides helps provide cheap inputs for the
leather and shoe industries.
83)    The rationale offered for export restrictions on unprocessed primary products and semi-processed
manufactures is that they promote value-adding activities. This rationale may have had some validity
when Iran faced a significant risk of being suddenly isolated from world markets. Now that this risk has
diminished, the case for providing assistance to such activities has disappeared. If the protected
downstream manufacturing activities are profitable at world prices, they have no need of such assistance;
if they are not profitable at world prices, producing them hurts Iran by reducing the value of its net
national product at world prices. In effect, such restrictions are taxes on the producers of raw materials,
which are used to cross-subsidize the manufacturing sectors that use them. Both the taxes and the
subsidies are inefficient.
84)    The restrictions on exports of price controlled goods, such as flour, are needed to prevent the
government's present scheme for assisting the poor from degenerating into a device that merely dissipates
government revenue. For the same reasons, exports of products that use these essential goods as inputs are
also generally banned, although exports of flour and products using flour, such as manufactured bakery
products, may now be approved, provided that the exporter repays the subsidies
Surrender of Foreign Exchange
85)    Exporters are required to surrender their foreign exchange receipts within eight months of the
time their goods are brought to Iranian customs for export clearance. The Iranian authorities may, at their
discretion, demand that the exporter obtain a bank guarantee for the delivery of the full amount of the
export proceeds by the specified date. In the case of established exporters deemed by the authorities to be
25



reliable, a formal bank guarantee is not usually required, although the obligation to deliver the foreign
exchange still applies. This differential treatment of new and established firms deters competition by
acting as a barrier to new entrants
86)    The obligation to repatriate foreign exchange within eight months restricts the ability of exporters
to extend credit to foreign buyers. In the case of products for which this type of export finance is not
usually provided, the restraint is not serious. In the case of products for which such finance is part of
normal commercial operations, however, the restraint may create serious inefficiencies. Arr.ong Iranian
exports the main example of such a product is carpets. In some cases, such as a sale to a depaitment store,
the carpet exporter normally has a firm order from the foreign buyer at the time the goods are exported
from Iran. In these cases, the surrender requirement is not a major impediment (provided, of course, that
the buyer does not renege on the contract). In many cases, however, exporters ship their carpets to an
agent on consignment, on the understanding that the agent will pay the Iranian supplier only when the
carpets are sold. This method of selling carpets is often more profitable than outright sale al the time of
export. In some cases, the Iranian supplier owns the overseas wholesale or retail outlet io which the
carpets are delivered. One exporter informed the mission that he still had some unsold carpets in a foreign
warehouse that had been there since he set up his business more than 30 years ago. In a long-established
large or medium-size exporting firm, the failure to sell some items within eight months of their being
exported need not be a major problem, because other items will be sold in less than eight m.onths. Even
so, the export surrender constraint imposes an average tumover time of no less than eight months, which
may well be faster than the efficient time. Even exporters of modem manufactures complained to the
mission about the interference of the regulation with efficient business practices.
87)    In a small, newly established exporting firm, the eight-month rule can result in very severe
problems if goods remain unsold. The exporter can apply for an extension, and short extens.ons may be
granted, although the conditions for granting them are not transparent. If no extension is grarwed, or if the
goods remain unsold at the end of the extension, the exporter may use its own working capital to buy
foreign exchange to surrender to the Central Bank or it may ask its agent to borrow from an offshore
bank, on the understanding that the exporter will bear the high resulting interest cost. Another option is
for the agent to dispose of the goods as rapidly as possible, even if this means accepting very low prices .
Such forced sales unnecessarily reduce the exporter's Revenue
Compulsory Export Quality Standards
88)    Quality standards are set by the Institute of Standards and Industrial Research of Iran 'ISIRI),
which has established roughly 5,000 national standards covering exports, imports. aid domestic
production."' These standards are based on intemational standards, or lacking that, on the standards
adopted by the largest producers of the relevant products, taking into account consumer tastes
89)    Certification requires about five months and involves training and certification of one company
employee as the person responsible for quality control, sample taking, and laboratory testing; three
random ISIRI visits to the production line to check system quality (production, warehousing, packaging);
and testing of products (either purchased from market or taken from the production line). P'roducers can
manufacture and sell their products on the domestic market during this process, as long as they have
clearance from the Ministry of Health. They are not, however, allowed to advertise until -hey receive
" ISIRI is the modem successor to the Bureau of Standards, created in 1953 to establish compulsory export standards. Then as
now, the objective of compulsory standards was to prevent some low-quality Iranian exports from spoiling the reputation of all.
26



certification. If they want to export before being certified, each batch of products must be tested.
Certification is renewed every year, and random visits and testing continue. The cost of certification is
0.08 percent of a firms' sales, with a minimum of 0.5 million rials and a ceiling of 60 million rials.
90)    The government has provided a set of rules and guidelines to ensure standardization of products,
and it has given ISIRI oversight power and the authority to sue violators. ISIRI also has the authority to
recall products and to impose damages (based on a schedule) if a product causes the bodily harm or death
of consumers.
91)    Export standards are required only for goods that also require certification for production and sale
within Iran. In this sense, exports are not being discriminated against relative to goods marketed
domestically. For instance, six agricultural products (pistachios, raisins, dates, dried apricots, saffron, and
cumin) and 389 industrial products (or product categories) currently require standard certification for
production, warehousing, distribution, sales, and export. Setting mandatory standards that extend beyond
the realm of the health and safety of Iranian consumers and requiring export standard certification may be
unnecessary, however. The government, supported by the High Commission on Standards, opted to
require mandatory certification on exports, apparently swayed by the argument that lower-quality
products may harm the reputation of all Iranian exports within a product group.12 In some circumstances,
these considerations may justify the setting of certain compulsory standards, however, export certification
increases the cost of production and export, however, thereby reducing the competitiveness of Iranian
exporters. International experience also suggests that certification can be subject to abuse. It may also
violate WTO rules, if there is discriminatory treatment of foreign producers, in contrast to domestic firms.
Balancing the costs and benefits of standards can only be done on a case by case basis.
92)    In addition, evidence indicates that reliance on private sector standards, based on international
voluntary product and process specifications, raises quality and enhances market competitiveness of firms
over time. Government direction of standard systems ensures outdated technology and poor quality
products which are not competitive on world markets.13 While some exporters, especially those exporting
food items, support obligatory standards and certification, others argue that judging quality should be left
to the buyer, particularly in export markets. ISIRI agrees, arguing that compulsory standards should be
limited to those affecting health and safety. With that in mind, the government is reforming the list of
products for which standard certification for exports is required. In 2000 it initiated-and the Parliament
passed-a major reduction in the agricultural list, trimming it from 55 products to just 6. The industrial
list also needs revision, with some items eliminated and others possibly added, on the grounds of health
and safety. For instance, the current list includes standard requirements for several types of footwear.
ISIRI considers inclusion of these items a mistake and acknowledges that it has no method of monitoring
standard adherence in this industry, given the very large number of small footwear producers.
93)    Mandatory export standard requirements also raise the specter of collusion among the more
established producers and traders in different product categories. Such collusion could lock out potential
newcomers and innovators who might otherwise compete with them in their price and quality range or
who could branch out and find a different market niche with different quality and price characteristics.
94)    In summary, export standards pose issues that can only be resolved by studying each proposed
standard on its merits to see whether it is likely to act as a backdoor route to the re-imposition of
12The High Commission on Standards is composed of 10-13 ministers as well as representatives from the private sector, the
Chamber of Commerce, the Central Bank, and the judiciary. It is presided over by the President of the Republic.
13 For additional reference see reference material at www.worldbank.org/trade/standards.
27



licensing, or as a legitimate way of preserving the good reputations of other Iranian exporters. The World
Bank is considering surveying firms in Iran and other countries in the region to gather information on
technical barriers to trade and the impact of voluntary standards on export competitiveness. [f finalized,
this study would provide useful information that will help resolve some of these issues.
4.2 Duty-Free Access to Inputs by Exporters
95)    Since imports must ultimately be paid for by exports, some anti-trade bias is an inevitable
consequence of using import taxes to protect domestic industries and raise revenue. It is easy to see why
import taxes reduce imports; to see why they also reduce exports, note that by protectuig import-
competing industries, taxes on imports raise the prices of domestic factors of production and imported
inputs relative to the domestic prices of exported goods. This anti-trade bias can be reduced somewhat by
schemes that grant exporting firms duty-free access to imported inputs. While usually better than nothing,
these schemes are a poor substitute for free trade, since they do not provide exporting firms with access to
domestic factors of production at the prices that would obtain under free trade. Moreover, i ' exporting
firms do not use imported inputs, the schemes do nothing to mitigate the anti-trade bias of import taxes.
In addition to providing only partial relief from the anti-trade bias of import taxes, schemes to provide
exporters with duty-free access to imported inputs have often been plagued by administrative problems,
including not only inevitable monitoring costs and delays but also fraud.
Three main kinds of schemes provide Iranian exporters with access to imported inputs ai free-trade
prices:
*  Duty drawbacks. Under this scheme, import duties are paid when the imported input, enter the
country but are refunded by the Customs Department when the finished products into which they
have been incorporated are exported.
*  Duty exemptions, or "temporary importation." Under this scheme, imports of inputs into products
that are to be exported are exempted from duty, but the importer has to provide some guarantee that
the product will eventually be exported. Usually, products that have avoided duty must be stored in
bonded warehouses, which the Customs Department has the right to enter in order to check that the
exempt items have not been sold to domestic buyers.
*  Free-zones. Free zones are zones in which there are no domestic customs controls on trade between
foreign countries and the factories and warehouses in the zone. Domestic customs controls do apply
to trade between each zone and the rest of the domestic economy. The general definition of zone'
given here covers not only what are called 'free trade zones' in Iran, but also what Iran calls 'special
economic zones'. Both types of zone provide exemptions from import duties; Iran's free-trade zones
also provide exemptions from many other taxes and regulations.
96)    Duty drawbacks and duty exemptions are closely related and involve similar adrninistrative
problems and costs. The Customs Department has the right to insist that the importer/exporter provide a
bank guarantee that the final product will be exported (in practice, it does not usually require established
manufacturers to provide such guarantees). When the final product has been exported, the
importer/exporter must apply to customs to release it from the guarantee. The delays and chargps involved
are similar to those involved in waiting for duties to be rebated under a drawback scheme, except that the
importer/exporter does not forgo interest on the amount of duty that would be payable in the absence of
the scheme. Free-trade and special economic zones and duty exemption schemes are also similar, because
all the firms and warehouses in each zone are effectively treated as if the zone constituted a single very
large bonded warehouse.
28



97)    The Republic of Korea, Taiwan (China), and Hong Kong (China) have used all three mechanisms
in parallel, with considerable success. Users there prefer exemption schemes to drawbacks, because only
exemptions save them the interest costs on the duties paid. However, exemption schemes are more open
to fraud. As result, exemptions are restricted mainly to producers, whose factories provide de facto
collateral against fraud, while traders must normally make do with drawbacks.
98)    The disadvantage of free-trade and special economic zones relative to the other two schemes is
that it is not always efficient for exporters to be located in the designated zones. The advantage of the
zones comes from economies of scale in administration. In the case of both drawbacks and exemptions,
administrative problems arise when the inputs are transformed in production, because it then becomes
difficult to determine exactly how much of each input was actually incorporated into the finished products
that are exported. Without free zones, which can eliminate these problems, substantial administrative cost
is necessary to overcome these problems, since the Customs Department, perhaps in conjunction with the
producer and the relevant line ministry, must establish technical input-output coefficients specifying the
amounts of each imported input in each type of exported good.
99)    Free-trade zones provide a way of avoiding many of the problems in administering drawbacks
and exemptions that arise in the case of indirect exports (such as the use of imported raw materials in
making packaging materials, some of which are then used by exporters). These problems can also be
partially overcome under drawback and exemption schemes, but the admninistrative costs of measuring
and establishing technical coefficients usually become prohibitive once more than one step is involved.
Drawbacks and Exemptions
100)   Drawbacks Article 113 of the Third Five-Year Development Plan announced the government's
intention to enhance the effectiveness of the duty drawback scheme, which was established before the
1979 revolution. The scheme works as follows: importers pay the duties (both customs duty and
commercial benefit tax) applicable to their products when they are imported and use them to produce final
goods. Producers are entitled to a refund of the import duties on the portion of the imported inputs that is
included in those final products that are exported, either directly or indirectly by being sold to another
domestic producer who uses them in the production of exports.
101)   Article 25 of the Ordinance of Law on Export-Import Regulations and Article 14 of the Export-
Import Regulation Act of 1993 set out the rules and explain how to calculate entitlements to refunds.
Article 25 also notes that exporters who have a complaint regarding the handling and calculations of their
case by the Customs Department or a ministry have recourse to an appeal committee.14 Article 14 of the
Export-Import Regulation Act states that refunds are made by Customs upon presentation by the exporter
of the export certificate. To apply for a refund, an applicant must provide Customs with proof of import
and export (as well as a trader's license); the technical input-output coefficients, confirmed by the
14 In case of disputes regarding exemptions, drawbacks, valuations of products, mis-categorization, or other matters related to
customs, two appeals committees convene at the request of exporters/importers. Disagreements regarding miscategorization of
products or the amount of import taxes due must be submitted within eight months . The first committee reviews the case and
makes a judgment. The second comnmittee reviews the judgment at the request of the exporter/importer. (In practice, very few
cases are taken to these review courts: according to Customs authorities, there have been only about 10 cases in the past eight
years. The lack of cases may reflect that fact that disputes have almost always been decided in favor of the Customs
Administration.) If necessary, the Customs Department may pursue those who do not comply in national courts.
29



relevant ministry; and the completed application form requesting duty drawback. Exporters have three
years from the date of the import of the inputs to produce, export, and file for duty drawbacks.
102)  The time taken by Customs to calculate refunds, verify applications, and then process refund
payments depends on the product and the complexity of the input-output relations. Calculating the input
of textiles into garment production is rather simple; calculating the use of a specific imported chemical in
the production of soap is much more complicated, as there is much more transformation of the imported
inputs. Once the documentation is complete, Customs authorities claim that the process can be completed
in two to three days. Where documentation is incomplete-if, for instance, documents need to tie gathered
from different border customs offices-the process may take two to six months. One of the exporters
interviewed stated that it usually took his staff two months to get refunds.
103)  Exemptions ("Temporary Importation") The duty exemption scheme was enacted in Article 12 of
the Export-Import Regulations (September 1993) and in Article 24 of the Executive Ordinance of Law on
Export-Import Regulations (April 1994). The law provides for exemptions of duty on the temporary
importation of raw materials and products needed to produce, complete, prepare, or package exported
products. Indirect exporters (both importers who sell inputs to producers who export and tradeis who buy
goods from producers and export) are entitled to exemptions. Re-export of goods that contain duty-free
imports must occur within one year, unless an extension for a second year is obtained. If re-export does
not occur within the allotted time, a heavy fine (about three times the value of the imported inputs plus the
amount of duties) is levied on the importer.
104)  The importer/exporter must provide a promissory note or other valid security to Customs at the
time of the initial import as a guarantee that the exempted goods will be re-exported. Importers are
responsible for payment of expenses, such as warehousing and transport, incurred by Customs, but
Customs does not charge any additional administrative fees.
105)  In practice, the promissory note or valid security takes the form  of a specific financial
commitment. For raw materials, parts, and packing material, conditional on the importing firnr providing
proof that it is a producer, Customs may demand a dated draft equal to the value of all duties and taxes
plus 50 percent of the c.i.f. value of the imported product. For all other applicants and godcls, it may
demand a guaranteed dated (one-year) bank note or letter equal to twice the c.i.f. value of the imported
product. In practice, the amounts demanded are usually much lower: public enterprises are excused from
having to provide any bank guarantees provided that the relevant ministry agrees to guarantee their
obligations to Customs, and "well-reputed" private producers (usually those recognized by che Export
Promotion Center and the Chamber of Commerce) may be given discounts of up to 80 percent of the full
amount of these financial commitments.  Applicants for exemptions must provide the. following
documents to Customs:
*  Trader's license (issued to all traders in Iran by the Chamber of Commerce and the Ministiry of Trade
and renewed annually).
*  A document from the appropriate ministry outlining the technical input-output coefficients (for the
industry), the amount of imported inputs, and the amount of the final product to be exported.
*  An "economic code" issued by the Ministry of Finance to all traders in Iran (both domestic and those
trading across borders).
*  For producers who want to use the dated draft method, the permit for their production site l:Firm site).
*  Customs documents for the retrieval of the imported products from the customs post at wvhich they
are held until duty exemptions have been approved.
*  Completed application requesting duty exemption.
30



106)  Customs officials claim that the processing of the application takes only one to two days
once these documents have been provided. Once the application has been approved, the importer
can retrieve the goods from the customs post at which they must be left until approval is granted.
107)   Once production has taken place and the exporter wants to clear the promissory note with
Customs, two cases emerge. If the applicant provides the necessary documents immediately
before export, Customs can readily check that the products to be exported conform with the
importer's original obligation."5 The central customs office should take only one day to authorize
clearance. Next the applicant firm takes the export documents to the border customs office from
which it originally retrieved the temporary imports. This office then confirms that the bank may
clear the applicant's promissory note. If the applicant waits until re-export has actually taken
place, Customs cannot readily verify that the importer/exporter has met its obligations. In this
case, the cancellation of the promissory note takes longer.
108) Performance of Drawbacks and Exemptions According to people with whom the mission
spoke, experience with the exemption scheme has been mixed."6 In about 15-20 percent of cases,
importers with exemptions have failed to make the legally obligatory re-exports, presumably
selling their exempted imports to domestic buyers. Most of these cases have involved textiles, for
which import restrictions have been very severe and domestic demand is very high. To prevent
this kind of fraud, the government no longer allows traders to use the exemption scheme, which
is now restricted mainly to producers, whose factolies serve as collateral for their obligations to
re-export exempted inputs.
109)   To assess barriers to exports and the effectiveness of the government's export promotion efforts,
the mission spoke with several exporters. Only two of the exporters interviewed used either scheme
actively. One, who had been using the duty exemption scheme for packaging products for two years,
found that it worked well and reported that there had recently been a marked improvement in customs
procedures, resulting in less paperwork and shorter delays. The other exporter used the duty drawback
scheme. He submitted his requests in batches twice a year and estimated that it took him about two
months to get his money back. He noted that he had a team working on this regularly and that the
procedure had become routine. The other exporters interviewed either did not use or did not know of the
schemes. One found duty drawback procedures cumbersome and bureaucratic and refused to use them.
Officials estimate that roughly 5 percent of exporters use these schemes. They believe that few exporters
use the schemes because import duties are low and the administrative procedures for drawbacks and
exemptions are cumbersome.
110)   All exporters pointed to the fact that customs procedures have become much easier and faster in
the past two to three years. Customs has removed unnecessary regulations, reduced delays in processing
exports, and begun to rely more heavily on self-declarations by exporters. These measures have also
improved the effectiveness of the duty drawback and temporary exemption schemes.
15 Customs tests products in laboratories when they are imported. In the case of temporary imports and duty drawbacks, it tests a
sample brought in by the exporter for content. For imported textiles and exported clothing, this testing is rather methodical and
routine. For some other products, checks are random. Customs usually accepts the self-declaration of well-known traders.
16 We were unable to obtain quantitative data on the total amount of refunds under the drawback scheme or the amount of duty
exemptions provided under the exemption scheme. Customs may wish to improve its data collection for statistical and analysis
purposes.
31



111)  The process now underway of converting nontariff barriers into their tariff equivalents will
initially increase import duties and therefore presumably increase the incentives to use the drawback
scheme. To the extent that the exemption scheme provides effective exemptions from import licensing
requirements as well as duties, tariffication will not affect the incentives to use it. When and if tariffs are
eventually lowered below the levels of existing nontariff barriers, the incentives to use both schemes will,
of course, decline.
112)  The implementation of the Automated System for Customs Data is progressing. Regulations are
being implemented by hand in all customs offices, and some desktop computers have already been
equipped with the automated system. In the next year, more than half of all customs offices are expected
to be equipped with the computerized program. Within two to three years, all customs offices are
expected to be computerized. The Automated System of Customs Data will greatly fiacilitate the
administration of both the duty drawback and exemption schemes. It will reduce paperwork arnd delays in
processing applications and transmitting documents from central and border customs offices
Free-Trade Zones
113)  All three free-trade zones are located on the Persian Gulf. They thus have easy access to the
Indian Ocean as well as to the regional markets of the Commonwealth of Independent States (by air, road,
or rail through Iran) and the Gulf states. However, they also face stiff competition from the Gulf states in
the struggle to attract investment and tourism.
114)  Each of Iran's three free-trade zones is administered by an independent authority, organized as a
company with autonomous legal status, whose capital belongs to the govemment. A board of' directors-
three to five people chosen by the board of ministers-administers each zone, for a renewable period of
three years. The managing director of each zone is chosen by the President of the Republic from among
the board of directors. The firms in the zones do not participate in administration, and the admrninistrators
interfere as little as possible in normal business operations
Box 4.1. Increasing Export and Employment through Free Trade Zones FTZs
Free trade (FTZs) are enclaves in which governments attempt to enable manufacturers of exported
goods to have duty-free access to imported inputs. They are inferior to free trade both because it is not
efficient for all export activities to be located in a few specified zones, and also because they do not
remove import restrictions. As a result, producers in FTZs cannot buy domestic factors of p]roduction at
the prices that would occur if all trade were free. Nevertheless, they can still be a useful way of
expanding trade before the implementation of more thorough-going reforms.
FTZs are generally used to achieve three goals: promote export-oriented production and
employment, increase foreign exchange eamings through nontraditional exports, and encourage foreign
direct investment in countries in which legal, administrative, and infrastructure-related weaknesses
impede investment in exportables. EPZs also provide backward linkages and allow the transfer of
technology and know-how to the rest of the economy.
International experience with FTZs has been mixed. In Mauritius EPZs generated 71 percent of
gross exports and employed almost 17 percent of the work force in 1994. Mexico's FTZs, known as
maquillas, employed some 900,000 people in 1997, and the sector is among the largest generators of
foreign currency. In contrast, the Senegal EPZ was hampered by excessive administrative red tape and
strict labor laws. As of 1990 - 14 years after it became operational - it employed only 600 vBorkers and
exported just $15 million worth of goods. The experience of most EPZs falls between these two
extremes.
32



Effective FTZs combine clear private property rights and investment regulations, no restrictions on
foreign exchange, tariff-free imports for export production, moderate levels of taxation, streamlined
administrative procedures, and private sector management. Public provision of basic infrastructure
outside the zone-telecommunications, roads, ports-can have positive spillover effects for local and
national economies by facilitating economic activities, but FTZ development, including the provision of
infrastructure and management, should be privately handled.
The success of an FTZ is highly dependent on a hospitable host country economic environment,
including sound macroeconomic and exchange rate polices. Worldwide experience suggests that
investors weigh economic and political stability, labor skill compatibility and productivity, and other
similar factors carefully.  Incentives, such as overly generous tax packages or legal investment
assurances, may not attract the right type of investors or any investors at all. Furthermore, forgoing tax
revenues may be expensive, especially if major public investments are made to develop the zone. The
failed Bataan zone in the Philippines shows that heavy government investment and concessions can be
costly and need not create a successful FTZ.
The Philippines' new FTZs have increased both employment and exports. In 1996 the 4 public and
43 privates zones employed more than 150,000 people and exported US$6.5 billion worth of goods.
Average wages in the zones are higher than in the rest of the country, but integration and forward and
backward linkages with the domestic economy have been difficult to achieve, especially in the absence of
more economywide reforms. Despite increases in exports, however, these FTZs have lead to high import
dependency and low net exports (41 percent) and net foreign exchange earnings.
115)   Four main incentives have been provided to increase the attractiveness of free-trade zones to
potential investors
1. The foreign share in the equity of firms is not capped in the zones, and there are laws to protect
foreign investment and guidelines for compensation in case of nationalization. Iranians can purchase
or lease land in the zones; foreigners can only lease it.
2. In addition to exemptions from import taxes on raw materials, parts, and machinery for use in their
factories, firms in the free-trade zones receive exemptions from direct taxes for 15 years.17
3. To foster the development of the zones as off-shore financial centers that are not subject to the
repressive financial regulations that operate in the rest of Iran, the government allows the inflow and
outflow of foreign currency. It may take up to a week for the zone administration to approve requests,
however. This verification is supposed to ensure that no ill-gotten gains are transferred into or out of
the zones. However, this clearance prerequisite may act as a deterrent to foreign investors.
4. Labor laws in the free-trade zones are more lenient and business friendly than on the mainland, where
it is difficult and costly to dismiss employees. Although labor contracts in the zones allow firms
much greater flexibility, procedures to address workers' complaints have been established, and the
minimum wage in effect in the rest of Iran applies in the zones as well.18
17 It seems likely that many firms will simply close after 15 years and then reregister under new names in order to continue to
receive full free tax status.
'S The national minimum wage is 458,013 rials per month (or US$56.50 per month, at US$1=8,100 rials)
33



116)   Officially, the free-trade zones were established to provide exemptions from tariff and nontariff
barriers on imported inputs used by manufacturing firms in order to increase non-oil, ncn-traditional
exports, eam foreign exchange, and create employment opportunities in the mostly poor regions in which
they are located. In practice, particularly in their early years and particularly in the case of Ki,h, the zones
have provided partial exemptions from tariff and nontariff barriers to finished manufactures. In this sense,
Iran's free-trade zones initially functioned as import-processing zones rather than expoit-prccessing
zones.
117)   The free-trade zones have been used to bypass barriers to imports in two ways. First, Iranian
citizens are allowed to bring up to $80 worth of goods a year from the free-trade zones into the mainland.
Since there are three zones and effective coordination among them appears to be lacking. it 'would appear
that Iranians can actually import a total of $240 a year from the zones. The provision granting $80 of free
imports per person led to the growth of a cottage industry in which small traders hire peopic to t-avel to
the free-trade zones for the sole purpose of bringing back consumer goods. This practice has been the
source of longstanding criticism of the zones in Iran. Critics have correctly argued that if lIan wants to
liberalize its imports of consumer goods, it should do so by liberalizing the regulations that apply to all
firms, rather than by subsidizing special zones. which are costly to develop. increase the administrative
workload on the Customs Department, and facilitate smuggling.
118)   Second, firms in the zones partially circumvent the nontariff barriers that apply to foreign firms
because they are allowed to sell some of their gross output to the mainland without obtaining import
licenses. Total exports from each zone to the mainland must not exceed SlOO million a yeai; as long as
this ceiling is not exceeded, each firm in a zone is allowed to export to the mainland an arnournt of its
gross output equal to its value-added plus the value of inputs purchased from the mainland. A firm that
exports the full amount to the mainland permitted by this rule therefore makes no net cortribtition to
earning foreign exchange. To see why, suppose that for every $100 of gross output, the firm buys $60 of
imported inputs from foreign countries and $10 worth of inputs from the mainland, prodLcing value-
added of S30. For each $100 of gross output, it can sell $40 to the mainland, leaving $60 for exports to
foreign countries, which is just sufficient to pay for the inputs purclhased abroad.
119)   These loopholes shaped the early development and performance of the zones, especially Kish.
Exports from Kish to foreign countries averaged only $1 million a year in 1998 and 19'.9--a<bout 1
percent of the volume of its exports to the customs territory of Iran.
120)   The free-trade zones have failed to achieve their primary goals of Increasing exports and
attracting foreign direct investment. Employment creation has been commensurately low. Discussions
with officials in November 2000 revealed that efforts are now underway to redirect the zones toward
exporting to foreign countries rather than to Iran. Kish, with its natural beauty and pristine beaches, is
slated to become a destination for foreign and Iranian tourists. Other commercial activitic;, including
nonpolluting production for export and exports of services, are to be pursued as subsidiary goals. Qeshm
is to be developed as a more traditional free-trade zone, specializing in energy and heavy industries that
take advantage of its abundant gas resources and its natural deep sea port. Chahbahar is to tak,2 advantage
of its position as a port on the Oman Sea with easy access to the Indian Ocean and as a transit site for
trade with Afghanistan and the Commonwealth of Independent States. After an extended period of policy
uncertainty, the govemment has nominated a new management team for each zone. It has r2iterated its
goal to support and accelerate its efforts to implement the new zone-specific development strategy and to
attract foreign direct investment-a policy pronouncement likely to encourage potential inveslors.
.'1



Special Economic Zones
121)   The creation of the special economic zones was mandated by the First Five-Year Development
Plan. Legislation relating to their activities has been approved over the years as part of general trade
legislation. Seventeen special economic zones currently exist in Iran, at various stages of development,
with three others in the planning stages.19
122)  Very few data are available on the special economic zones, most of which are still in the early
stages of development and do not yet have much production or exports. The Sirjan special economic zone
(in the southeast), which was established in 1990, is one of the oldest and most developed of these zones.
It contains more than 50 industrial firms that produce garments, polyurethane, color TVs, and other
goods.
123)  The special economic zones seem to have been set up for three main purposes, which sometimes
overlap:
1. To create jobs in poor and underdeveloped regions by attracting domestic and foreign investment.
2. To take advantage of strategic locations, such as borders and trading crossroads. Twelve of the zones
are located along the border. Five, including three ports on the Caspian Sea, are on the northern
border, where they can trade with neighbors to the north, northwest, and northeast. Another seven
zones are ports on the Persian Gulf, which have a comparative advantage in trade with neighbors to
the southeast and southwest and with world markets by way of the Indian Ocean.
3. To allow localities to specialize according to their comparative advantage in specific industries. The
Sang-e-Lorestan special economic zone, for instance, will focus on mining stones, while the Yazd
special economic zone will build on the very strong textile tradition of the Yazd region in central
Iran.
124)   Special economic zone firms can perform four main functions, as the Second Development Plan
(1994) notes. First, unlike imported goods on the mainland, which must clear Customs within a specified
period of time, goods brought in under temporary admission can be warehoused for an unlimited time.
Second, the special economic zones facilitate access to raw materials, machinery, and other manufactured
goods that support production for domestic sale or export. Third, the special economic zones create value-
added in manufacture. Fourth, the zones act as centers for regional and global trade, particularly with
Central Asia, the Caucasus, Asia, and Europe.
125)   The special economic zones are similar to the free-trade zones in that both provide exporters with
duty-free access to imported inputs. Four main differences distinguish the two types of zones (table 4.3):
1. Social security and labor regulations in the special economic zones are identical to those on the
mainland; less stringent regulations apply in the free-trade zones.
19The special economic zones include Sirjan, Sarakhs, Bandar-e-Anzali, Bandar-e-Anzali (location 2), Khuzistan,
Salafchegan, Khorramshahr, Jolfa, Arg-e-Jadid, Bandar Bushehr, Bushehr, Bandar Amirabad Behshahr, Bandar
Shahid Raja'ee, Assaluyeh, Sang-e Lorestan, Petrochemicals, Mines and Metals. The three zones being planned are
Shiraz Electric and Electronic SEZ, Yazd Textiles SEZ, and Persian Gulf ship building SEZ.
35



2. Exporters in the special economic zones are allowed to export their own outputs to the rnain customs
territory of Iran under the same formula as the free-trade zones. However, firms in the free-trade
zones are allowed to trade at both the retail and wholesale level, whereas those in the special
economic zones can trade only at the wholesale level.
3. Firms in the special economic zones can use only the domestic banking and insurance services
available to ordinary Iranian firms. In contrast, foreign banks have been allowed to set tip in the free
trade zones, which the government is trying to develop not only as export processing zc nes, but also
as offshore banking centers. In the special economic zones, national laws govern company
registration. intellectual property rights, and foreign investment protections. Firms in free-trade zones
have their own regulations in these areas.
Table 4.3 Policies in Iran's Free-Trade and Special Economic Zones
Policy                          Free-trade Zones                   Special economic cones
Import of goods from     Free from all taxes and duties. Some levies and fees   Same
abroad                   are collected to cover the cost of services provided.
Re-export abroad of      Free from all taxes and duties                  Same
goods imported into the
zones
Import of goods, semi-    If exported, subject to the export-import regulations   Same
finished parts, and raw  in force on the mainland
materials from mainland
Export to the mainland of  The amount of goods that can be exported to the  Same
goods produced in the    mainland by each firm in a free trade zone without
zones.                  the need for any special import license by the
mainland purchaser, is equal to the value-added by
(i.e., wages, domestic inputs) by the firm in the zone.
Duties apply to the amount of imported materials
and parts used in the final product being exported to
l___________________________  the  mainland.
Unloading, loading,      Free from all taxes and duties; only warehousing and   Same
transit, and transshipment  local charges collected
of merchandise abroad
Registration of          Governed by special regulations                  Governed by laws and
companies, intellectual                                                  regulations in f rce on the I
property rights, trademark                                                mainland
brand, patents, and so
forth
Utilization of land      Land is public and is sold or leased to Iranian  Same
nationals; foreign nationals can only lease land
Exchange rate            Free-market exchange rates                       Domestic banking exchange
_ _ _ _ _ _ _ _ _   _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _   ~~~~~~~~~~rates
Certificate of origin   Issued bv zone authority                          Same
Retail export sales to   Allowed                                          Not allowed
mainland
Offshore banking         Permitted under recently approved law            Domestic banking
operation by private                                                      operations by slate banks
sector                                                                    only
Insurance activities by  Permitted under recently approved law           Provided by stat insurance
private sector                                                            companies    _
Foreign capital          Accepted and protected                           Same
investment
36



Policy                          Free-trade zones                    Special economic zones
Guarantees to foreign    Guaranteed by the government or the zone authority,  Governed by the law on
investors against        depending on the amount                          attraction and protection of
nationalization and                                                       foreign investments
confiscation
Foreign ownership        Up to 100 percent of shares                      Same
Recruitment of foreign   Up to 10 percent of manpower                     Governed by aliens'
workforce                                                                 employment regulations in
force on the mainland
Entry into the zones     No previous application for entry visa is needed;  Prior visa required. Zone
visa issued at port of entry                     Authorities facilitate
securing the visa from the
Ministry of Foreign Affairs.
Social security, social  Mainland social security regulations currently in  Governed by laws and
insurance                force; fund to be set up in the future           regulations in force on the
mainland
Labor law, labor         Governed by special regulations                  Governed by laws and
conditions, industrial                                                    regulations in force on the
relations                                                                 mainland
Souirce: Secretariat of the High Council of the Free Trade-Industrial Zones (www.iftiz.org).
4.3 Export Finance, Insurance, and Guarantees
126)   This section discusses the export promotion agencies recently established or revived to assist the
export promotion goals of the government.
The Export Development Bank of Iran
127)   The Export Development Bank of Iran (EDBI) was set up during the First Five-Year
Development Plan (1990/91-94/95) to help promote exports. Five national commercial banks, all state
owned, were ordered to provide EDBI with its initial capital of $12 million, which was lent at a zero
interest rate. The Second Five-Year Development Plan (1995/96-1999/2000) helped build up the bank's
capital by exempting it from remitting after-tax profits to the national treasury, as the other state-owned
commercial banks are required to do.
128)   Traditionally, EDBI engaged in collateral-based lending. Recently, however, it has begun
developing credit-based lending. It prefers letter of credit financing and will finance 90 percent of the
value of exports if a contract is based on a letter of credit (and only 60 percent of the value if a letter of
credit is not used). The average loan is about $70,000-$75,000, with a minimum of $20,000 and a
maximum of $5 million.
129)   The processing of a loan application takes two to four weeks. In granting loans, EDBI gives
preference to small and medium-size enterprises and to exporters of modern manufactures rather than
traditional exports, such as carpets or pistachios. The results of this bias can be seen in table 4.4.
Exporters of traditional products tend to use Iranian comrnercial banks (such as Bank Melli) or other
financing arrangements.
37



Table 4.4. EDBI Loans by Industrial Sector, 1992/93 and 1998/99
1992/93                          1998/99
Sector              Rials (bIllions) |    Percent     Rials (billions)   Pei cent
Industrial products                   8.5             41.4            333.2            $9.2
Foodstuffs                            3.7             18.0             15.5            15.7
Agricultural products                 3.1             15.2             71.4            10.5
Minerals                              0.5              2.4             16.9             2.5
Carpets and handicrafts               3.4             16.6             60.0             8.9
Textiles and clothing                 1.3              6.4             89.4            13.2
Total                                20.5            100.0            677.1           1C00.0
Source: EDBI annual report 1998-99.
130)   Until about 1999 EDBI concentrated on financing short-term working capital loans for exporters,
usually for periods of less than one year. Recently, it has allocated 20-30 percent of its funds toi financing
medium-term loans to support the creation of export capacity. Examples of investments financ,ed include
factories and machinery for production for export of herbal medicines, preserved fruits, tomato paste, and
apple concentrate.
131)   EDBI's capital is about $40 million; another $100 million has been allocated to it in the current
government budget and will be transferred from the Central Bank. The additional funds will increase the
direct govemment share in the bank dramatically, while further reducing the share of the commercial
banks, which currently stands at $8 million. EDBI's resources also include its clients' deposits.
132)   EDBI charges 2.5-3.0 percent above the London Interbank Offered Rate (LMOR) on its dollar
loans. On Rial loans it charges the ceiling interest rate set by the Central Bank for lending to exporters,
currently 18 percent. UJntil last year this rate was well below the inflation rate, thus providing exporters
with credit at a negative real interest rate. Although the Central Bank's interest rate ceiling for bank loans
to exporters is just below the ceiling interest rate of 19 percent for loans to manufacturing---and well
below the ceiling of 25 percent for loans to commercial services, including traders-EDBI has been able
to raise its capital from $12 million to $40 million in less than a decade. This expansion has been the
result of at least four factors. First, all Iranian banks benefit from interest rate ceilings on deposits, which
allow them to act like a cartel. Second, the default rate on loans made by EDBI has been only about 4
percent. Third, EDBI pays no interest on the capital initially contributed to it, and it makes nc dividend
payments to the government. Fourth, unlike other commercial banks, EDBI is not forced to allocate any
of its portfolio to domestic housing loans at interest rates that have ranged between 8 and 15 pe-cent over
the past few years.
133)   Because of its small capital base and conservative lending practices, EDBI plays a relatively
modest role in the overall financing of Iranian exports. In 1998-99 only about 10 percent of fr-an's total
non-oil exports of about $3 billion were channeled through EDBI.20 Between 1995/96 and 19)8/99, the
volume of EDBI's Rial-denominated loans more than quadrupled, rising from  167 billion rials to 677
billion rials, while the volume of its dollar-denominated loans more than doubled, from a very lcw base of
$4 million. These data imply that the value of EDBI's outstanding loans in all currencies was about $100
million in 1998/99, or 22 percent of Iran's annual non-oil exports.
20 These figures were obtained fiom EBDI's 1998-99 annual report and from discussions with EDBI management.
38



134)   Discussions with exporters revealed that some used the bank often or very often and considered
its services good. Others suggested that the loan amounts were small and did not cover their export
business needs. Not surprisingly, exporters hoped to see the subsidies to export finance increased, so that
11DB!I could adopt a less conservative approach to risk and make larger loans.
The 'xport Guarantee Fiutnd of Iran
1 5)   The law establishing the Export Guarantee Fund of Iran was passed in 1975, but the Fund
remained dormant until 1994. It then spent approximately three years reorganizing and hiring staff,
Iecoming fully operational only in 1997.
13)6  The Fund is an independent legal, financial, and administrative entity managed as a private joint-
stock company fully owned by the government and under the supervision of the Ministry of Commerce. It
is an observer of the Beme Union (the international union of official investment and credit insurers) and
lhopes eventually to become a full member.
137)  The Fund earns about S4 million a year from fees and interest, it has paid out claims totaling $9
nillion since 1997. It does not transfer its after-tax (net) profits to the budget but retains them to build up
its capital. In addition to its initial capital and retained profits, the Fund also receives a mandated annual
injection of capital through the budget equal to 1 percent of the c.i.f. value of non-government imports.
As a result of these various additions to capital, the Fund now has authorized capital of about $34 million,
not all of which has yet been fully paid up by the government.
138!  The Fund is involved in both banking and insurance, and it also invests, on its own and in joint
ventures. in various Iranian firms. In banking it provides working capital and loans for Iranian exporters,
ptarticularly small and medium-size enterprises and those involved in private manufacturing. Like other
iranian banks, it lends to exporters at the ceiling rate of 18 percent, offering exporters three types of
faciIi ties:
I. Buyers' credit. The Fund extends credit to foreign buyers for up to one year after delivery to them of
Iraniatn expoits, while paying the Iranian exporter at the time of delivery.
1  Domestic undervriting. The Fund helps Iranian exporters obtain medium- and long-term credit from
iranian banks bv providing the banks with unconditional guarantees that their loans will be repaid.
J. inppliers' criitii. Thie Fund provides foreign exporters (or their banks) with guarantees or insurance
of loanis nmade to Iranian firms to finance imports into Iran of inputs needed by the firms to produce
manufactured exports.
139)   Several exporters suggested that they do not use the Fund because it is too conservative in its
insurance policy and unwilling to cover exports to risky markets, such as the countries of the
Commonwealth of Independent States. According to the Fund's managing director, the Fund will be able
to extend its lending and be less conservative once it receives the full capital injection promised by the
government. That lending practices will change stands to reason, as the Fund will have to be less
conservative in order to make new loans at an unchanged interest rate once its capital increases.
140)  In the past, the Fund has asked for collateral (property and dated checks) from its customers.
Currently, 44 percent of this collateral is property and 56 percent is checks. Recently, in response to
demanids by congressionial representatives, the Fund has agreed to ease these requirements, and it is now
moving to a system in which well-known exporters (those with three years of export experience) will be
asked to provide 25 percent of their loan as property. New exporters will have to provide a mix of
property collateral and dated checks.
39



4.4 Policy Recommendations
141)  This section summarizes our suggestions for removing unnecessary restrictions on exports and
streamlining the adrministration of those that should remain.
Eliminating Exchange Controls
142)  Once the foreign exchange rates are unified, the government could consider eliminating all
remaining exchange controls on current account transactions. The most important of these conitrols are the
requirements that exports must be paid for in hard currency and that these hard currency proceeds be
repatriated within eight months.
Setting Export Quality Standards and Technical Regulations on Imports
143)  We support the government's policy of moving toward a standard system that covers health and
safety issues but steps back from attempts at full export quality control. It is important that thc removal of
explicit export licensing not be undermined by implicit licensing under the guise of compulsory quality
standards.
144)  We also support movement toward a system of technical regulations on imports that tncreasingly
removes mandatory requirements on goods and agricultural products based on principles of open,
transparent, non-discriminatory treatment. These principles are embedded in the WTO agreements.
Moreover, increased reliance on systems which center on post-market surveillance and manufacturers
declaration of conformity to standards for low risk products is extremely important.
Improving Duty Drawbacks and Exemptions
145)  Iran's experiences with the duty drawback and exemption schemes suggest several possible
policy reforms the government could adopt. First, a specialized unit could be set up within Customs to
handle the administration of both schemes. This unit could:
*  Process applications and make refunds, where appropriate. Speeding up the process cf granting
refunds so that all refunds are made in less than a month would help raise the proportion of exporters
using the scheme.
*  Act as a link between users and customs offices.
*  Provide information to potential applicants by coordinating an information campaign with other trade
promotion agencies, such as the Chamber of Commerce and the Export Promotion Center, to better
inform exporters about the two schemes available to them. Manufacturers would be informed in a
simple, clear manner about how the drawback and exemption process works, and how to apply for
and take advantage of the programs.
*  Conduct audits of firms using the schemes.
146)  Second, international experience suggests that exporters should be given only three months after
exports have occurred in which to claim refunds. Not setting a short and clearly defined deadline for
claims needlessly increases the cost to Customs of processing and verifying claims. The three-year time
limit allotted to users of the drawback scheme should be shortened to match the two years allolted to users
of the exemption scheme.
40



147)   Third, the financial requirements for the exemption scheme are currently much higher than the
international norm, except in cases in which Customs excuses importers (such as state-owned enterprises)
from part or all of the maximum requirements. The international norm is to require a bank guarantee for
the amount of the duty only. Higher financial conmnitments help reduce the cost to Customs of
noncompliance by producers and discourage fraud by traders who might otherwise import and sell
products on the domestic market. They also increase the burden on small exporters, however, by locking
up a high proportion of their working capital. To lighten this burden, we suggest that all importers should
have to place bank guarantees for no more than the full amount of the duty. Reducing the amount of the
bank guarantee would make the scheme more efficient and more transparent: banks would presumably
charge higher fees to guarantee relatively unknown private firms than they would to guarantee large state-
owned enterprises, but competition among banks would help protect private exporters from fees, which
would significantly exceed the cost of capital plus the risk premium. The Customs can also increase the
penalty for non-compliance as a deterrent to abuse the programs
Reducing the Distortions Caused by Export Credits, Guarantees, and Insurance
148) International experience has shown that removing barriers to exports is a much better way of
taking full advantage of a country's comparative advantage than providing export subsidies, for several
reasons. First, it is impossible to design subsidies that exactly offset any set of barriers. Second, subsidies
and offsetting barriers are costly to administer: subsidies create opportunities for fraud, while barriers
create opportunities for smuggling. Third, subsidies usually favor exports of modern manufactures over
traditional exports. Fourth, there is no evidence that preferential credit and insurance schemes actually
increase exports. A study of export credit programs in seven developing and three industrial countries
found that in all but one country, subsidized exports accounted for less than 10 percent of total exports. 21
149)   For all these reasons, a good economic case cannot be made for preserving, let alone increasing,
Iran's subsidies to export finance. Such schemes are used by almost all countries around the world to
subsidize manufactured exports, however, and it appears almost inevitable that they will be retained in
Iran. If the subsidies are maintained, the government could reduce the distortions they cause by ensuring
that the amount and the form of the subsidies provided by the Export Guarantee Fund of Iran and the
EDBI conform with the limits on export finance subsidies set forth in the WTO' s Agreement on Subsidies
and Countervailing measures and in the conventions of the Berne Union.22
150)   We also recommend that a study be undertaken of the options for comprehensive liberalization of
the whole financial sector, subject to prudential regulations to prevent the abuse of implicit or explicit
government guarantees of financial institutions. Within the framework of comprehensive financial
liberalization, we believe that interest rate and quantitative controls on export finance should be
abolished: all financial institutions, including commercial banks as well as the Fund and the EDBI, should
be free to engage in export finance to whatever extent, and on whatever terms, they choose.
21 The authors of the study argue that export credit programs are used mainly as weak means of offseting anti-export bias found
elsewhere in the economy (Fitzgerald and Monson 1989).
22 For the Agreement on Subsidies and Countervailing measures, see the Web sites of the WTO (www.worldbank.org) and the
Intemational Trade Center (www.intracen.org Information on the membership and conventions of the Beme Union is available at
http://www.bemeunion.org.uk.
41



Developing a New Strategy for the Free-Trade and Special Economic Zones
151)  The announcement of new management teams for each free-trade zone, the government's
emphasis on speeding up the new zone-specific development strategy, and its renewed efforts to attract
foreign direct investment are encouraging signs. To improve the effectiveness of these zones even further,
the govemnment could also consider several additional reforms:
1. Some of the most successful zones in the world have been privately owned and managed. The
government could consider privatizing its free-trade and special economic zones or hiring private-
sector managers to operate them.
2. Movement of capital out of the free-trade zones currently takes up to a week. While suptervision and
regulation is necessary to ensure that money laundering does not occur, reducing the processing time
is critical to the ability of the zones to attract foreign investment.
3. To achieve its desirable aim of transforming the zones into true export-processing zones. rather than
import-processing zones, the government could accompany reductions in the economywide barriers
to imports from foreign countries with the abolition of the preferential treatment of imports from the
zones into the customs territory of Iran. Doing so would involve two policy refonms: the abolition of
the $80 allowance of duty-free imports from the free-trade zones for domestic shoppers arid reform of
the value-added rule, which currently allows limited amounts of -imports from the zones to the
mainland. The government may wish to consider realigning the value-added rule applied to the zones
with the general trade reform taking place on the mainland by imposing the same regulations and
duties that apply to imports from foreign countries on imports from the zones.
4. There appears to be a good case for investing in electricity-generating plants and deep sea ports in
both Kish and Qeshm. Detailed cost-benefit analyses could be conducted to confirm that such
investments are justified.
42



ANNEX 4A. IRAN'S FREE-TRADE ZONES: KISH, QESHM, AND CHAHBAHAR
This annex provides details about locations, comparative advantages, facilities, activities and
development strategy of Iran's three FTZs.
Kish
Kish Island is the second largest island in the Persian Gulf, with an area of 90 square kilometers
and some 15,000 inhabitants. Its moderate climate and pristine beaches make it an attractive tourist
destination. Daily flights connect the island with the major Iranian and regional cities.
According to the Kish Comprehensive Plan, 55 percent of Kish's revenues should eventually come
from tourism, 30 percent from trade and services, and 15 percent from industry. The Kish FTZ authority
has developed several tourist attractions on the island (including a large aquarium and a small amusement
park in an effort to attract both Iranian and foreign tourists. As of February 2000, Kish boasted some 13
shopping centers and bazaars, 35 hotels or tourist accommodation centers, 20 banks and insurance
companies, and 23 service firms, including warehouses, cold storage facilities, tour operators, and travel
agencies.
Iranians travel to Kish to shop or vacation or both. The zone has been much less successful in
attracting foreign tourists, largely because of the Islamic dress code and the zone's inability to compete
with other regional vacation spots in terms of entertainment, services, and personal freedom. Recently, a
mixed-gender beach for foreigners was permitted on Kish, but its creation is under severe criticism from
conservatives in the government.
Kish serves as a conduit for the mainland's consumer products market (table 4A.1. Travelers
imported more than US$10 rntillion worth of products to the mainland in 1998. The decrease in 1999, to
US$87 million, reflects the change in the Iranian economy, which weakened as a result of the decline in
world oil prices. It also highlights the extreme dependence of the island's economy on the mainland.
By the summer of 2000, 361 production permits had been granted in the industrial sector, involving
the equivalent of US$340 million of investment. About 65 industrial firms are active (the level of their
activities could not be determined); another 45-50 firmns are at different stages of development.
Table 4A.1. Performance of the Kish Free-Trade Zone, 1998-99
(millions of US$, except where otherwise indicated)
Item                                          1998          1999
Annual imports to Kish                         110.7          88.5
Annual imports for consumption on Kish          15.7          10.4
Exports by travelers from Kish to the mainland  110.7         86.7
Iran
Annual exports abroad (outside Iran and other    0.1           1.8
zones)
Number of industrial investment issues           53            77
Capital investment approved (billions of rials)  134.3       219.0
Employment (people)                           1,156.0      2,069.0
Source: Kish Free Zone Organization.
43



To safeguard the tourist industry, the emphasis in Kish is on nonpolluting industries, such as
computers, electronics, televisions, garments, toys, shampoos, detergents, and woodworks. Despite a
number of active firms, exports from the zone to destinations other than mainland Iran have been
negligible, at just US$0.1 in 1998 and US$1.8 million in 1999. One producer confirmed that the majority
of his production was directed to the mainland, with a smaller share transshipped to foreign markets
through Arab intermediaries.
Few domestic or foreign investors have set up in the zone, largely because of policy uncertainty
and the negative image of " the shopping mall of Iran" that Kish acquired in its early development
stages.23 Essential infrastructure, such as a deep sea port, is also lacking. Products need to be unloaded at
another port and reloaded onto smaller ships to be brought to Kish, raising the cost of transportation and
increasing uncertainties about disruptions in production lines and deadlines and exports.
Qeshm
Qeshm Island, the largest island in the Persian Gulf, with a population of 75,000 people, is only 15
kilometers away from mainland Iran. Like Kish, Qeshm has not fulfilled its role as an export-processing
zone, providing instead an import plateau into Iran. Imports reached US$480 million in 1998, while
exports were a mere US$0.9 million (table 4A.2). The number of Iranian tourists rose from 100,000 in
1994 to 1 million in 1997. The number of foreign visitors hit a high of 228 the same year (Ministry of
Economic and Financial Affairs 1998c).
Qeshm lacks an independent and adequate electricity supply (it is connected to the mainland by
pylons in the Persian Gulf). Industrially usable water is pumped out of wells and desalinized, while
bottled water is used for consumption.
The Bank mission was informed that the free-trade zone authorities have plans to re-orient the
Qeshm free-trade zone into a true export-oriented free-trade zone based on its natural comparative
advantages. These include the deep water off the island's coast, which make it possible to build wharves,
docks, and harbors to receive oceangoing vessels, and the island's large reserves of natural gas, which
could be used for petrochemical enterprises and fuel for heavy industries. A biotechnological research
center on sea life is also now operational on the island.
23 Twelve firms have 9-100 percent foreign ownership. Eight of the investors are from Europe, two are from Southeast Asia, and
two are Arab. Eleven of these firms are operational; one is under construction.
44



Table 4A.2. Performance of the Qeshm Special Economic Zone, 1993 and 1998
(millions of US$, except where otherwise indicated)
Category                                               1993            1998
Annual imports                                         480               145
Annual exports                                           0                 9
Annual budget (billions of rials)                       24               253
Annual development budget (billions of rials)           16               219
Number of investors                                     60              1,403
Realized domestic capital investment (billions of rials)    Very low  10.000
Realized foreign capital investment                       0              200
Factories under construction                              0              300
Factories constructed                                     0              105
Industrial buildings constructed (square meters)          0          500,000
Commercial buildings constructed (square meters)          0          240,000
Service buildings constructed (square meters)             0          136,000
Residential buildings constructed (square meters)         0          220,000
Employment                                            3,000           21,000
University graduate personnel                           217              317
High school-educated personnel                          705               99
Source: Secretariat of the High Council of Free Trade-Industrial Zone (www.iftiz.org).
As of February 2000, some 145 firms were registered or active in Qeshm. Very few firms are
dedicated to exports/imports, however. Firms span the range of industrial activities (chemical products,
construction material, home appliances, food-processing and packaging, electric and electronics,
mechanical industries, engines, tubing, office machine products). Industrial activities are concentrated in
four industrial "townships": Toula for light and medium enterprises, Kaveh for heavy industries, Souza
for high-tech firms, and Alvand for chemical and petrochemical industries. Data on the level of firms'
activities, number of employees, investment, ratio of production to capacity were not available for
1999/2000. In 1998, however, some 77 firms were active, employing about 1,250 workers. The
production mix included clothing, boats, marine products, electronics and computer assembly, and
chemicals (Ministry of Economic and Financial Affairs 1998c).
As of early 2000. 44 firms-about 30 percent of all firms-in Qeshm were partially or totally
owned by foreigners. (Minimum foreign ownership is 10 percent.) Nineteen of these firms are
operational. Another 1 1 have been granted development licenses, with the remainder at different stages of
development.
Chahbahar
Located in the far southeastern part of the mainland on the Oman Sea, this zone links the Central
Asian states to international waters. Abundant aquatic sources make Chahbahar a suitable place for
fishery and related industries.
Given its location, Chahbahar has the potential to become a transit point for warehousing, re-
exporting, and distributing goods all over the region, particularly to Central Asia. Further infrastructure
and utility development are necessary both within and outside the zone to attract investment and realize
this potential, however. The island lacks adequate roads, water mains, and electricity, and there is no
international airport in the vicinity (the closest airport is 35 kilometers away).
45



Chahbahar faces the same problems as Kish and Qeshm in having financed its development by
becoming a conduit for imports into Iran. Compared with those zones, however, Chahbahai seems closer
to fulfilling its master plan of attracting commercial entrepreneurs, with the ultimate goal i f becoming a
major regional transit and transshipment port for products going to Afghanistan and the Commonwealth
of Independent States. As of February 2000, about 185 firms were either registered or active in the
Chahbahar free-trade zone. Many of these firms are commercial export-import entities. Several are light
industrial assembly plants (in which electronics, electrical parts, TVs, and bicycles are assembled); food-
processing and packaging plants; and chemical processing facilities. The mission was unable to find
information on t:he level of these firms' activity.
There does not seem to be an industrial master plan to encourage any specific group of industries.
In this sense, Chahbahar seems to live up to the true definition of a free-trade zone as a zone allowing any
economic activity that is not illegal.
46



5. QUANTIFYING THE GAINS FROM TRADE AND EXCHANGE RATE REFORM IN
IRAN
152)  Tariffying nontariff barriers and lowering tariffs are important steps in Iran's effort to join the
WTO. The measures will also have important effects on economic development in Iran. What effect will
these actions have on Iranian welfare and the incomes of the poor? How will they affect the government
budget, the real exchange rate, the output and price levels of industries, and the real wage and rental rate
on capital?
153)  In this section, we present quantitative estimates of the impacts of these policy changes on these
variables based on a multisector computable general equilibrium model of the Iranian economy. The
model includes 20 household types-10 rural and 10 urban, grouped according to income-in order to
assess the impact of tariffication and the reduction in tariffs on the poor and on the distribution of income.
We also assess the impacts of unifying the exchange rate for imports and exports of goods and services.
We evaluate two alternate mechanisms for compensating the poor for the loss of the implicit subsidy of
imported agricultural commodities provided by multiple exchange rates: equal lump-sum payments to all
households and subsidies to consumption of those commodities that hold the price unchanged. Finally, we
draw on our work on estimating the impact of energy pricing reform in Iran to estimate the impact of
combining trade and exchange rate policy reform with energy pricing reform.
5.1. Data on Tariffs, Nontariff Barriers, and Subsidies
Data on Tariffs
154)  Collected tariffs in Iran are low by international standards. Customs Department data
show that aggregate collected tariffs were just 0.3 percent of GDP in fiscal 1998/99. Collected
tariff rates are low for two reasons. First, for the purposes of customs valuation, all imports are
valued at the official exchange rate. Use of this exchange rate rather than the market rate in effect
in November 2000 reduced tariff receipts by 78 percent. Second, licensing requirements rather
than tariffs have been the principal means of protecting imports in Iran.
155)  The data on the average collected duty and commercial benefit tax for the sectors in our model
were calculated as follows. Since up-to-date applied tariff data are important, we obtained the collected
tariff data at the tariff line level for fiscal 1999/2000. Iran employs the intemational harmonized system at
the 6-digit level (although it disaggregates some tariff lines, introducing tariff lines at the 8- or possibly
10-digit level to reflect national needs). We aggregated the 5,313 tariff lines at the six-digit level with
simple averages to obtain the average collected tariff for the sectors in our model. Since it is what the
importer pays that affects the decision to purchase, collected tariff rates should be superior, for the
purpose of measuring nominal protection, to legal tariff rates. We thus updated the data in the input-
output (10) table of our model with collected tariff rates for 1999/2000 (table 5.1).
47



Table 5.1. Import Protection of Sectors Included in the Model
(percentage rate of distortions)
Commercial   Nontariff     Commercial      Energy      Foreign
benefit tax  barrier (tariff   benefit tax  subsidy to  exc ange
Sector           Imrdut   (pre-reform)  equivalent) (posttariffication) consumption suibsyfpor
Farming                    0.1          0.7          9.2            10.0                    63.0
Livestock                  0.1          0.7         19.1            20.0
Other agriculture          0.1          0.7         14.2            15.0
Mining                     0.5          1.1         13.7             15.0
Crude oil
Sugar                                                                                       79.0
Other food                 0.1          0.4         29.5            30.0                    31.0
Paper and print            0.7          2.4          6.4              9.0
Cement                      1.1         1.0         19.6            21.0
Brick                       1.1         8.2         11.7            21.0
Gypsum and other minerals   0.7         2.3         18.2            21.0
Glass                       1.3         6.5         21.8            30.0
Other nonmetal products     1.1         5.3         14.8            21.0
Textiles                   0.4          2.3         69.8            74.0
Clothing                    3.1        11.1         69.1            90.0
Weaving and leather        0.6          3.6         67.6            74.0
products
Rubber and plastic products   0.4       1.3         23.3            25.0
Pharmaceutical products                                                                     79.0
Kerosene                                0.1                          0.1        92.0
Fuel oil                                0.1                           0.1       94.0
Gasoline                                0.1                           0.1       74.0
Gas oil                                 0.1                          0.1        91.0
Liquid gas                              0.1                          0.1
Other materials and        0.3          1.7          7.2              9.0
chemical products
Basic metal and steel      0.4          3.1         16.3            20.0
products
Copper and aluminum and    0.4          3.1         16.3             20.0
other basic products
Metal products              1.0         4.9          4.8             10.0
Industrial machinery       0.6          2.1          7.7             10.0                   59.0
Radio and television        1.2         2.8         16.5             20.0
equipment
Motor vehicles              1.4         2.1         32.8             36.0
Other industrial products  0.5          2.9         16.5            20.0
Electricity
Water
Natural gas
Construction
Trade
Restaurants
Hotel and motels
Load transport
Passenger transport
Post and
telecommunications
48



Commercial   Nontariff      Commercial       Energy     Foreign
benefit tax  barrier (tariff   benefit tax  subsidy to   exchange
Sector           Iduport (pre-reform)  equivalent)  (posttariffication) consumption  imyfor
.....  .............   .. ...   ....... ...    . ... .... ........   ........    .. ....I..... .... ..... ... ...     .. ........ ...   ...   ... .......   .....   ....    ... .   .....   ....    .. .... .........   . . .......... ... . - .......  ...... ... .... .
Other transport and storage
Other services
Source: Authors' estimates.
Tariff Equivalence of Nontariff Barriers
156)   The intergovernmental committee chaired by the Ministry of Commerce, which includes the
Ministry of Industry, is responsible for recommending the tariff equivalent of nontariff barriers.
International versus domestic price comparisons are made based on a database of prices that contains 70
million observations from Iranian customs declarations. The Ministry of Industry has estimated the tariff
equivalence of the nontariff barriers for the 3,000 tariff lines for which it is responsible. We obtained
preliminary estimates from the Ministry of Industry of the new commercial benefit tax necessary to
provide tariff equivalence of the nontariff barriers. For imports that are subsidized in the initial period, we
take the tariff equivalence to be zero. (Since the domestic price is less than the world price, the tariff
equivalence of the nontariff barrier cannot be positive.) For imports that are not on the positive list, the
tariff equivalence of the nontariff barrier should be very high, since these goods cannot be legally
imported. For products on the positive list, we assume the tariff equivalence to be lower than for products
that are not on the positive list.
We calculate the tariff equivalence of the nontariff barriers as follows. Let
PM = the domestic price of imports in rials
PW = the border price of imports in dollars
ER = the exchange rate (rials per dollar)
TD = the customs duty
commercial benefit tax(0) = the conmnercial benefit tax before tariffication
commercial benefit tax(l) = the commercial benefit tax after tariffication
nontariff barrier = the tariff equivalent of the nontariff barrier in ad valorem terms.
The tariff equivalent of the nontariff barrier in place before tariffication is then given by the
following equation:
PM = PW*ER[l+TD+commercial benefit tax(0)][1+nontariff barrier].
After tariffication, the nontariff barrier is removed and replaced by a higher commercial benefit tax:
PM = PW*ER[1+TD+commercial benefit tax(1)]
Since the increase in the commercial benefit tax is supposed to leave the domestic price of imports
unchanged:
PM = PW*ER[l+TD+commercial benefit tax(0)][1+nontariff barrier] = PW*ER[1+TD+commercial
benefit tax(1)]
or
[1+TD+commercial benefit tax(0)][1+nontariff barrier]=[l+TD+commercial benefit tax(1)].
Rearranging, the tariff equivalent of the nontariff barrier is:
[1+TD+commercial benefit tax(1)]/[l+TD+commercial benefit tax(0)] - 1.
49



157)   Since we have data on all of the right-hand-side variables, we can calculate the left-hand- side,
the tariff equivalence of the nontariff barrier. The nontariff barrier rate for a sector typically represents the
average tariff equivalence in a product category, since each category represents many tariff lines. These
estimates are based on the Tehran Stock Exchange exchange rate, that is, they are about 20 percent of the
tariff equivalence that would prevail if imports were valued at the official exchange rate. We use the
Tehran Stock Exchange rate both because the government plans to adopt that rate for customs valuation
and because we need rates that reflect the real costs that induce resource movement.
158)   A key question in assessing the consequences of tariffication is what happens to the quota rents
when the nontariff barriers are in place. We model this in two ways. In the first scenario, all rents are
dissipated through rent-seeking. In the second scenario, all rents are distributed as a lump sum to the
owners of the firms that obtain the licenses, with no rent dissipation.
159)   Rent dissipation follows from the conventional theory of rent-seeking. The model of Barzel
(1973), for example, maintains that resources are expended to obtain the licenses and that competition
among license-seekers results in costs that dissipate the rents available. The classic example is queuing
for a good under price control. In this case, the queue lengthens until the value of the time in the queue is
just equal to the difference between the market price and the controlled price of the good. In the case of
licenses for imports, there are lobbying costs, queuing costs, and inefficiencies in the cost of the delivery
of final products in which the imported good is an intermediate. Given that the license to import has
value, competition among license-seekers will dissipate the rents. Since the value of the license to import
is the difference between the domestic price and the tariff-inclusive world price, competition for rents
would not dissipate the tariff revenue. Thus the difference between the domestic and world price of quota-
constrained products is part tariff and part rent, where the rent is competed away in higher costs for the
rent- seekers. Elimination of the nontariff barrier through tariffication would eliminate the rent from
obtaining the license to import and eliminate the wasteful expenditure of resources on rent- seeking
behavior. This view of license allocation thus implies that there are real resource gains from tariffication
and that welfare should increase significantly for all households. In addition, the poor are likely to gain
disproportionally, since we assume that the tariff revenue of the government will be distributed to all
households in equal amounts.
160)   No rent dissipation would occur if recipients of the licenses to import are unable to influence the
decision on who obtains the licenses (that is, if firm size or payments to or lobbying of officials is
irrelevant). When a firm receives the license to import, it receives a windfall profit equal to the difference
between the domestic price of the imported product and the tariff inclusive import price (that is, it
receives the tariff equivalent of the quota). We assume that this value accrues to the owners of the factors
of production in the firm. This value is ultimately part of household income, since the owners of the
factors of production are households. Under this assumption of no rent dissipation, when tariffs are
imposed and nontariff barriers eliminated, the tariff revenue of the government increases and the
government distributes the tariff revenue back to households in equal lump-sum payments. Although
there will be little or no efficiency or aggregate welfare gain from this process, there will be significant
income distribution effects, with the poor becoming better off and the rich worse off. This effect occurs
because the rents from the quotas accrue to the owners of the factors of production in the economy (of
which the poor hold a small share), whereas the tariff revenue is distributed to households in equal shares.
Data on Centrally Allocated Foreign Exchange
161)  In fiscal year 1999/2000 the official exchange rate was 1,750 rials per U.S. dollar and the market
rate was about 8,150 rials. Dollars allocated at the official exchange rate thus cost only about 21 percent
of the market rate; recipients of centrally allocated dollars thus receive a subsidy of about 79 percent of
50



the market value of the dollars. At the same time, producers in these sectors face an effective negative
tariff of 79 percent. Unifying the exchange rate would have both resource allocation and efficiency
effects.
162)   Imported goods qualifying for foreign exchange at the official exchange rate fall into one of the
following categories: essential food commodities, pharmaceuticals and petroleum products, investment
demand for state-owned enterprises, national defense, and debt repayment (by both the central
government and individual enterprises). Essential food commodities comprise wheat, rice, sugar, cooking
oil, and milk powder, all of which are imported by the Government Trading Corporation. These products
fall into three sectors in our model: farming, sugar, and other food products. Imports of these
commodities represent 10 percent of the value of imports at the official exchange rate. Pharmaceuticals,
which are imported by the Ministry of Health, account for about 1 percent of the value of imports. The
Iranian National Oil Company imports petroleum products, which represents about 8 percent of the value
of imports.
163)   The subsidy to the sector is adjusted proportionately based on the share of the sector's imports
that is subsidized. In the case of sugar and pharmaceuticals, all imports receive the subsidy, so the subsidy
is 79 percent. In the farming and other food products sectors, the subsidy is reduced in proportion to the
share of imports in the sector that receive the subsidy. 24
164)   For the investment projects of state-owned enterprises, one of the largest categories of imports in
our 10 table is industrial machinery. We assume that 75 percent of these imports are destined for the
investment demand of the state-owned enterprises at the official exchange rate. The subsidy rate is thus
estimated at 59 percent (75 percent of 79 percent).
165)   According to data from the Central Bank of Iran, 50 percent of imported goods in fiscal year
1999/2000 were imported at the official exchange rate. The sum of these categories represents 32 percent
of the value of imports based on the data in the 10 table.
166)  In addition to these imports, which are for private consumption or intermediate use in industry,
the central government allocates foreign exchange for national defense. We take national defense as the
residual 18 percent of centrally allocated foreign exchange at the official exchange rate and assume that it
represents final consumption by the central government (that is, the central government holds foreign
exchange, which it uses to purchase imported goods for its own consumption in the form of national
defense expenditures). As a result, the rate at which foreign exchange is accounted for national defense
purposes is irrelevant for economic decisionmaking, and we ignore national defense expenditures in the
analysis that follows.
5.2. The Model
167)   The small open-economy model used here is designed for trade policy analysis with a large
number of sectors. With the exception of the disaggregation of households, the model is a generic general
equilibrium model of a single economy along the lines of de Melo and Tarr (1992); Harrison, Rutherford,
and Tarr (1993); and Rutherford, Rutstr6m, and Tarr (1994). We describe the general features of the
24 We used Customs Department data to calculate the share of subsidized commodities farming and food products in
imports. For customs valuation purposes, all imports are valued at the official exchange rate.
51



model here. The annex contains more details on the model's structure and the constr-11tion of the.
underlying database.
168)   In our model, goods are produced using primary factors (labor and capital) and intermediate
inputs. Labor and capital are perfectly mobile, which yields a unique real wage rate and retntal rate oen
capital. Oil is a specific factor in the crude oil sector, and the governmernt receives the retur-s to oil. The
returns to oil are the revenues from the sale of oil after the payment of wages and rent on the capi al used
to produce it. Land is a factor of production specific to the production of agriculture.
169)   Production exhibits constant returns to scale, and individual firms behave competitiv,ely, s,lecting
output levels such that marginal cost equals the market price. Output in all sectors excepl cruce oil is
differentiated between goods destined for domestic and export markets. Output substitution possibilities
are characterized by a constant elasticity of transformation frontier. Composite output is an .iggregate of
domestic output and exports. We assume that crude oil is a homogeneous product (that is. thele is no
distinction between Iranian crude oil and crude oil sold on the world market). The structure o' proluction
and allocation of output for the nonenergy and oil sectors is depicted in figure 5.1 (with elasticitiC s). TrhC
production and allocation of oil is depicted in figure 5.2; the energy sectors are depicted in fig: ire 5 3.
Figure 5.1: Production and Allocation of Output in Iran
Domestic Suppl;
Gross Output          CEI       0 = 3 C = 6 for nlOf or -g..
E.xport SuppO
Leo--tief
Value-added and Energy                               Intermediate
I         -Intrelt
CES                                             Leo nLief
00.5
/t,    S5                         XeX=~~~~~~~0=
Energy                     Value-addcd           Composite                  Co.potr   Jtc
I n                       InteredIe  atc
CES      0  0.5           Cobb-Douiglas                                      (Is
CT1        (IFS    0=
Energy Good I      Energy Good 7
Capital    l abor   Domestic   Iinpurted      Dotrnesic    liup. r-cd
CES        (        ES       6Intermcdiate  Intermediate                       linternidiatu    liuicril .d 
XfCK=~(T6                  (T 6
Domestic  tmported   Domestic  tmponed
tennediate   Intermediate   iitermediate  tinterimediate
52



Figure 5.2: Crude Oil Production3-j and Allocation in Iran
Domestic Supply
Gross Output        Homogeneous
Export Supply
CES                   bJ
Value-added and Intermediates       Natural Resources (Oil)
Leontief
Intermediate                 Value-added
Leontief         0           Leontief
Compositer 
Composite     ...       . nte         Capital    Labor
inteT fdiate              nedat
CES                      CES    O =3
Domestic    Imported  ...  Domestic    Imported
Intermediate  Intermediate    Intermediate  Intermediate
as The farming and livestock sectors share the same production structure, but their exports and domestic outputs are differentiated.
bJ 13* is calibrated such that elasticity of supply equals 0.5.
170)   The model includes 20 household types-10 urban and  10 rural-all grouped according to
income. The 10 rural household types cover 38 percent of the Iranian population, with an equal number of
households in each group (that is, each group includes 3.8 percent of the total population). Each urban
household group includes 6.2 percent of Iranian households. We estimate that the two poorest urban
household types and the two poorest rural household types are below the $1 a day poverty line.
171)   The shares of each consumer's expenditure on different commodities differ (table 5.2). Although
we have the source of income by factor of production for households in aggregate, we lack data on the
factor income source at the level of the individual household. Consequently, we assume that all
households obtain their income from the different factors of production in identical proportions. The
structure of demand is depicted in figure 5.4.
53



Figure 5.3: Energy Sectors Production and Allocation in Iran aJ
Doimestic Supply
Gross Output           CET       0 = 6
Export Supply
Leontief
00
Energy              Value-added             Intermediates
I                     I
Leontief            Cobb-Douglas
0=0         0=1           ~~~~~~~~Leontief   0 
Capital    Labor
,nergy Good I     Energy Good 7    Crude oil             Composite   ...       Composite
I n                                                Intermediate          Intermediate
CES              CES
Y =6             (0=6                           CES                   CE3  S    G  3
Domestic  Imported   Domestic  Imponed
Intermediate Intermediate Internediate Intermediate     Domestic  Imported    Domestic   Imported
Intermediate Intennediate   Intermediate  Intermediate
a_ Energy sectors are gasoline, kerosene, fuel oil, liquid gas, natural gas, gas oil and electricity.
172)   Government demand and investment demand are exogenous. The net return from the sale of oil
on world markets (after payments to labor and capital), import tariff revenues, and exogenous lump-sum
taxes finance government demand and subsidies to foreign exchange for imports and subsidies to
petroleum products.25
173) Reductions in subsidies reduce government expenditures. In all scenarios we hold government
demand for goods unchanged (otherwise welfare analysis would be meaningless, since only consumers
obtain utility and only from private goods). Consequently, when government revenues rise, they are
endogenously distributed back to households so that government demand remains unchanged. Thus
government demand is balanced with revenue (which is consistent with the loose requirement in Iran to
balance the budget). We nevertheless calculate and present the impact of all policy changes on
government revenues, since policymakers may consider alternate expenditures for these revenues, such as
institution-building to assist the development of the private sector.
25 The lump-sum tax replaces income and other taxes, which we do not represent in the model.
54



174)   The decision rule we typically adopt is that lump-sum  distributions of the government are
distributed to households in equal shares. Suppose the government is distributing 10,000 rials. Since rural
households in aggregate constitute 32 percent of all households, the government would provide 320 rials
to each of the 10 rural household types and 680 rials to each of the 10 urban household types. All
individual households, rural and urban, would receive the same rial amount. Since the recipients of
government commodity subsidies receive subsidies in unequal shares (that is, based on their consumption
of subsidized goods), this distribution rule would affect the distribution of income. In particular, it would
typically favor the poorest households, which receive less than an equal share of most commodity
subsidies (even subsidies targeted for the poor) because they consume less of virtually all goods. As we
discuss below, this is not necessarily a recommendation for implementation of the safety net, but
conveniently allows us to assess and quantify the distributional consequences of the existing subsidy
regime. Private consumption equals the income from primary factors plus net transfers by the households
to the government (from domestic and foreign trade).26
Figure 5.4: Consumer Demand in Iran
Utility -
I
Essential Goods                         Energy                          Other goods and services
Cobb-Douglas
CES                                   CES                                   / \            =
(< =0.4                              (7y=0.4
Composite   ....   Composite
Essential Good I   Essential Good (4)   Energy Good I       Energy Good 7    Consumption Good (I)  Consumption Good (n)
CES            ~~~~~~CES  u= ES    -                   CES   0-              ES                 CES
CES  oT = 3          ces  a 3        >        (>< <s = 6    C E5   o = 6         C\S                 CE
Domestic   Impotted  Domestic  Imported    Domestic  Impound  Do,estic  Imported  Domestic  Impotted  Domestic   Imported
Consumption  Consumption  Consumption Consumption  Cot-sumptrio  Consum,ption  Consumption cowsumption  Consumption Comumptmn   Consumption  Consumption
26 This means Walras' Law is satisfied.
55



Table 5.2 Expenditure Shares by Household Type
(percent)
Household type        Energy      Transportation     Food            Other
Rural 1                 4             23              44             29
Rural 2                 4              15             49             33
Rural 3                 3             22             44              31
Rural 4                 3              15            47              35
Rural 5                 3              19            43              35
Rural 6                 3              16             39             42
Rural 7                 3             20              41             37
Rural 8                 3              12             43             41
Rural 9                 3              14             37             47
Rural 10                1               6             14             79
Urban 1                 2              11             35             52
Urban 2                 3              9              34             54
Urban 3                 2              13             29             55
Urban 4                 2              12             29             56
Urban 5                 2              10             27             60
Urban 6                 2              10             28             60
Urban 7                 2              11             26             61
Urban 8                 2              9              22             67
Urban 9                 2               8             17             73
Urban 10                1              5              10             83
Source: Household Budget Survey (1995), authors' estimates.
175)   World market import and export prices are fixed, so there are no endogenous changes in the terms
of trade. In other words, import supplies and export demand are infinitely elastic at world prices. The real
exchange rate in the model adjusts so that the current account balances the value of exports and imports,
taking into account exogenously fixed capital inflows. The model allows for changes in these fixed world
prices, such as a change in the price of crude oil on world markets
5.3. Results and Policy Implications
176)  In many constant retums to scale models, the estimated welfare gains from trade liberalization are
less than 1 percent of GDP (see de Melo and Tarr 1990, 1992, 1993; Harrison, Rutherford, and Tarr 1993,
1997a, 1997b; Morkre and Tarr 1980, 1995; and Tarr and Morkre 1984). The much larger gains estimated
below for Iran reflect the unusually high level of distortions at the starting point of reform and suggest
that the benefits from reform are potentially enormous. We note, however, that household consumption is
about 37 percent of Iranian GDP. We report welfare changes at the aggregate level as a percent of
household consumption. Welfare gains as a percent of GDP would be only 37 percent of this value.
56



Tariffying Nontarif Barriers
177)  The impact of the tariffication of nontariff barriers depends on whether the rents from existing
nontariff barriers are dissipated through rent-seeking. We perform two simulations, one in which all rents
are lost to rent-seeking behavior and one in which no rents are lost. We believe the actual situation is
closer to rent dissipation and employ rent dissipation as our central assumption.
178)  In the first scenario, tariffication increases aggregate welfare by 3.4 percent of initial household
income (column 1 in table 5.3). Although all households gain in this scenario, the impact on the poor is
greatest: the poorest rural household type gains 23 percent and the poorest urban household type gains 11
percent. The favorable distribution effect on the poor reflects the fact that converting nontariff baniers to
tariffs increases the government's tariff revenue by 2 percent (to 2.3 percent of GDP). At the same time,
government revenues are endogenously affected by the depreciation of the real exchange rate. The
depreciated exchange rate implies that the cost of government subsidies to foreign exchange and imported
petroleum products increases, worsening the government's fiscal position. On the positive side, the
revenues the government receives (after factor payments) from the sale of oil on world markets increase
by 0.5 percent of GDP as a result of exchange rate depreciation. The net fiscal impact is a positive 1.4
percent of household income. Unless otherwise specified, we assume that the government distributes
additional revenues generated by reform back to households in equal absolute amounts. Since the poor
have low incomes, the distribution of these revenues represents a significant share of their income.
57



Table 5.3. Impact of Trade and Exchange Rate Reforms: Welfare and Macroeconomic Effects
Initial                           Tariffication Tariffication            Exchange
situation             Tariffication  + maximum   + uniform   Exchange       rate
(level               without rent  tariff of 25   15 percent  rate    unification +
values)  Tariffication  dissipation    percent    tariff   ULnificatio.k food subsidies
Item             (0)         (1)          (2)         (3)          (4)          (5)         (6)
Aggregate welfare
change (% of income)                3.4         -0.4          4.1          5.5        6.9           6.7
Fiscal effects (change as percent of GDP)
Food subsidies            n.a.        n.a.         n.a.         n.a.         n.a.         n.a.        -2.1
Foreign exchange
subsidies              -6.4        -0.3         -0.1         -0.8         -0.2          6.4         6.4
Petroleum subsidies     -18.1         -0.8        -0.1         -1.7         -1.9          2.7         2.3
Import taxes              0.3          2.0          2.0          1.7         1.6          0.0          0.0
Oil rent                 15.7          0.5          0.1          1.4         1.5         -3.8        -3.7
Net effect                n.a.         1.4          1.9         0.7          1.0          5.3          2.9
Average effective
tariff rate             2.5         19.4        19.5         15.3         13.9          2.8         2.8
Trade effects
Real exchange rate       n.a.         1.1          0.2          3.6          3.8        -13.0        -12.2
Aggregate exports        n.a.         1.0          0.1          5.6          4.9        -21.9        -22.4
Factor incomes
Wage rate                n.a.        -0.1          0.1          0.2          0.4          3.0          6.8
Return to capital        n.a.        -0,4         -0.2          1.1          1.4         -4.7         -1.7
Price of essential goods
Primary food items       n.a.         1.2          0.3          1.6          2.5         10.5
Food products            n.a.         0.6          0.2          0.8          0.4          6.0
Sugar                    n.a.         0.0          0.0          0.6          7.4         37.6
Pharmaceuticals          n.a.        -0.3         -0.1          0.8          2.3          1.0
Change in household welfare
Rural 1                  n.a.        23.3         27.9         15.6         20.2         72.0         46.3
Rural 2                  n.a.        15.2         16.6         10.9         14.2         44.6         30.5
Rural 3                  n.a.        10.8         10.4          8.3         10.9         30.4         21.8
Rural 4                  n.a.         9.8          8.9          7.9         10.4         26.6         19.7
Rural 5                  n.a.         8.0          6.3          6.9          9.0         20.9         16.1
Rural 6                  n.a.         6.3          3.9          6.0          7.9         15.6         12.7
Rural 7                  n.a.         5.6          2.9          5.6          7.4         13.0         11.3
Rural 8                  n.a.         5.2          2.4          5.7          7.5         11.7         10.7
Rural 9                  n.a.         3.6          0.1          4.7          6.2          6.7          7.3
Rural 10                 n.a.         1.1         -3.8          2.6          3.6         -0.4          1.9
Urban I                  n.a.        11.1         10.6          8.3         10.9         32.0         21.9
Urban 2                  n.a.         7.5          5.6          6.3          8.3         19.9         14.9
Urban 3                  n.a.         5.9          3.2          5.4          7.1         14.8         11.6
Urban 4                  n.a.         5.0          2.0          5.0          6.7         11.9          9.9
Urban 5                  n.a.         4.4          1.1          4.7          6.2          9.9          8.6
Urban 6                  n.a.         3.9          0.5          4.4          5.9          8.4          7.8
Urban 7                  n.a.         3.3         -0.4          4.1          5.5          6.5          6.5
Urban 8                  n.a.         2.6         -1.6          3.7          4.9          4.0          4.9
Urban 9                               1.8         -2.7          3.1          4.2          1.9          3.4
Urban 10                              0.9         -4.1          2.4          3.5         -0.7          1.5
n.a. Not applicable.
Source: Authors' estimates.
58



0                                                                -         0w-  ,,0                  0           .-   oo ooo                          o             -0'   -C! 
0  ~~~~-0  00  ~~~~~~                                                                                                              '0o"0~~~~~~   OX    ~~~~~   0'0oE.                         -    RO                                                               -
0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~V01                                                                                                                                                                                          f    00  
o oo   bo   oo   oo o o o o              oo__o   e oo   ~o o o                                 o--      
6r                                                                                         0~~ -~
0                                                                                                                                                                                                    _~~~~~~~9
o~~~0 40 0 0 4 0                                                          0        o           X0    00400    0s04    4a 0q  o00                                                      -  '         >>£XNoooXofiX~qq<oo>r><sXXs,-, 0000C0,0000
o0    o0                      0         0          0         0         0         0              0   o   o 0~    o0    oooooo-0    o   o  o                                                         oooooooo  S  3  50 0    0 0
o4           P                  o                                                                                                -                                                                                                                         -- o-  o   o   -   0  o    o   _    o  o.oo.e-  -ooo  -ooho  -   e  'r._   0
°  °   °  °  °  °  -  °  w° iJ -° A° <  <  >                  x   i°lS   °   W  o  b  b  ,w  b °   w    °  °  °  °  °   <  0\ u  XOD v                                                               A  °  ° 9s  -  k  A4  71                   %               3
~~~~~~~~~~~~......    ... ..   .. .    ........ ...                               ...    ... ... .    . ............................. .............  . ........ ...         .    ................................    ........ ..............  ........... .  .  ..............  ..     .   . ....... ... ..  ............... . .............................. ..................
o x >X  >  h w  8 9     o  ;  J sO X  9>  o                                        w   utiw ox s     >   ° w  w  wo  x       o w  > W° O4°o s                                                                                             -o               U 
_~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~O _     W*_   'O                               i,
L4rk ~ ~ ~ ~ ~ ~ ~ ~ ~    ~         ~        ~         ~        ~        ~        ~        ~        ~        ~        ~        ~        ~       ~        ~       ~ ~ ~ ~ ~ ~ ~ ~ 0
9   P Pt   P 9    P Ps                               P P    P                        P °h             P      z94°°o>W o wxt                                                                                                                                                  
55  gWS   oooS goSo o                                                                   S                                                                                                                                                                        --<~0 £                          OWoX>>oo              
41                                                                  -~~~~~~~~~~~~~~~~~~~~-
00P       0-                40             0 -00                       0         00             - -                   .        00P-                             " 00-P0 0P                                                                     0
_ ~~~~~~~~~~~~~~~~~~~.            _.. ..................  ...... .. ........  ............... ......   ........  ... .........      ....... ... .  ..            ..............  .   ................. ...... ...  ...................... .........  .... ................ .................
00A    0A004-4000-40.OA.00.0'0    4   (.4    00000000o  -£xb£  'xx0x00000x    00=40-400   t.>o> °a
,x
4is                                                                                                                                 os>i  vwO£wgw£> wo x w vgOgAoe h 6£-wo w<x4s    >    >    eowx   .   ,k>9
.0..........  -  .  ...   ............ .'0........  . .  ......  ..  .  .   ..4.........0..' 0......0.'                                                                                                                    00..0
-    -  ~ ~ ~~~~~~   04          -          -    -    -        04      -       04                    -         -       -        0                                                                  0.4                   '0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~:-91~o91 9
C)  M                                                            -              ,                                                                         -  -  -                                                                                   0 



179)   An interesting and unique aspect of this scenario is that the output of all Iranian industries
expands, as real resources that had been allocated to rent-seeking are freed up by tariffication. At the
same time, the increase in the supply of labor and capital for production results in a 0.1 percent decline in
the real wage and a 0.4 percent decline in the rental rate on capital. These declines are more than offset by
the additional output available from the productive use of the newly available capital and labor and the
income transfers from the government.
180)   The principal impact of the tariffication of nontariff barriers without rent dissipation is the
increase in government revenues, which increase by 2.0 percent of GDP (column 2 in table 5.3). Since we
assume that the government distributes these gains back to households in equal Iranian rial anmounts, poor
households gain substantially, even though rich households lose in this scenario (see the next s,ection for a
discussion of the distribution scheme). The distributional impacts are strictly progressive, because we
assume that the rents from the quotas were not dissipated but rather accrued to households in proportion
to their income.
181)  There is a slight negative welfare effect due to the fact that tariffication induces a smrll increase
in the food and energy subsidies. Given the change in the distribution of income, expenditure in the
economy shifts toward the budget items consumed more intensely by the poorer households. As shown in
table 5.2, the poor intensively consume food, energy, and transportation (an intense direct user of energy
subsidies). The increased demand for food and energy results in a slight reduction in economywide
efficiency and welfare because increased consumption of these products due to subsidies reduces
efficiency.
182)   The impact of the different policy changes on domestic output, prices and exports at the sector
level is presented in tables 5.4 and 5.6.
Unifying the Exchange Rate
183)   We simulate the unification of the exchange rate (that is, the removal of subsidies through
centrally allocated foreign exchange at the official exchange rate for essential commodities and for the
investment demands of state-owned enterprises). Because petroleum product consumption subsidies are
considered part of energy policy, we retain them, except in the energy policy scenarios.
184)   Eliminating subsidized foreign exchange for the investment demand of state-owned enterprises
increases efficiency with no obvious impact on the poor, since the owners of capital and labor employed
in these enterprises are not likely to be poor. Since the objective of subsidizing foreign e.xchange for
essential commodities is to assist the poor, alternate safety net programs need to be promided if the
subsidies are removed. We consider two alternate programs that could be designed to address the needs of
the poor.
185)   First, we assess the impact of distributing the additional revenue the government cibtains from
eliminating subsidies back to all households in equal lump-sum payments to each household (column 5 in
table 5.3). All households, rather than just poor households, are included because it may be difficult to
identify at first which households are poor. As a practical manner, the design and implennentation of
social safety nets is difficult. Any scheme which distributes income back to households is subject to
fraudulent claims. Some households may collect more than once. More seriously, intermeciiaries may
attempt to capture distributions intended for others, possibly excluding some poor households. Over time,
60



excluded households should be able to obtain payments, and it may become possible to accurately
identify poor households, at which time safety net payments can be targeted.27 Including all households
should minimize the risk that no needy household is excluded. This issue will be analyzed in more detail
in a follow-up study as the World Bank and the govemment of Iran have agreed to a study of how to
efficiently distribute the surpluses from subsidy reduction and tariffication.
186)   The aggregate welfare gain from this policy is a very large 6.9 percent increase of income. The
magnitude of the effect shows how inefficient a dual exchange rate regime can be when the market
exchange rate is four or five times the official exchange rate and substantial amounts of foreign exchange
is allocated at the official rate.
187)  The gains are derived from the fact that subsidized foreign exchange means that different sectors
face different prices for their imports. Moreover, even the same sector or firm faces different prices for its
imports depending on how the foreign exchange is spent (investment demand versus current use of
imports as intermediates). This implies that the foreign exchange is inefficiently allocated between sectors
and uses. Sectors and uses that receive subsidized foreign exchange value it less highly than those who
have to pay the market price for foreign exchange. Unifying the exchange rates will induce purchases so
that foreign exchange is valued equally at the margin by all sectors and uses.
188)   Once the subsidies are lifted, the prices of essential commodities increase significantly (38
percent for sugar, 11 percent for farm products, 6 percent for food). Despite these price increases,
however, the welfare of the poorest households increases significantly. The welfare of the two poorest
rural household types rises 72 and 45 percent; the welfare of the two poorest urban household types rises
32 and 20 percent. These increases occur because these households are so poor that the lump-sum
distribution payments represent a substantial portion of their income. Note that all individual households
gain from this policy but that the distribution scheme is monotonically progressive: the poorer the
household, the larger the percentage gain. Thus even though the distribution scheme is not perfectly
targeted at the poor, it is highly pro-poor.
189)  Import subsidies represent an implicit tax on the farming sector, which has to compete with
heavily subsidized imports. Removing subsidies to imports results in an increase in the price of farm
products and removes the implicit tax on Iranian farmers. As a result, the price of domestic farm products
rises 7 percent and the farming sector grows 13 percent. Similarly, domestic producers of items that
competed with subsidized imports (producers of sugar, oils, pharmaceuticals, and industrial machinery)
see demand for their products increase and respond with increased production in the new equilibrium.
These sectors expand considerably, competing resources away from other sectors.
190)   Eliminating subsidies to imports also reduces demand for foreign exchange, causing the real
exchange rate to appreciate by an estimated 13 percent. Output effects by sector are also partly explained
by this appreciation.
191)  An alternate scheme for protecting the poor that is sometimes proposed is subsidizing
consumption of essential commodities (column 6 in table 5.3). This subsidy does not discriminate based
on the geographic source of the product, thereby removing the implicit tax on domestic producers of the
import-competing product and eliminating the distortion in consumer choice between imports and
27 This was the process adopted in Jordan, where food subsidies were initially converted to a payment to all households. Only
later were payments targets at the poor.
61



domestically produced goods. It should therefore be welfare superior to an import subsidy (see Bhagwati
and Srinivasan 1971).
192)   In fact, we observe a substantial aggregate welfare gain from this policy, equal to 6.7 percent of
income. Since subsidies to consumption of essential food commodities and pharmaceuticals distort
resource allocation toward production and consumption of these commodities, the aggregate welfare gain
is slightly less than that generated by the policy of exchange rate unification without subsidies to
consumption (6.9 percent), however.
193)   By design of the experiment, there is no change in the price of any of the essential commodities.
Since all subsidies to foreign exchange (not only those to essential commodities) are eliminaled in this
scenario, the net fiscal impact on the government is positive.28 Poor households gain in this scenario but
considerably less than they do if the government eliminates foreign exchange subsidies without
subsidizing food consumption. The smaller gains to poor households are explained by the fact that the
fiscal gains to be distributed back to households are smaller as a result of the subsidization of food
consumption. The model helps us understand that a policy designed to help the poor can be
counterproductive.
Lowering Tariffs and Introducing Competition
194)   The government intends to introduce foreign competition in the Iranian marketplace after it has
tariffied nontariff barriers. Since the government intends to adopt a gradual approach to tariff
liberalization, we simulate a sequential process of lowering tariffs in two steps. In the first step, the
government lowers all tariffs above 25 percent to 25 percent, leaving all other tariffs unchanged. In the
second step, the government imposes a uniform tariff of 15 percent. Unless otherwise indicated, all
simulations are based on a benchmark equilibrium in which rents are dissipated. The simulation combines
the effect of tariffying nontariff barriers and lowering tariffs in some sectors. We infer the marginal
impact of lowering tariffs as the difference between the gain from both removing nontariff barriers and
lowering tariffs and the gain from tarrifying nontariff barriers but leaving tariffs at their current levels.
195)   The first simulation examines the case in which tariffs above 25 percent are lowered to 25 percent
and nontariff barriers are tariffied (column 3 in table 5.3). Under this scenario, aggregate welfare
increases relative to the initial equilibrium by 4.1 percent of real consumer income. The average effective
or collected tariff, which is 2.5 percent initially, increases to 19.4 percent. When the maximum tariff is set
at 25 percent, the average effective tariff falls to 15.3 percent.
196)   Given tariffication of nontariff barriers, the marginal impact of lowering high tariffs to 25 percent
maximum is 0.6 percent of real consumer income. By international standards, this is a large gain in
welfare for a change in the average tariff rate of this magnitude. It illustrates that the largest gains from
trade policy reform are derived from reducing protection to moderate levels in sectors with the very high
protection.
197)   After tariffication the sectors with the highest tariffs would be clothing (93 percent), textiles (74
percent), weaving and leather products (75 percent), and motor vehicles (37 percent). Reducing these
tariffs, well as those on glass and other food products, to 25 percent results in a deprecation of the real
28 There is, however, a net fiscal cost to the government associated with replacing an import subsidy with a consumpti on subsidy
for a particular product.
62



exchange rate by 2.5 percent, which induces an increase in exports of 4.5 percent. Three of the four
sectors with the highest protection contract, while all other sectors expand. When tariffication is
combined with setting a maximum rate of 25 percent, the negative impact on these sectors is muted but
still negative.
198)   The weaving and leather products sector is interesting, because it will expand despite the
lowering of nominal protection, according to our model. This seemingly anomalous result occurs because
the depreciation of the real exchange rate increases exports, and the price of imported textile products,
which represent 30 percent of the intermediate inputs used in this sector, declines significantly.
Setting a Uniform Tariff of 15 Percent
199)  Eliminating nontariff barriers and setting a uniform tariff rate of 15 percent (except on petroleum
products) results in an increase in aggregate welfare of 5.5 percent of real consumer income (column 4 in
table 5.3), according to our model. The marginal impact of imposing uniform tariffs is 2.0 percent. The
impact on output by sector is similar to that in the 25 percent maximum tariff scenario.
200)   The combined effect of tariffying nontariff barriers and lowering tariff protection has a strong
positive impact on the income of the poorest households, with the income of the poorest rural household
type rising 20 percent and the income of the poorest urban household type rising 11 percent. All
households gain, but the percentage increase in income declines monotonically with income, since the
equal lump-sum transfers of the fiscal surplus represent a larger percentage of income for poorer
households.
201)   Given tariffication the marginal impact of lowering tariff protection has a revenue impact on
government revenues. The adverse fiscal impact is greater under the 25 percent maximum tariff scenario
(0.7 decline in revenue) than under the 15 percent uniform tariff (0.4 percent decline in revenue). The
second option has less negative an effect on fiscal balances because low tariffs are raised to 15 percent,
partly offsetting the revenue loss associated with lowering tariffs above 15 percent. Since the impact on
the poor is primarily a function of the lump-sum transfers and the negative fiscal effect can be assumed to
cause a lump-sum transfer from households to the government, the marginal impact on the poor of
lowering tariff protection given prior tariffication is negative. The combined impact of tariffication plus
lowering tariff barriers is positive for the poor, provided they receive their share of the fiscal surplus
generated as transfers.
Adopting Integrated Pricing Reforms
202)   By evaluating a combination of policy scenarios, we determine the relative importance of the
various reforms and the magnitude of the combined effects (tables 5.5 and 5.6). Our results should help
inform the discussion of key policy reforms.
63



Table 5.5. Impact of Trade, Exchange Rate, and Energy Pricing Reforms
(percentage change from initial equilibrium)
Energ y pricing reform +
initial    Tariffication +  Tariffication +           Energy pricing  tariffication + exchange rate
situation    exchange rate   exchange rate    Energy     reform +       unifica, ion + tariff reform
Item            (level     unification +    unification + zero  pricing    exchange rate   15% uniform
values)  uniform 15% tariffs   tariffs      reform      unification      tari0fs    Zero tariffs
(0)          (1)               (2)          (3)           (4)           (5)           (6)
Aggregate welfare change      -            12.3             12.7         32.9          38.8           50.1         50.7
(percent of income)
Fiscal effects (percent of GDP)
Food subsidies                -              -                -             -             -              -            -
Foreign exchange subsidies    -6.4          6.4              6.4          2.1           6.4            t.4           6.4
Petroleumsubsidies        -18.1             0.8             -0.3         18.1          18.1           18.1          18.1
Import taxes                0.3             1.6             -0.3          0.1           0.1            .. 1         -0.3
Oil rent                    15.7           -2.2             -0.6         -7.0          -9.2           -8.1          -6.6
Net effect                    -             6.6              5.1         13.3          15.3           1;.5          17.6
Average effective tariff rate    2.5       14.0               -           2.7           2.9           14.7            -
(percent)
Trade effects
Real exchange rate          n.a.           -8.5             -3.5        -26.1          -35.5         -31.9        -26.1
Aggregate exports           n.a.          -17.2             -8.9         30.4          16.6           25.8         35.3
Factor incomes
Wage rate                   n.a.            3.1              3.2          2.4           7.7            8.4          7.8
Return to capital           n.a.           -3.7             -1.3         -6.1           -7.1           -'.8        -3.7
Price of essential goods
Primary food items          n.a.           13.5             13.1          8.2          19.4           24.9         23.9
Food products               n.a.            7.4              6.9          4.3           8.1           1 0.3         9.5
Sugar                       n.a.           40.9             41.9         -0.3          36.4           41.6         42.1
Pharmaceuticals             n.a.            2.1              3.1         -4.0           -1.2           0.4          1.4
Change in household welfare
Rural I                     n.a.           95.6             77.7        209.8         239.1          292.2        282.9
Rural 2                     n.a.           60.8             50.5        139.0          157.2         193.3         188.7
Rural 3                     n.a.           42.5             36.1         98.5          112.8         140.2        137.4
Rural 4                     n.a.           38.1             32.9         90.0         102.4          128.1         126.2
Rural 5                     n.a.           30.7             27.1         73.1          84.0          105.9        104.7
Rural 6                     n.a.           24.0             21.9         58.7          67.8           86.3         85.8
Rural 7                     n.a.           20.8             19.5         51.6          60.0           77.1         77.2
Rural 8                     n.a.           19.6             18.7         49.5          56.8           7:3.6        74.2
Rural 9                     n.a.           12.9             13.4         34.6          40.6           53.9         55.0
Rural 10                    n.a.            2.8              5.2          11.9          15.6          21.6          23.2
Urban 1                     n.a.           44.3             37.3        102.6          116.3         143.1         139.5
Urban 2                     n.a.           28.9             25.4         70.3          79.8           99.4         97.9
Urban 3                     n.a.           22.4             20.3         55.1          63.5           80.0         79.2
Urban 4                     n.a.           18.9             17.7         47.5          54.9           69.8          69.6
Urban 5                     n.a.           16.3             15.8         41.8           48.4           62.0         62.2
Urban 6                     n.a.           14.4             14.3         37.8          43.9           56.5          56.9
Urban 7                     n.a.           12.0             12.5         32.1           37.7          49 2          49.9
Urban 8                     n.a.            8.8             10.0         25.1           29.9          39 6         40.7
Urban 9                     n.a.            5.7              7.5          18.4         22.6           30 3          31.5
Urban 10                    n.a.            2.3              5.0         10.5           13.9          19<4          21.1
n.a. Not applicable
Source: Authors' estimates
64



0   ~~~~~~~~~~    ~ ~ ~ ~~~~              0~~~~~  zN              AC)                                                                                           '~ g 000C
C.  C)  0  PI ~         ~           ~          ~           ~          ~           ~          ~          ~         ~          ~         C           0~
-    00                    90                                                                                             -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~r   5  PE
El~~                                              E.        -o                                                                                                                                     M
ND  CD~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~C
CD ~ ~ ~      ~         ~         ~         ~        ~        ~        ~        C ~ -C 
CD  CD~~~~~~~~~~~~~~~~~~~~~~~~~~C
ft
.   .      ..........      ........ .-......    ....    ..................                                     ........... ....     ...        . ......        .............                                               .     .....  . ....     ... .... 
7"    6                                                    i3~~~~~~~~~~~~~
to to ON ON t    O    t    -          C      O to       to    ON t    N    O    L             t         o             -     ON t       O    O    C       to       L    0     NO    -      O to -                 t     -    t O6O 6 
6    61  L.   6                      L,   i~~~~~~~~~~~~  61   ;P,   j,    ~     ~     ~     ~     ~    ~    C
-   -  -   -   to  NO  -  to  -  to  to  to  LA  -  to    to    to                                                                      NJ  to  to  NO  00  -   DO  NO~~~~~~~
ON  NO    to  CN   NO   N  C   O   ON  0   o  ON   N  -   N                           to    N           ~.000                    00   ~-~                 ON   N  '0A N~                     to   N  to             0    NO   N  to   N  to 
ON.ON      .. N O O N..     .....    . .. .   ...to .. ..   ON ...   ........ 0 .    ..  C.....   . - .............. ..ON.N....O ..  .......  .. ...........  t o o. ON   ..........-.. to....N . ON ..  ..0  ....  .....   ON.   ....0 0.
Ul  6~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~f
N                           N-NJ  to   ON   N          -        -        -    -                 N            o   N        -    to   to        N N N N N N                            ON    N 
NZft
00 NNN tC0000 N                                                      ON A              O                                                   1 D O to o to t…00ON                                                                N       OC A              N           N.,N
NO   00  C    ON   -    ON   NO   LA    ON   ON   ON   to   -    00   00    0    LA  NO  ON  -    to   LA   to   ON   LA    C    ON  NO    0    NO   to    -    -    ON    to    -    NO   LA   ON   ON   ON2
----N         - --    -                       ........... -....o                     o            t        0                                                          -     t      o    N                                               N....to... . N.....O ....
to   ON  0  -    NO   ON   ON    LAO  ON~~~~~~~~C  '0C C   ON   C   ON    to       too         o    0       -0        LA   NO        -    ON   NO   NO   -        ON   NO    0    to   to   LA   to    C          ON~~~~~91   91  1  71 
-    ON  0  t    -000    L  CO  to    J   0    NO    0 0000  to to  0 0 0   Nto    LA   O          ON   NO           ON   0       ~ LA    NOON           o    ON   ON     LA   ON                                                                f
ON         NJ       CD                -                      to    -     N      N    O    N     Oto00toto O                      N    O    Nto          000000    -               to          N     N           00    -    -      N    -    to    -    to~~~tg  6 
to   ON  to   ON   to   to   -    NO   C    -    -  NO   LA   0    to   LA   to  ON  00  to   NO   LA   to   ON   ON   to   to  ON   LA   NO    -    LA    C   0    0    NO   00   to   to   NO   to   LA    to    '0~~~~~~~~~~~~~~~~~~, 6,   6
ON   LA  CD    CON  ON   LA   ON   0000    to    000    to   NO   00  00  ON  to    O   C    to   to   to   ON   to  LA   C    LA    NJ            LA   ON   ON   -    NO   ON   NO 9o
-    ----- -------    .   ...  -    ------- ---   - --------  --  ---  .  .......      ........                                         ....    .  ....                 .   ...
N    N  to  N N N N N N N    N    NO   to    -    to        N    N     N    N     N    N     N             NO           N          N    to    N      N                  NDNN..NO ~~~~~~~~~~~~~~~~~~~~~~~N'~~N0
-    ON  to  LA   C    C    NO C    C    LA   ON   NO   ON   N    LA   ON  -  LA        NO   ON    ON   -    NO   ON   ON   LA            o    to   to    totototot                                 C    LA    to   to   ON   t
ON   NO  ON   00   ON   LA   ON   tOO  NO   NO    -    NO   to   ON   NOON   o   to  LA   0  to   ON   Do   to   ON   ON  LA   ON   0    N-A   NO   -000    to   LA   ON   -0-0      -0    0    00   NO~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~   9
N          N N N * *                        N    N              *      N     N     N      N     N     N     N                          N           k    N        k    *        *     N    N    NN7N                 Nr                  N 
LA   to  LA    A  ON   ON  L    ON      to        ONNO                              ON             ON    -A   LA   LA    A    ON   to   O    LA   LA   ON to    ON   LA                N   ON      CD                                            f
LA   ON                                          ONONLA              to                                              -~~~~~~~~~~~~~~61Z~t                                    NO   t    00    N   O        ON    N   L
-    ON  0  to   CD   NO   LA    00000000  ON    0to90         NO        9         90900     ~~~~~~~~~~~~~~~~~~~~~~~0                          '00000            to. ~ ~ ~~~~~    ~~                                                ON9



Reforming Petroleum Prices
203)   Domestic petroleum prices in Iran are only about 10 percent of world prices. Eliminating the
subsidy to domestic consumption of petroleum products potentially has strong links with trade and
exchange rate reform. In particular, the elimination of subsidies to petroleum product consLumption will
increase the relative costs of energy intensive industries. This could change the pattern of 2omparative
advantage, inducing Iran to export more crude oil and more of products that do not use energy
intensively, and import more of the products that use energy intensively. It will also induce Iran to use
energy more efficiently, reflecting the value of oil and petroleum products on world markets. Moreover,
the additional exports of oil would be expected to induce a real appreciation of the Rial that in turn will
adversely impact on non-traditional exports and put further pressure on import competing indLIstries.
204)   The results of Table 5.5 are consistent with theory. The elimination of the petroleum subsidies
results in a strong increase in exports of crude oil of 76 percent. The additional crude oil exports earn
additional foreign exchange so that the real exchange rate appreciates by 26 percent in ordetr to restore
equilibrium in the balance of trade. Aggregate exports and imports increase by 30 percent. 'I'hus, import
competing sectors contract and non-traditional exports contract by more than 50 percent, while oil exports
expand. This phenomenon is sometimes referred to as "Dutch disease."
205)   This scenario results in an enormous increase in welfare of 33 percent of consumption (column 3
in table 5.5). The results are explained by the fact that oil moves to where it is valued more highly (world
markets) and the economy uses petroleum products more efficiently. If the fiscal surplus fronm eliminating
the petroleum product subsidies is transferred back to households in equal amounts, the income of the
poorest urban household type doubles, while that of the poorest rural household type rises by more than
200 percent.
Combining Trade and Exchange Rate Reform
206)  In these scenarios we combine the effects of tariffying nontariff barriers, unifying the exchange
rate for imports and exports and lowering tariffs. We consider two tariff policies: a uniform tariff of 15
percent and zero tariffs. Under the first policy, the welfare gain is 12.3 percent of consumption; under the
second policy, the gain is 12.7 percent. The poor gain enormously from these combined policies, but they
benefit slightly more under the 15 percent uniform tariff, because there is less fiscal surplus to distribute
to the poor if tariffs are eliminated. The impact on production is dominated by the sectors that benefit
from eliminating the foreign exchange subsidies.
Combining Energy and Exchange Rate Reform
207)   Combining exchange rate reform with energy reform increases the aggregate welfare gain to 39
percent of benchmark consumption (column 4 in table 5.5). Since both energy and exchange rate reform
increase government revenues, there is an enormous potential increase in welfare to the poor if the fiscal
surplus is distributed to households as a lump sum. The poorest urban household type gains 116 percent,
and the poorest rural household group gains 239 percent. All households gain, but the percentage gains
decrease with the household's income level.
Combining Trade, Energy, and Exchange Rate Reform
208)  We estimate the gains from combining all the key policy reforms based on two different policy
options: a uniform 15 percent tariff (column 5 in table 5.5) and free trade (colunm 6 in table 5.5). Our
66



estimates suggest that the Iranian economy would enjoy an enormous gain of more than 50 percent of the
value of consumption as a result of the combined reforms. Aggregate gains under both the zero tariff
option and the uniform 15 percent tariff are estimated at more than 50 percent of consumption. The poor
gain slightly more from the uniform tariff of 15 percent because the fiscal surplus is larger when tariffs
are not eliminated.
67



ANNEX 5A. DATA AND MODEL CONSTRUCTION
To calibrate our model, we constructed a database that represents a benchmark equilibrium. We
used four main data sources to construct the database: (1) an 10 table for Iran for 1994-95; (2) a
household expenditure survey of Iran from 1994-95; (3) policy data, including tariffs, subsidies to
imports and energy products, and tariff equivalence of nontariff barriers from various Iranian ministries
and agencies, including the Central Bank, the Ministry of Industry, the Ministry of Commerce, and the
Customs Department; and (4) estimates of Iranian elasticities (where available). We combined the data
into a social accounting matrix, which constitutes the basis for our modeling effort.
The I0 table provides data on the costs of intermediate inputs and value-added (labor and capital)
in 43 production sectors, and it distinguishes household demand, government demand, investment
demand, export demand, and import supply by sector. Household demand is divided into two categories:
urban household demand and rural household demand. To further disaggregate households. we use the
household expenditure survey to decompose both rural and urban households into 10 hous&,hold types,
grouped according to income. That is, all Iranian households are grouped into one of 20 household types,
depending on their income level and whether they live in a rural or an urban area.
Unfortunately, the 10 table and the household expenditure survey are not consistent with respect to
total rural and total urban household demand by sector. We therefore use share data from the household
expenditure survey to decompose the data on rural and urban household demand. For each sector and for
both rural and urban households, we calculate each of the 10 household types' share in total household
demand by sector in the household expenditure survey and then apply those shares in the lT table. We
then have a table with the 20 households' expenditures on output from the 43 production sectors.
Neither the 10 table nor the household expenditure survey provides data on the incorne pattern by
household type, leaving us with no information on the distribution of income across factors of production
or on the sector from which the income comes. We therefore make the strong assumption that all
households have identical income patterns.
The 10 table also contains little information on the policies we want to analyze; the data that it does
contain-collected import tariff revenues-do not represent current policies. We have therefcre relied on
Iranian ministries for our data on policy parameters for tariffs and nontariff barriers to imports, foreign
exchange subsidies, and subsidies to domestic petroleum consumption.
The 10 table reports the costs of imports to users, so in constructing the social accounting matrix,
we incorporate the data on barriers to imports by deducting the costs of the barriers to arrive at the border
costs of the imports. In the case of foreign exchange subsidies, we derive the border costs of the imports
by adding the value of the foreign exchange subsidy to the user costs of imports to arrive at the border
costs. The data on subsidies to domestic petroleum consumption were derived on the basis of table S.Al,
which shows the difference between the domestic and international prices of four petroleum products.
68



Table 5A1. Estimated Domestic and International Prices for Petroleum Products,
1999/2000
Domestic price  Intemational pricea   Ratio    Subsidy rate
Product          (rials/liter)      (rials/liter)   (percent)   (percent)
Gasoline            350.0             1329.2       26.3           73.7
Kerosene            100.0             1254.3        8.0           92.0
Gas oil             100.0             1136.9        8.8           91.2
Fuel oil             50.0               880.6       5.7           94.3
a International prices are converted to rials at the market exchange rate on the Tehran Stock
Exchange of 8,150 rials per dollar.
Source: Ministry of Oil and authors' calculations.
The price of gasoline in Iran was 26 percent of the international price, and the domestic price of
kerosene, gas oil, and fuel oil were less than 10 percent of the international price. Given that international
prices are exogenous to the Iranian economy, these prices therefore imply an implicit subsidy of almost
75 percent on gasoline and more than 90 percent for the other three petroleum products.
Since petroleum subsidies apply to domestic consumption, they effectively apply to both imports
and domestic production. In the case of imports, we add the subsidy to the user costs of imports to obtain
the border costs of the petroleum imports. In the case of domestic production, we add the subsidy to the
costs of production.
Our database also includes a set of elasticities. Many sources were used for the elasticities. We
employed the study of Ahangarani (1999) who estimated a system of demand functions for Iran. We also
employed the study by Hope and Singh (1995) for energy elasticities. These studies suggest that the price
elasticities of demand for different energy goods are between -0.2 and -1. We employed -0.4. In a CES
function with a small energy cost share this implies an elasticity of substitution of 0.4.
These studies suggest income and price elasticities of household goods of about 1 and -1,
respectively. This corresponds to a Cobb-Douglas utility function. Some essential household goods are
reported to have price elasticities less than unity. We choose -0.4 for these goods.
In most economies, the capital-value share in total value-added is constant in the long run, which is
consistent with a Cobb-Douglas production function for total value added.
Most studies suggest low substitutability between most intermediate inputs in different
product categories, corresponding to the Leontief production function for the aggregate of
intermediate goods (see, for example, de Melo and Tarr, 1992). Finally, most studies
suggest energy demand elasticities in production between -0.2 and -0.7 - we chose an
average value of -0.5.
In the remaining cases, we use estimates employed in sirnilar analyses, such as de Melo and Tarr
(1992); Harrison, Rutherford, and Tarr (1993); and Rutherford, Rutstrom, and Tarr (1994). In particular,
we choose a value of three for the elasticity of substitution between domestic and foreign varities in
demand. For energy goods, which are relatively homogeneous, we choose a value of six. Figures 5.1 and
5.2 show the nesting structure of the production functions and the utility functions along with the assumed
elasticities of substitution.
69



ANNEX 5B: COMPENSATING THE POOR FOR THE REMOVAL OF
PRICE SUBSIDIES ON THE CONSUMPTION OF ESSENTIAL GOODS
In absolute terms, the rich gain far more than the poor from subsidies that hold down th, prices of
essential goods, such as flour, pharmaceuticals, electricity and other fuels. These items make up a higher
share of total expenditure for the poor than for the rich, but this effect is dominated by the mujch greater
absolute expenditures of the rich, relative to the poor. According to the estimates in World Bank (1999,
Tables 14A and 14B), the per capita benefits of fuel subsidies to members of the richest urban quintile
were 6.7 times the per capita benefits to those in the poorest urban quintile. For the rural quintiles the
corresponding ratio was 5.5.
To avoid wasteful over-consumption of subsidized goods, and to raise the share of the poor in total
benefits, we recommend that price subsidies be removed and that compensation be provided in the form
of equal lump sum amounts payable to all households.29 Iran already has a mechanism for dctstributing
ration coupons for edible oils, sugar and cheese. Every holder of an ID card can go to a bank regardless
of whether or not they have an account there) and collect ration coupons. The bank stamps the 11D card to
show that the coupons have been handed out. The ID card is a booklet that contains a recent photo of the
holder and space to allow the bank to stamp it at regular intervals over a two year period. Th, coupons
can be used to buy subsidized goods at controlled retail prices from grocery stores. The stores must match
coupons collected from customers with price controlled goods delivered by government agencies, or pay
the difference to the government. This system could easily be amended to distribute cash instead of
coupons.
If substantial amounts of cash were distributed through the existing coupon system, it would be
subject to additional stresses that do not apply when only small amounts of low quality goods are
involved. There are already incentives to retain ID cards for those who have died or emigrated. and these
abuses would increase as the benefits paid to card holders increased. Cards can also be lost or stolen.
Because of the photos, it is hard to use someone else's card unless a bank official collaborates in the
fraud, but some bank officials may do this, and if severe penalties were enforced they might bc inflicted
on those who had made honest mistakes.
Further study of ways to minimize the abuses that cash transfers might create would clearly be
necessary. However, admninistrative problems are not unique to cash transfers and would confront any
welfare system. Some critics of uniform cash transfers argue that it is wrong to help the rich as wvell as the
poor, and that cash subsidies should therefore be targeted to the poor and denied to the rich. Against this,
we would make three points. First, targeting subsidies is administratively costly and has the major
disadvantage that it would generate high marginal rates of tax on incomes just above the poverty line
defining eligibility for the full handouts. These high marginal tax rates would tend to create a poverty trap
by reducing the incentives for the poor to help themselves. (A negative income tax system, however,
could in principle avoid the problem of high marginal rates of taxation.) Second, as the above estimates
from World Bank (1999) show, the rich benefit from the existing price subsidies, and in fact they benefit
far more than the poor in absolute terms, whereas by definition everyone would benefit equally, in
absolute terms, from a uniform cash payment. Third, to compensate the poor, the cash transfers need only
be set equal to the amount that they gain from price subsidies, which is far less than the average gain to all
citizens from these subsidies. Importantly, as Iran obtains experience with administering a cash
29 Since children eat less than adults. and since the per person cost of fuel is less for large families than for small one:., there is a
case for smaller payments per person in large families than in small ones.
70



distribution system it could be progressively targeted to the poor, including possibly the introduction of a
negative income tax system.
The estimates in World Bank (1999) imply that the per capita gains from fuel subsidies were Rls
165,000 and Rls 227,000 for the poorest quintiles in rural and urban areas, respectively. In contrast, the
average gains were Rls 472,000 and Rls 585,000 respectively. A flat payment of Rls 227,000 to everyone
would therefore have compensated the members of the poorest urban quintile and more than compensated
the members of the poorest rural quintile. This is about $28 per person per year, at the current open
market exchange rate. The actual cash handout per person that would now be needed to just compensate
members of the poorest quintile for the removal of all price subsidies would be higher than $28 per year
because world fuel prices have risen since the above estimates were calculated, and because the above
estimates apply only to fuel subsidies, and exclude basic foods.30
Setting relatively low cash handouts that would only compensate the poor for the removal of price
subsidies would have two advantages. It would minimize the incentives for the rich to go to the trouble of
collecting their entitlements, and it would allow the government to reduce other taxes, relatively to what
they would otherwise have been. However, if further study suggested that it would be feasible to
administer a system of flat rate cash subsidies at the higher rate corresponding to the average benefits to
all households from existing price subsidies, or even to the much higher per capita cost to the government
of providing all existing price subsidies, it would be possible to reduce poverty substantially, rather than
merely compensate the poor for the removal of the existing price subsidies. The important point is the flat
rate cash subsidies needed merely to compensate the poor for the removal of price subsidies are
sufficiently low that we doubt that they would result in excessive abuses of the ID card system.
For the above reasons, we are confident in recommending that all price subsidies be removed and
replaced by flat rate cash transfers. In addition, we think that further study may well confirm the
administrative feasibility of setting cash subsidies at a rate that would be high enough to substantially
alleviate poverty, rather than merely compensate the poor for the removal of price subsidies.
30 Compensation for the removal of price subsidies for pharmaceuticals should be provided through the health insurance system,
because the compensation needed by individuals with certain major illnesses would be far in excess of the compensation needed
on average.
71



6. SEQUENCING REFORMS
209)   The Third Five Year Development Plan incorporates an ambitious program of reforms and in this
report we have suggested still further reforms. To avoid discouraging potential private investors by
creating unnecessary uncertainty, the government will need to commit itself to a credible ind detailed
timetable for these reforms. An essential element of any credible plan is that the government must
anticipate the possible effects of reforms on unemployment and the poorest groups in society and
implement policies to offset potentially adverse effects. The proposed reforms of the exzhange rate
system and of fuel subsidies will produce large fiscal gains to the government budget, which will be
reinforced by proposed reforms to direct and indirect taxation. They should therefore provide the
government with ample revenue to finance policies needed to offset possible adverse effects on
unemployment and the poor.
210)   Since the methods currently used to alleviate poverty are not well targeted, it shoulcl be possible
to design more effective methods at a modest budgetary cost. Moreover, since the reforms will remove
barriers to non-oil exports-industries that are intensive users of unskilled and semi-skilled labor-the
aggregate effect of the reforms may well be to boost demand for these types of labor. However, the whole
purpose of reforming trade policy and reducing input subsidies is to change relative prices and cause
resources to move from activities in which their marginal social productivity is relatively low :o activities
in which it is higher. This will inevitably lead to job creation and expansion in some sectors and to job
losses and the closure of firms in others.
211)   The sectors likely to be adversely affected by the reform program are those that have relatively
high barriers to imports and those that are intensive users of subsidized oil products. The industries that
receive the greatest protection from imports are those that produce finished manufactures, particularly
garments and vehicles. Following reform, therefore, the transport sector may shrink, but it will inevitably
survive. The most important users of oil products are the transport, petrochemicals, and steel, cement, and
brick-making industries. Given Iran's abundant fuel supplies, even without subsidies or protection from
imports, these industries will almost certainly be viable, provided that they are efficiently operated. There
is no reason why Iran should not be internationally competitive in all these industries follow.ng reform.
However, to make Iranian firms competitive at international prices in these sectors as well as in vehicle
production, it may be necessary to privatize them and allow the new owners to restructure therr.
212)   The govemment will need to ensure that the regulatory and legal environment becomes more
conducive to private enterprise. This will be important both for ensuring the viability of privatized
enterprises and for ensuring that entrepreneurs who wish to set up wholly new private enterpriL es are able
to do so. In turn, the successful development of a vigorous private sector is very important fOr ensuring
the long-term viability of the reforms. The reforms that are needed to achieve this objective are not
merely the trade sector reforms dealt with in this report, though these are essential, but also:
* the removal of barriers to trade and investment in services,
* the introduction of competition policy to minimize barriers to all potential new firms,
* the modernization of the systems of direct and indirect taxation.
213)   One of the most important aspects of the liberalization of trade and investment in servizes will be
financial deregulation, but other service sectors will also need to be deregulated if Iranian bus,:nesses are
to be able to compete on equal terms with foreign competitors after the opening up of trade in goods.
72



Reforming the regulatory environment so that policies are in place that encourage the entry of new firms
will be urgently needed both to ensure that new private entrants to markets that were formerly dominated
by state enterprises are able to compete on equal terms. It has been shown that free entry is the most
effective competition policy 31 to stop new private owners of formerly state owned monopolies from
capturing all the benefits of privatization in the form of monopoly profits. Finally, an efficient tax system
is an essential feature of an environment that is conducive to private enterprise.
214)   The three policy areas listed above are largely outside the scope of this report. Although the tax
system was mentioned in section 2.3, that section focused only on current differences in the tax treatment
of domestic and traded goods. Similarly, although financial reforms were mentioned in section 4.3 that
section focused only on trade finance. There is therefore a need for other broader studies to explore in
detail the reforms that are needed in the areas of trade and investment in services, competition policy and
taxation. Several studies of tax reform have already been undertaken, however there is a need for further
studies of the scope for competition policy and the liberalization of trade and investment in services.
215)  The timetable suggested in table 6.1-which incorporates and extends the plans of several
government ministers who support economic reform-proposes unifying the exchange rates and
converting nontariff barriers into their tariff equivalents by March 2002. The conversion of nontariff
barriers to tariffs will require an increase in the commercial benefit tax on the most heavily protected
items. However, merely to keep effective import tax rates unchanged in real terms when exchange rates
are unified will require very large reductions in the legal rates. These reductions will be needed because
import duties are calculated by multiplying the legal duty rates by the value of imports at the official
exchange rate. If the official exchange rate (at which imports are valued for the calculation of import
duties) is raised from 1,750 to about 8,175 rials per dollar (that is, by a factor of 4.67) all legal import tax
rates would have to be divided by 4.67 merely to leave the amount of tax payable in rials unchanged.
216)  If the Ministry of Industry's estimates of the tariff equivalents of existing nontariff barriers are
accurate, the total import taxes on the items under the responsibility of the Ministry of Industry would be
37 percent and the maximum import tax rate would be 100 percent. The unweighted economywide
average total import tax for all items would be about 30 percent.
217)   To improve the efficiency of resource allocation and encourage growth and poverty reduction (as
well as gain entry into the WTO), it will be necessary to reduce the average level of import taxes after
tariffication, narrow the dispersion between these taxes, and reduce fuel subsidies. Under the proposals
summarized in table 6.1, fuel subsidies would be gradually eliminated over a four-year period beginning
in March 2001. The average levels of import taxes would be progressively reduced between March 2002
and March 2005, by which time there would be a uniform import tax of 15 percent.
218)  Deciding which import taxes will be reduced when is likely to involve a great deal of lobbying
and uncertainty. To minimize these problems and simplify the process as much as possible, the
government could announce that beginning in March 2003 (when import taxes would be below the tariff
equivalents of existing nontariff barriers), only a few import tax bands will exist. Setting a small number
of tariff bands would have no particular economic benefit or cost. Setting a date after which there could
no be no further lobbying for tariff reductions could have a political benefit, however.
219)  To see the advantages of reducing the number of bands, to say, four, suppose that only 10 percent
of items are placed in the highest band and that the remaining items are equally distributed among the
31 See Hoekman, Kee and Olarreaga (2001).
73



other three bands. Setting import tax bands for March 2003 at 3 percent, 20 percent, 40 percent. and 60
percent would satisfy the condition that the average import tax be 25 percent and the rnaximum 60
percent.32 Setting bands for March 2004 at 10 percent, 18 percent, 25 percent, and 40 percent would
satisfy the condition that the average import tax be 20 percent, with a maximum of 40 percent.33 All
import taxes would be unified at 15 percent by March 2005.
220)  There is nothing especially important about the particular choice of bands suggested above-
many others might be just as good. The advantage of picking any one of the many possible sensible
choices is that it would reduce the scope for lobbying to the question of which band any particular item
would be placed in. The economics ministries would make a preliminary assignment of iterns to the four
bands; lobbying groups could get particular items assigned to higher bands only by having other items
assigned to lower ones. Once the bands had been chosen, the future path of all tariifs would be
determined. After all tariffs had been unified, there would be a strong case for passing an act of
Parliament to replace the commercial benefit tax and customs duty with a single tariff.
320.3 x 3% + 0.3 x 20% + 0.3 x 40% + 0.1 x 60% =24.9%.
30.3 x10% + 0.3 x 18% + 0.3 x 25% + 0.1 x 40% = 19.9%.
74



APPENDIX: TRADE DATA FOR IRAN
Table Al. Iranian Exports by Major Partner, 1989-99
Partner      1989        1995        1997        1999
Export
Value in $
million
World     11609.0    18360.0    18381.0    19726.0
United Arab        0.0       285.3       285.6       598.7
Emirates
Germany       657.8       391.0       391.5       423.0
Turkey       891.8       90.1        90.2        183.4
Italy     1420.3      275.2       275.5       181.4
India      150.2        95.0        95.1       128.6
Turkmenistan         ..       146.0       146.2       122.3
Azerbaijan         ..       193.5       193.7       119.2
Iraq         ..          ..          ..        98.5
Taiwan, China          ..       66.5        66.6        97.2
Canada       112.5        54.8        54.9        95.6
China        63.8       62.1        62.1        77.3
Russia         ..        45.5        45.5        62.0
Korea          ..        94.8        94.9        60.9
Netherlands     1302.8        66.6        66.6       59.6
Japan      2102.6      104.2       104.3        57.1
Top 15 partners    6701.8      1970.5      1972.7      2364.8
Rest of the World    4907.2    16389.5     16408.3    17361.2
As % of
Total
Exports
World       100.0       100.0       100.0       100.0
United Arab        0.0         1.6         1.6         3.0
Emirates
Germany          5.7        2.1         2.1         2.1
Turkey         7.7         0.5         0.5         0.9
Italy       12.2        1.5          1.5        0.9
India        1.3         0.5         0.5         0.7
Turkmenistan         ..         0.8         0.8         0.6
Azerbaijan         ..         1.1         1.1         0.6
Iraq          ..         ..          ..         0.5
Taiwan, China         ..         0.4         0.4         0.5
Canada         1.0         0.3         0.3         0.5
China         0.5         0.3         0.3         0.4
Russia         ..         0.2         0.2         0.3
Korea           ..        0.5         0.5         0.3
Netherlands       11.2         0.4         0.4         0.3
Japan        18.1        0.6         0.6         0.3
Top 15 partners      57.7        10.7        10.7        12.0
Rest of the World      42.3        89.3        89.3        88.0
Source: UN COMTRADE Statistics.
75



Table A2. Iranian Imports by Major Partner, 1989-99
Partner      1989        1995       1997        1999
Import
Value in $
million
World    10697.0    13882.0    14180.7    12621.8
Germany      2043.7      1814.9      1853.9     1382.2
Italy     714.4       778.3       795.1      901.5
United Arab Emirates       ..       550.3       562.1      768.6
South Africa        ..       121.6      124.2       721.1
France      251.8       661.0      675.2       685.4
Brazil      361.4      287.4       293.6       681.3
China       162.5      386.2       394.6      613.2
Japan     1467.6       863.1       881.7      590.2
Russia         ..       689.5      704.3       531.5
Canada       180.9      603.5       616.4       530.9
United Kingdom      701.5       667.1       681.4      439.1
Spain      143.6       257.5       263.0      341.3
Switzerland     310.5       520.2       531.4      336.0
Austria      193.5      259.0       264.6       303.8
Australia     337.8       510.7      521.7       298.4
Top 15 partners    6869.3     8970.1      9163.2      9124.5
Rest of the World   3827.7      4911.9      5017.6     3497.3
As % of
Total
Imports
World       100.0       100.0      100.0       100.0
Germany        19.1        13.1        13.1       11.0
Italy       6.7         5.6         5.6        7.1
United Arab Emirates       ..         4.0         4.0        6.1
South Africa        ..         0.9        0.9         5.7
France        2.4         4.8         4.8        5.4
Brazil        3.4        2.1         2.1         5.4
China         1.5        2.8         2.8         4.9
Japan       13.7         6.2         6.2        4.7
Russia         ..         5.0        5.0         4.2
Canada         1.7        4.3         4.3         4.2
United Kingdom        6.6         4.8         4.8         3.5
Spain        1.3         1.9         1.9        2.7
Switzerland       2.9         3.7         3.7        2.7
Austria        1.8        1.9         1.9         2.4
Australia       3.2         3.7        3.7         2.4
Top 15 partners      64.2       64.6        64.6        72.3
Rest of the World     35.8        35.4        35.4       27.7
Source: UN COMTRADE Statistics.
76



Table A3. Iranian Export Structure and Major Products, 1989-99
Export                             As % of
Value in                                 all
$ million                             exports
_______________________                                    ~~~~~~~~(%)
Product (SITC Rev. 2)  1989      1995     1997     1999    1989    1995    1997    1999
All goods (0 to 9)  11609.0  18360.0  18381.0  19726.0   100.0   100.0   100.0   100.0
Food and live animals (0)    320.0    637.9    638.7    808.0   2.8      3.5     3.5      4.1
Beverages and tobacca (1)   0.1      7.4       7.4      7.8      0.0     0.0      0.0     0.0
Crude materials, excl. fuels (2)    297.8    240.5    240.7    186.2  2.6    1.3      1.3     0.9
Fuels (3)  10246.1  15712.3  15730.3  16842.5    88.3    85.6    85.6    85.4
Animal and vegetable oil (4)  0.0     12.9     12.9       5.1     0.0      0.1      0.1     0.0
Chemical products (5)    6.0    348.3    348.7    244.0      0.1      1.9      1.9     1.2
Basic manufacturing (6)    649.1   1112.2   1113.5   1254.2    5.6      6.1     6.1      6.4
Machinery and transport equipment  65.5     53.4     53.5     87.8      0.6      0.3     0.3      0.4
(7)
Misc. manufacturing goods (8)  17.4    200.7    200.9    193.0      0.1      1.1      1.1     1.0
Goods not classified by kind (9)  7.2    34.4     34.5     97.4      0.1      0.2      0.2     0.5
Agriculture (0+1+2+4-27-28)    617.8    836.2    837.2    945.6    5.3      4.6      4.6     4.8
Manufacturing (5+6+7+8-68)    737.9   1667.0   1668.9   1665.6     6.4      9.1      9.1     8.4
All non-oil products (0 to 9 -3)   1362.9   2647.7   2650.7   2883.5    11.7    14.4    14.4    14.6
Memo Items: Non-oil Major products
cereal preparation etc. (048)  0.0    110.1    110.3    70.6      0.0      0.6     0.6      0.4
Fruits fresh and dried (057, ex nuts)    106.1  81.2  81.3    149.2     0.9      0.4      0.4     0.8
Nuts fresh and dried (0577)    143.4    207.6    207.9    333.0   1.2     1.1      1.1      1.7
Spices (075)    13.9     23.4     23.5      47.8     0.1      0.1      0.1     0.2
Hides and skins, excl. furs (211)    116.0  87.3  87.4      46.2      1.0     0.5      0.5     0.2
Organic chemicals (51)   2.1    143.7    143.8       98.6     0.0      0.8      0.8     0.5
carpets (659)    605.1    694.1    694.9    733.3     5.2      3.8     3.8      3.7
Iron and steel in primary forms (672)  0.0    145.6    145.7    161.4    0.0      0.8      0.8     0.8
Copper (682)    28.9      41.1     41.2     84.3      0.2      0.2      0.2     0.4
Clothing and accessories (84)  0.6     55.6     55.6      66.5     0.0      0.3      0.3     0.3
Above top 10 export products   1016.1   1589.8   1591.6   1790.9   8.8      8.7      8.7     9.1
Source: UN COMTRADE Statistics.
77



Table A4. Iranian Import Structure and Major Products, 1989-99
Import                             As % of
Value in                                 all
$ million                            imports
Product (SITC Rev. 2)    1989   1995      1997     1999     1989     1995     1997     1999
All goods (0 to 9)  10697.0  13882.0  14180.7  12621.8    100.0    10( 0    100.0    100.0
Food and live animals (0)   2254.8   2453.7   2506.5   1952.2  21.1     17 7     17.7     15.5
Beverages and tobacca (1)  48.3      7.7      7.9      5.7      0.5      0 1       0.1      0.0
Crude materials, excl. fuels (2)    292.5    617.2    630.4    639.5  2.7    4 4      4.4      5.1
Fuels (3)    399.0    259.1    264.7    214.4     3.7      ]. 9      1.9      1.7
Animal and vegetable oil (4)    267.0    436.2    445.6    523.8  2.5      3 1      3.1      4.1
Chemical products (5)   1636.9   1819.4   1858.5   1871.3   15.3     13 1     13.1      14.8
Basic manufacturing (6)   1883.1   2671.8   2729.3   2219.1   17.6     19 2     19.2     17.6
Machinery and transport equipment (7)   3406.2   4933.5   5039.7   4835.0  31.8    3'i 5    35.5     38.3
Misc. manufacturing goods (8)    403.5    409.0    417.8    330.3   3.8      29       2.9      2.6
Goods not classified by kind (9)    105.8    274.4    280.3  30.6    1.0      2 0      2.0      0.2
Agriculture (0+1+2+4-27-28)   2862.5   3227.0   3296.5   2930.9   26.8     23 2     23.2     23.2
Manufacturing (5+6+7+8-68)   7329.7   9680.0   9888.3   9154.4    68.5     69 7     69.7     72.5
All non-oil products (0 to 9 -3)  10298.0  13622.9  13916.0  12407.3  96.3  98 1     98.1     98.3
Memo Items:
Wheat unmilled (041)    557.9   1084.4   1107.8    801.3     5.2      , 8      7.8      6.3
Rice (042)    338.8    240.4    245.6    325.9      3.2      1 7      1.7      2.6
Sugar and honey (061)    194.5    396.8    405.3    280.8     1.8      29       2.9      2.2
Fixed vegetable oils (423)    234.1    389.8    398.2    486.4  2.2      2 8      2.8       3.9
Medicinal prarm products (541)    296.4    384.8    393.0    392.5   2.8      2 8      2.8      3.1
Iron and steel in forms or shape (672-679)    673.2   1225.6   1252.0   1138.3  6.3   8 8       8.8      9.0
Steam engine (712)   90.3    206.4    210.9    424.1       0.8      1 5      1.5      3.4
Machinery tools for industries (728)    100.3    174.8    178.6    281.6  0.9    1.3       1.3      2.2
Metal working machinery (737)  38.8     98.5    100.6    508.0       0.4      0 7      0.7      4.0
Motor vehicle parts and accessories (784)    318.6    701.2    716.3    596.7  3.0    5 1      5.1      4.7
Above top 10 import products   2842.8   4902.8   5008.3   5235.5  26.6      35i3     35.3     41.5
Source: UN COMTRADE Statistics.
78



REFERENCES
Ahangarani, Rouyan Mashayekh. 1999. "An Almost Ideal Demand System for Iran." IRDP Working
Paper.
Barzel, Yoram. 1974. "A Theory of Rationing by Waiting." The Journal of Law and Economics 17:73-
95.
Bhagwati, J.N. 1971. "The generalized theory of distortions and welfare," in: J. Bhagwati, R.W. Jones,
R.A. Mundell and J. Vanek, eds., Trade, balance of payments and growth: Papers in international
economics in honor of Charlers P. Kindleberger (North-Holland, Amsterdam) 69-90.
De Melo, J., and D.G. Tarr. 1990. "Welfare Costs of U.S. Quotas in Textiles, Steel, and Autos." Review
of Economics and Statistics 72 (3): 489-497.
. 1992. A General Equilibrium Analysis of U.S. Foreign Trade Policy. Cambridge, Mass.: MIT Press.
. 1993. "Industrial Policy in the Presence of Wage Distortions: The Case of the U.S. Auto and Steel
Industries." International Economic Review 34 (4): 833-851.
Dollar, David. 1992. "Outward-Oriented Developing Economies Really Do Grow More Rapidly:
Evidence from 95 LDCs, 1976-1985." Economic Development and Cultural Change 40 (3): 523-
544.
Edwards, Sebastian. 1992. "Trade Orientation, Distortions and Growth in Developing Countries." Journal
of Development Economics 39 (1): 31-57.
. 1993. "Openness, Trade Liberalization, and Growth in Developing Countries." Journal of Economic
Literature 31(3): 1358-93.
. 1998. "Openness, Productivity and Growth: What Do We Really Know?" Economic Journal 108
(March): 383-98.
Fitzgerald B., and T. Monson. 1989. "Preferential Credit and Insurance As Means to Promote Exports."
World Bank Research Observer 4 (1).
Harrison, Ann. 1996. "Openness and Growth: A Time-Series, Cross-Section Analysis for Developing
Countries." Journal of Development Economics 48 (2): 419-47.
Harrison, G.W., T.F. Rutherford, and D.G. Tarr. 1993. "Trade Reform in the Partially Liberalized
Economy of Turkey." World Bank Economic Review 7 (2): 191-217.
- 1997a. "Economic Implications for Turkey of a Customs Union With the European Union."
European Economic Review 41: 861-870.
-. 1997b. "Quantifying the Uruguay Round." Economic Journal 107 (September): 1405-1430
Hoekman, B., H. L. Kee, and M. Olarreaga. 2001. "Markups, Entry Regulation and Trade: Does Country
Size Matter?" The World Bank, Washington DC. mimeo.
79



Hope, Elinar, and Balbir Singh. 1995. "Energy Price Increases in Developing Countries: Case
Studies of Colombia, Ghana, Indonesia, Malaysia, Turkey and Zimbabu e." Policy
Research Working Paper 1442, The World Bank.IMF (International Monetary ]Fund). 2000.
International Financial Statistics. CD-ROM. Washington, D.C.
International Trade Center. 1997. The Financing of Exports: A Guide for Developing Countries and
Transition Economies. Geneva.
Michalopoulos, Constantine. 1999. "Trade Policy and Market Access Issues for Developing Countries:
Implications for the Millennium Round." World Bank Working Paper No. 2214. Washington, D.C.
Ministry of Commerce, Islamic Republic of Iran. 2000. Export-Import Regulations. Tehran.
-. (1999). Islamic Republic of Iran: Your Partner in Trade. Tehran.
Ministry of Economic and Financial Affairs, Islamic Republic of Iran. 1998a. "Ana[lysis of the
Performance of the Chahbahar Free Trade Zone." July. Tehran.
. 1998b. "Analysis of the Performance of the Kish Free Trade Zone." September. Tehran.
1998c. "Analysis of the Performance of the Qeshm Free Trade Zone." September. Tehran.
Morkre. M., and D.G. Tarr. 1980. Effects of Restrictions on United States Imports: Five Case Studies and
Theory. Washington, D.C.: Federal Trade Commission.
. 1995. "Reforming Hungarian Agricultural Trade Policy: A Quantitative Evaluation."
Weltwirtschaftliches Archiv 131(1): 106-131.
Plan and Budget Organization, Islamic Republic of Iran. 2000. The Third Plan Law: Economic, Social,
and Cultural Development of the Islamic Republic of Iran, 1379-1383 (2000/01-20004/20005).
Tehran.
Sachs, J. D., and A. Wamer. 1995. "Economic Reform and the Process of Global Integration." In W.C.
Brainard and G.L. Perry, eds., Brookings Papers on Economic Activity. Washington, D.C.:
Brookings Institution.
Tarr, D.G., and M. Morkre. 1984. Aggregate Costs to the United States of Tariffs and Quotas on Imports.
Washington, D.C.: Federal Trade Commission.
Tarr, D.G., T. Rutherford and E. Rutsrom. 1997. "Morocco's Free Trade Agreement with the EU: A
Quantitative Assessment," Economic Modelling, 14( 9):237-269. April.
Wilson, J.S. 2000a. Technical Barriers to Trade and Standards, Challenges and Opportunities for
Developing Countries Presented by the World Bank. Submitted to the Technical Barriers to Trade
Committee Meeting, World Trade Organization.
2000b. The Development Challenge in Trade: Sanitary and Phytosanitary Stanlards. Paper
prepared for the WTO Sanitary and Phytosanitary Standards Committee. World Bank Development
Research Group, Washington, D.C.
80



World Bank. 1993. The East Asian Miracle: Economic Growth and Public Policy. New York: Oxford
University Press.
. 1999. Economic Aspects of Increasing Energy Prices to Boarder Price Levels in the Islamic
Republic of Iran. Report 198031RN. Washington, D.C.: World Bank.
. 2000c. Global Economic Prospects and Developing Countries 2001. Chapter Three, Washington,
D.C.: World Bank.
81



Annex: Computer Code for the Model
$to-le  Simple Static Constant Returrs to Scale Model
Slibinclude cgi input elimesuo  No         "Eliminate energy subsidies?" Yes
$libinclude cgi input exogoil   No         "Exogenous crude oil exports?' Yes
Slibinclude cgi input fxsubs    No         "Remove foreign exchange subsidies?" Yes
$libinclude cgi input fsub        No       "Subsidize domestic food consumption?" Yes
$libinclude cgi input ntbs        No       "Tariff reform?" Tariff Uniform 25 Free 15
$libinclude cgi input nobrent   VA         'NTB rent" Sain
Read the data:
Set the aggregation level:
$set dataset full
Read the set definit_on:
$3nclude %dataset%.set
alias (g,i,j);
Declare model parameters in data file:
parameter        iod     Input-output demand
vad     Value added
fin     Final demand
imp     Import
itx     Net taxes on import
uhe     Urban households expenditures
rhe     Rural households expenditures;
*       Read the data set:
$include %dataset%.dat
Declare additional sets and model parameters:
set fd  Fonal demands - symbols /
uhc   Urban household consumption
rhc   Rural household consumption
gov   Government consumption
inv   Gross fixed capital accumulation
stc   Change in stocks
exp   Export
set
Households:
hh             All households                     /rCl*rlO,uOlIulO/,
rh(hh)         Rural households                  /rCl*rlC/,
rh6(hh)        Rural households (6 richest)      /rOf*rlC/,
uh(hh)         Urban households                  /uOl*ulO/,
uh6(hh)        Urban households (6 richest;       /uO5*ulO/,
high(i)        High demand price elasticity
Energy:
nr(i(          Sectors with natural resources  /frr.,,lvs,ext/
cru(i)         Crude oil                         /ext/
tsp(i)        Transportation                     /ltr,ptr/
ene(i)         Energy products                   /
KER     Kerosene
FOI     Fuel oil
GNE     Gasollne
GIL     Gas oil
LQG     Liquid gas
ELE     Electricity
NGS     Natural gas
pet(i)         Subsidized energy products         /
KER     Kerosene
FOI     Fuel oil
G?NE    Gasoline
GIL     Gas oil                   /
op(i)          Crude oil and refined oil products
oth(i)        Non-oil sectors
*       Foreign exchange:
oe(i)          Imports at the official excharge rate   /frm,sgr,foo.pha,mac/
ess(i)        Essential food items                        /frm,sgr,foo,pha/;
oth(i)              yes;



oth(nr)           no;
oth)ene)          no;
op(cru)           yes;
op(ene)         = yes;
high(i)         = yes;
high(ene)       = no;
high(ess)        = no;
display op,oth,high;
scaler
va            Flag for NTB rent equal to value-added costs
exo           Flag for exogenous crude oil exports;
$if %ntbrent%   == "VA"          va  = 1;
$if %ntbrent%   == "Gain"        va  = 0;
$if %exogoil%   == 'Yes"         exo = 1;
$if %exogoil%   == NNo'          exo = 0;
parameter
cO(hh)        Consumption demand
cdO(i,hh)     Consumption demand by good
gO            Total government demand
gdO(i)        Government demand
iO            Total investment demand
idO(i)        Investment demand net of taxes
eO(i)         Total export demand
edO(i)        Export demand net of taxes
ii(i,j)       Intermediate demand net of taxes
ldO(i)        Labor payments
kdO(i)        Capital payments
sff           Elas of sub between spec capital and other factors
phi           Specific factor value share
dO(i)         Supply to domestic markets
ty(i)         Production taxes
mO(i)         Imports gross of tariffs
pmO(i)        Reference price of imports
pdO(i)        Reference price of domestic goods
qO(i)         Imports net of tariffs
tm(i)         Import tariffs
pi(i)         Reference price of
aO(i)         Armington supply
lsO           Labor supply
ksO           Capital supply
nsO           Endowment of natural resources
gsO           Government capital endowment
bopdef        Balance of payment deficit
govdef        Government deficit
incsh(hh)     Household income share
nohh(hh)      Number of households (share in total number of households)
nohh6(hh)     Number of households excluding the 4 poorest rural and urban
gamma         Energy subsidies
alpha         Exchange rate subsidy
fsub          Flag for endogenous food subsidies
arm           Armington elasticities
eta           Elasticity of supply
eta("ext")        0.5;
eta("lvs")      = 3;
eta("frm")      = 3;
gamma(i)        = C;
fsub(i)         = 0;
arm(i)          = 3;
arm(pet)          6;
nohh(rh)        = 0.38/(0.5*card(hh));
nohh(uh)        = 0.62/(0.5*card(hh));
nohh6(rh6)      = 0.38/'(0.5(card(uh6)+card(rh6)));
nohh6(uh6)      = 0.62/(0.5*(card(uh6)+card(rh6)));
*       Calibrate the model parameters:
*       Final demands:
*       Urban households
cO(uh)          = sum(i,uhe(i,uh));
cdO(i,uh)       = uhe(i,uh);
*       Rural households
cO(rh)          = sum(i,rhe(i,rh));
cdO(i,rh)       = rhe(i,rh);
*       Expenditure and income share of each urban income group in total income
incsh(hh)       = cO(hh)/(sum(i,fin(i,"uhc")+fin(i,"rhc")));



display incsh;
gO               = sum(i,fin(i,"gov"));
gdO(i)           = fin(i,"gov");
idO(i)           = fin(i,"inv")+fin(i,"stc"):
eO(i)            = fin(i,"exp");
edO(i)           = fin(i,"exp");
*       Intermediate demands and value added:
ii)i,j)          = iod(i,j);
*.vad("cap",i) = vad()cap",i)+vad("ntx",i);
1dO(i)           = vad("lab",i);
kdO(i)           = vad("cap",i);
*       Domestic supply and production taxes:
dO(i)            = sum(j,ii(j,i))+ldO(i)+kdO(i)
+ vad("ntx",i) - edO(i);
ty(i)            = vad("ntx",i)/(dO(i)+edO(i));
*       Imports and Armington supply:
mO(i)            = imp(i);
tm(i)$mO(i)      = itx(i)/mO(i);
pmO(i)           = l+tm(i);
pdO(i)           = 1;
aO(i)            = mO(i)*pmnO(i4)+dO(1);
qO(i)            = mO(i);
Incorporate NTBs and tariffs:
scalar
kvs   Capital value share
ntbc Costs of NTBs;
parameter
ntbO Benchmark NTB rates;
table trd(*,*)  Import trade distortions
TM      CBTO    TD        NTB      TD+CBT1          CBT1
PRM4    0.8      0.7      0.1      9.2      10.1             10
L.NS    0.8      0.7      0.1      19.1    20.1              20
OAG     0.8      0.7      0.1      14.2    15.1              15
MN\G    1.6      1.1      0.5      13.7    15.5              15
EXT     0        0        0        C.0      0.0              0
SGR     0        0        0        0.0      0.0              0
FOO     0.5      0.4      0.1      29.5    30.1              30
PPP     3.1      2.4      0.7      6.4      9.7              9
CMT     2.1      1        1.1      19.6    22.1              21
BRK     9.3      8.2      1.1      11.7    22.1              21
GCM      3       2.3      0.7      18.2    21.7               21
GLS     7.8      6.5      1.3      21.8    31.3              30
lIMP    6.4      5.3      1.1      14.8    22.1              21
TXT     2.7      2.3      0.4      69.8    74.4              74
CLC     14.2    1i.1    3.1        89.1    93.1              90
LEA     4.2      3.6      0.6      67.6    74.6              74
PLC     1.7      1.3      0.4      23.3    25.4              25
PHA     0        0        0        0.0      0.0              0
KER     0.1      0.1      0        0.0      0.1              0.1
FOI     0.1      0.1      0        O.C      0.1              0.1
GNE     0.1      0.1      0        0.0      0.1               0.1
GIL     0.1      0.1      0        0.0      0.1               0.1
LQG     0.1      0.1      0        0.0      0.1               0.1
OCP     2        1.7      0.3      7.2      9.3               9
MET     3.5      3.1      0.4      16.3    20.4               20
CAL     3.5      3.1      0.4      16.3    20.4               20
MPS     5.9      4.9      1        4.8      11.0              10
MAC     2.7      2.1      0.6      7.7      10.6              10
RTV     4        2.8      1.2      16.5    21.2               20
MEQ     3.5      2.1      1.4      32.8    37.4               36
OIP     3.4      2.9      0.5      16.5    20.5              20;
tm(z)   = trd(i,"tm")/10C;
ntbOC(i) = trd(i,"ntb")/lCO;
pmO(i)  = (1+tm(i))1(l+ntbO(i));



mO(i)   = (aO(i)-dO(i))/pmO(i);
qO(i)   = mO(i);
ntbc    = sum(i, mO(i)*(l+tm(i))*ntbO(i));
*       Capital value share:
kvs     = sum(i,kdO(i))/sum(i,kdO(i)+ldO(i));
Incorporate energy subsidies:
parameter
ratio          Ratio of domestic to international prices
excor          Correction of exchange rates;
excor            = 4172/8150;
ratio('gne')     = excor*O.514;
ratio("ker')     = excor,O.156;
ratio("gil")     = excor'O.172;
ratio("foi")     = excor*O.111;
gamma(pet)       = ratio(pet)-l;
display gamma;
*       Eliminate small import taxes on oil products:
mO(pet)          = mO(pet)+itx(pet);
qO(pet)          = mO(pet);
tm(pet)          = 0;
pmO(pet)         = l+gamma(pet);
pdO(pet)         = l+gamma(pet);
*       Domestic production:
parameter delta Change in domestic production;
delta(pet)       = (aO(pet)-mO(pet)*(l+gammna(pet)))/(l+gamma(pet))-dO(pet);
dO(pet)          = dO(pet)+delta(pet);
ii("ext',pet)   = ii("ext",pet)+delta(pet);
kdO(ext')       = kdO("ext')+sum(pet,delta(pet));
dO("ext")        = dO(ext")+sum(pet,delta(pet));
aO('ext")        = aO("ext")+sum(pet,delta(pet));
ty(i)            = vad('ntx¾,i)/(dO(i)+edO(i));
b       Incorporate dual pricing of foreign exchange:
parameter fxsh  Share of imports imported at the official exchange rate;
fxsh("frm")      = 0.8;
fxsh("sgr")      = 1;
fxsh(Ufoo")      = 0.4;
fxsh(-pha")      = 1;
fxsh("mac")      = 0.75;
*       Ratio of market exchange rate to official exchange rate
alpha(oe)        = ((l-fxsh(oe))*8.2+fxsh(oe)*1.75)/8.2-1;
qO(oe)           = qO(oe)/(l+alpha(oe));
display alpha;
*       Elasticity of substitution in sectors with specific capital:
phi(nr)          = 0.5*kdO(nr)/(edO(nr)+dO(nr));
sff(nr)          = phi(nr)*eta(nr)/(l-phi(nr));
Closure rules:
Capital and labor supply:



gsO              = 0.5'kdO('ext');
nsO(nr)          = 0.5*kdO(nr);
IsO              = sum(i,ldO(i))+(l-kvs)*ntbc$va;
ksO              = sum(i,kdO(i))-gsO-sum(nr,nsO(nr))+kvslntbc$va;
Benchmark deficits:
bopdef           = sum(i, qO(i)-eO(i));
govdef           =nsO("ext')
+ gsO
+ sum(i, dO(i)*ty(i)
+ edO(i)*ty(i)
+ qO(i) alpha(i)
+ mO(i)'tm(i)
t mO(i)*gamma(i)
+dO(i)*gamma(i)
- gO;
Statistics:
parameter
aggr          Aggregate statistics
govstat       Government incomes and expenditures
fxs           Imports with foreign exchange subsidies
vastat        Value-added statistics,
ecs           Energy cost shares,
tsh           Trade shares
hhexp         Household expenditure shares,
inc           Income shares,
policy         Summary of policy instruments;
aggr('inc')      = sum(hh,cO(hh));
aggr(-gdp")      = sum(i,kdO(i)+ldO(i));
aggr(-ty')       = sum(i,(dO(i)+edO(i))*ty(i));
aggr('ty%')      = 100aggr('ty')/aggr("gdp');
aggr('ensub")   = sum(i,-(mO(i)+dO(i))*gamma(i));
aggr("ensub%')  =lOO1aggr("ensub")/aggr('gdp');
aggr(Utm')       = sum(i,mO(i)*tm(i));
aggr('tm%")     = lOO*aggr(tm1)/aggr("gdp');
aggr('fx')       = sum(i, -qO(i)*alpha(i));
aggr('fx%-)      = lOO1 aggr('fx")/aggr('gdp');
aggr("ntb')      = sum(i, mO(i)*(l+tm(i))*ntbO(i));
aggr('ntb%')    = l00*aggr('ntb')/aggr(Ugdp');
aggr("kvs')     = lOO*sum(i,kdO(i))/aggr("gdp');
aggr('imps')    = lOOsum(i,mO(i))/aggr(Vgdp');
aggr('oilrentn) =1O00dO('ext')/aggr("gdp');
govstat('ensub')         =sum(i,(mO(i)+dO(i))*gamma(i));
govstat('tm")            = sum(i,mO(i)ltm(i));
govstat('fx*)            =sum(i,qO(i)*alpha(i));
govstat('oilrent')       = nsO('ext');
fxsh(pet)SmO(pet)        =  ;
fxs(i,'fxsh')            = lOO*fxsh(i);
fxs(i,'impsh')           = lOO*fxsh(i)'mO(i)/sum(j,mO(j));
fxs('total',"impsh')    =lOO*sum(i,fxsh(i)'mO(i))/sum(i,mO(i));
vastat(i,'k%") = lO0*kdO(i)/sum(j,kdO(j));
vastat(i,"l%-) = 100*ldO(i)/sum(j,ldO(j));
vastat(i,'va%') = lOO1(ldO(i)+kdO(i))/sum(j,ldO(j)+kdO(j));
vastat(i,'kvs') = lO0*kdO(i)/(ldO(i)+kdO(i));
ecs(i) = lOO*sum(ene,ii(ene,i))/(edO(i)+dO(i));
tsh(i,'imp')    = lOO*mO(i)/sum(j,mO(j));
tsh(i,'impsub') = l00*qO(i)/sum(j,qO(j));
tsh(i,'exp')    = l0OOedO(i)/sum(j,edO(j));
inc("lab')      =100*lsO/sum(hh,cO(hh));
inc('cap')      =100*ksO/sum(hh,cO(hh));
inc("bop')      =lOO*bopdef/sum(hh,cO(hh));
inc("gov')      = lOOgovdef/sum(hh,cO(hh));
inc('inv')      = lOOsum(i,-idO(i))/sum(hh,cO(hh));
option aggr:l:O:l,ecs:l:O:l,fxs:l;
display aggr,vastat,ecs,tsh,fxs;
*       Tables for paper:
policy(i, CBTO")         = trd(i,"CBTO');
policy(i,"TD')           = trd(i,'TD');



policy(i,"NTB")          = trd(i,"NTB");
policy(i, CBTl1)         = trd(i,"CBTl);
policy(i, FX_Sub')       = round(-lOO*alpha(i),O);
policy(i,"EN_Sub")       = round(-lOO*gamma(i),O);
hhexp(hh,'Food')         = round(lOO*sum(ess,cdO(ess,hh))/sum(i,cdO(i,hh)),2);
hhexp(hh,"Energy')       = round(lOO*sum(ene,cdO(ene,hh))/sum(i,cdO(i,hh)),2);
hhexp(hh,'Transp")       = round(lOO*sum(tsp,cdO(tsp,hh))/sum(i,cdO(i,hh)),2);
hhexp(hh,'Other")        = round(100-hhexp(hh,"Energy")-hhexp(hh,"Transpl)-
hhexp(hh,'Food"),2);
option policy:l,hhexp:O;
display policy,hhexp;
*.$libinclude ssexport policy policy.wkl alldat
*.$libinclude ssdump hhexp hhexp.wkl
display govdef, nsO,gsO;
*       Declare the model:
$ontext
$model:static
$sectors:
co(hh)         ! Private consumption by income groups
go               Public sector demand
y(i)             Sectoral production
a(i)            Armington supply
m(i)$mO(i)       Imports
ex(i)$(not cru(i))    ! Exports
cex$(not exo) ! Crude oil exports
$commodities:
pc(hh)           Consumption price urban consumers
pg               Public goods price
pl              Wage rate
rk              Return to capital
rn(nr)          Rent to natural resources
pa(i)           Armington price
pm(i)$mO(i)      Import price
pd(i)$(not cru(i))              ! Domestic market price
py(i)           Costs of domestic production
pfx              Foreign exchange
$consumer:
ra(hh)         ! Households
govt           ! Government
dummy            Dummy agent collecting NTB rents
Sauxiliary:
ls              Lump-sum tax multiplier
my(i)$fsub(i) ! Food subsidies
chi(i)$gamma(i)          Energy subsidy multiplier
beta(i)$alpha(i)       ! Subsidy to selected imports
$prod:ex(i)$(not cru(i)) t:arm(i)
o:pfx         q:edO(i)
o:pd(i)       q:dO(i)
i:py(i)       q:(dO(i)+edO(i))
$prod:cex$(not exo)
o:pfx         q:(sum(cru,edO(cru)))
i:py(cru)     q:edO(cru)
Other production:
$prod:y(i)$oth(i) s:O vae:O.5 va(vae):l
o:py(i)       q:(dO(i)+edO(i)) a:govt t:ty(i)
i:pa(j)       q:ii(j,i)        vae:$ene(j)
i:pl          q:ldO(i)         va:
i:rk          q:kdO(i)         va:
*       Oil refining:
$prod:y(i)$(ene(i)) s:O va:l
o:py(i)       q:(dO(i)+edO(i)) a:govt t:ty(i)
i:pa(j)       q:ii(j,i)
i:pl          q:ldO(i)         va:
i:rk          q:kdO(i)         va:
Primary production:
$prod:y(nr) s:sff(nr) sa:O
o:py(nr)               q:(edO(nr)+dO(nr)) a:govt t:ty(nr)



i:pa(j)               q:ii(j,nr)       sa:
i:pl                  q:ldO(nr)        sa:
i:rk                  q:(O.5*kdO(nr)) sa:
i:rn(nr)              q:(O.5*kdO(nr))
$prod:a(i) s:arm(i)
o:pa(i)               q:aO(i)           a:govt n:my(i)$fsub(i) m:(-l)$fsub(i)
i:pm(i)               q:mO(i) p:pmO(i) a:govt n:chi(i)$gamma(i) m:gamma(i)$gamma i)
+       t:tm(i) a:dummy t:((l+tm(i))*ntbO(i))
i:pd(i)$(not cru(i))  q:dO(i) p:pdO(i) a:govt n:chi(i)$gamma(i) m:gamnmna(i)$gamma i)
i:py(i)$cru(i)        q:dO(i)
$constraint:chi(i)$gamma(i)
pa(i) =g= sum(hh,incsh(hh)*pc(hh));
$demand:dummy s:O
d:pl$va               q:(l-kvs)
d:rk$va               q:kvs
d:pc(hh)$(not va)     q:incsh(hh)
$constraint:my(i)$fsub(i)
sum(hh,incsh(hh)*pc(hh)) =g= pa(i);
$prod:m(i)$mO(i) s:O
o:pm(i)       q:mO(i)
i:pfx         q:qOC(i) a:govt n:beta(i)$alpha(i) m:alpha(i)$alpha(i)
$constraint:beta(i)$alpha(i)
sum(hh,incsh(hh)*pc(hh)) =g= pm(i);
$report:
v:dsup(i)     i:pd(i) prod:a(i)
v:msup(i)     i:prm(i) prod:a(i)
v:xsup(i)     o:pfx   prod:ex(i)
v:ldem(i)     i:pl    prod:y(i)
$prod:co(hh) s:0.4 a:l
o:pc(hh)      q:cO(hh)
i:pa(i)       q:cdO(i,hh) a:$high(i)
$prod:go s:O
o:pg          q:gO
i:pa(i)       q:gdO(i)
*       Government agent:
$demand:govt
d:pg          q:gO
e:rk          q:gsO
e:rn("ext")   q:nsO("ext")
e:pl          q:(-govdef)
e:pfx         q:(-l)                   r:ls
Exogenous exports of crude oil:
e:py(cru)$exo q:(-edOC(cru))
e:pfx$exo     q:(sum(cru,edO(cru)))
*==============================~=============================== ----------------
*       Households:
$demand:ra(hh)
d:pc(hh)      q:cO(hh)
e:pl          q:(lsO*incsh(hh))
e:rk          q:(ksO*incsh(hh))
e:rn(nr)$(not cru(nr))         q:(nsO(nr)*incsh(hh))
e:pfx         q:(bopdef*incsh(hh))
e:pl          q:(cgovdef*incsh(hh))
e:pfx         q:nohh(hh)               r:ls
e:pa(i)       q:((-idO(i))*incsh(hh))
$constraint:ls
go =e= 1;
$offtext
$sysinclude mpsgeset static
*       Replicate the benchmark:
ls.l            = 0;
ls.lo           = -inf;
ls.up           = +inf;



my.lIi)          = 0;
chi.l(i)         = 1;
beta.l(i)        = 1;
static.iterlim  = 0;
$include static.gen
solve static using mcp;
static.iterlim - 10000;
* Report parameters:
scalar  cpi      Consumer price index,
gdp     Gross domestic product;
gdp              = sum(i,kdO(i)+ld0(i));
parameter
Welfare        Aggregate welfare change (% of household consumption)
WelfGDP        Aggregate welfare change (% of GDP)
Welfhh         Welfare change by household
Welfnet        Welfare change net of lump-sum transfer
GilProd        Production of crude
OilExp         Crude oil exports
OilRef         Oil refining activity
EinCost        Costs of domestic energy intensive production (% change)
P_transp       Price of transportation services
Subsidy        Average petroleum subsidies (%)
EnePrice       Energy price index (% change)
OilPrice       Oil price index (% change)
CruPrice       Domestic price of crude oil (% change)
Exhrate        Real exchange rate (% change)
RealWage       Real wage (% change)
ReturnK        Real return to capital
OilRent        Real return to oil
oilSub         Oil subsidies (% of GDP)
FoodSub        Food subsidies
FxSub          Foreign exchange subsidies (% of GDP)
TmRev          Tariff revenue (% of GDP)
OilRent        Oil rent (% of GDP)
Fiscal         Net fiscal effect (% of GDP)
AvTar          Average tarrif rate
Exports        Aggregate exports
FodPrice       Price of primary food
FopPrice       Price of processed food products
SugPrice       Price of sugar
MedPrice       Price of medicine
Activ          Output by sector (% change)
DomCost        Costs of domestic production
export         Exports (% change)
explev         Exports (levels)
emplev         Employment (levels)
RP             Rate of protection
AIJ            Cost share of intermediate inputs in total costs
ERP            Effective rate of protection
*       Scenario definitions and report writing: ENERGY POLICY ANALYSIS
* Foreign exchange subsidies:
$if %fxsubs%    == "Yes"          alpha(i)                   = 0;
* Food subsidies:
$if %fsub%       == "Yes"          fsub(ess)                 = 1;
* Replace NTBs with tariffs:
$if %ntbs%       == "Tariff"      ntbO(i)                      0;
$if %ntbs%       == "Tariff"      tm(i)$(not pet(i))         = trd(i,"TD+CBTl")/100;
* Remove NTBs and impose a uniform tariff:
$if %ntbs%       == "Uniform"    ntbO(i)                     = 0;
$if %ntbs%       == "Uniform"    tm(i)$(not pet(i))            0.15;
* Replace NTBs with tariffs but no rates beyond 25%
$if %ntbs%       == "25"          ntbO(i)                      0;
$if %ntbs%       == "25"           tm(i)$(not pet(i))        =
min(0.25,trd(i,"TD+CBTl")/100);
* Eliminate all trade distortions:
$if %ntbs%       == "Free"        ntbO(i)                    = 0;
$if %ntbs%          "Free'        tm(i)                      = 0;
$if %ntbs%       == "Free"        alpha(i)                   = 0;
* Eliminate all trade distortions, except a uniform 15% tariff:
$if %ntbs%       == "15"          ntbO(i)                    = 0;
$if %ntbs%       == "15"           tm(i)$(not pet(i))        = 0.15;
$if %ntbs%       == "15"          alpha(i)                   = 0;
$if %elimesub%  == "Yes"          gamma(i)                   = 0;



$include static.gen
solve static using mcp;
cpi               = sum(hh,incsh(hh)*pc.l(hh));
Welfare           = 100*(sum(hh,co.1(hh)*cO(hh))/sum(hh,cO(hh))-l);
WelfGDP           = 100'(sum(hh,(co.l(hh)-l)*c0(hh))f/dp);
Welfhh(hh)        = round(l00*(co.l(hh)-l),l);
Welfnet(hh)       = round(l00*( (co.l(hh)*c0{hh)-pfx.l/pc.l(hh)*nohh(hh)"ls.l)/c0(hh.-
1), 1)i
Exhrate           = 100*(pfx.l/sum(i,pd.l(i)*dsup.l(i)/sum(j,dsup.l(j)))-1);
RealWage          = 100'(pl.l/cpi-1);
ReturnK           = 100*(rk.1/cpi-1);
FxSub             = 1001(sum(oe,pfx.l*m.l(oe)*qO(oe)*beta.l(oe)*alpha(oe))/cpi-
govstat("fx"))/gdp;
OilSub
100*(sum(pet,(pm.l(pet)*msup.l(pet)+pd.l(pet)*dsup.l(pet))*chi.l(pet)*gamma(pet))/c:,i-
govstat("ensub"))
/ gdp;
FoodSub             100*sum(ess,-a.l(ess)*pa.l(ess)*a0(ess)*my.l(ess))/(cpi*gdp);
TmRev             = 100*(sum(i,pm.l(i)*msup.1(i)*tm(i))/cpi-govstat(-tm")j/gdp;
OilRent           = 100*(rn.l(eext)*nsO)ext")/cpi-govstat("oilrent"))/gdp;
Fiscal            = 100*(
sum(oe,pfx.l*m.l(oe)*qO(oe)*beta.l(oe)*alpha(oe))/cpi-govstat("f>:s')
sum(pet,(pm.l(pet)*msup.l(pet)+pd.l(pet)*dsup.l(pet))'chi.l(pet)*gamma(pet))/cpi-
govstat( ensub")
+ sum(i,pm.l(i)*msup.l(i)*tm(i))/cpi-govstat('tm")
+ sum(ess,-a.l(ess)*pa.l(ess)*aO(ess)*my.l(ess))/cpi
+ rn.l("ext')*nsO("ext")/cpi-govstat('oilrent")
)/gdp;
AvTar             = 100*sum(ipm.l(i)*msup.l(i)*tm(i))/surm(i,pm.l(i)*msup.l(i));
Exports           = 100*((sum(i,xsup.l(i)Y+sum(cru,edO(cru))*(li$exo+cex.l$(not exo))
/ sum(i,edO(i))-l);
FodPrice          = 100(pa.l("frm')/cpi-l);
FopPrice          = 100'(pa.1('foo")/cpi-1);
SugPrice          = 100*(pa.l("sgr")/cpi-1);
MedPrice          = l00'(pa.1('pha')/cpi-1);
Activ)i)          = 100'(y.l)i)-l);
DomCost(i)        = 100*(py.l(i)/cpi-1);
export(i)SedO(i)
= 100*(xsup.l(i)/edO(i)-l);
exportli)$cru)i)= l1OO(l$exo+cex.1$(not exo))-l);
explev(i)$edO(i)= xsup.l(i)*1000000;
explev(i)$cru(i)=  (l$exo+cex.l$(not exo))*sumn(cru,edO(cru))*1000000;
emplev(i)         = ldem.l(i)*l000000;
RP(i)             = tm(i)+()l+tm(i))'ntb0(i));
display rp,tm;
AIJ(i,j)          = ii(i,j)/(dO(j)+edO(j));
ERP(i)            = 100*(rp(i)-sum(j,aij (j,i)*rp)j)))/(l-sunm)j,aij(j,i)));
* Install benchmark values for the government budget:
$if %cgicase% == "NoChange' FxSub                     = l00'govstat("fx')/gdp;
$if %cgicase% == 'NoChange' OilSub                     = 1001govstat("ensubt)/gdp;
$if %cgicase%      "NoChange' FoodSub                  = 0;
$if %cgicase% == 'NoChange' TmRev                     = 100*govstat("tm")/gdp;
$if %cgicase% == "NoChange" OilRent                   = l00*govstat("oilrent")/gdp;
$setglobal cgisol_nd 2
$1ibinclude cgi output FxSub
$1ibinclude cgi output OilSub
$libinclude cgi output FoodSub
$1ibinclude cgi output TmRev
$libinclude cgi output OilRent
$libinclude cgi output Fiscal
$libinclude cgi output RealWage
$libinclude cgi output ReturnK
$libinclude cgi output Exhrate
$1ibinclude cgi output Exports
$1ibinclude cgi output AvTar
$1ibinclude cgi output FodPrice
$libinclude cgi output FopPrice
$libinclude cgi output SugPrice
$libinclude cgi output MedPrice
$libinclude cgi output Welfare
$libinclude cgi output Welfhh hh
$libinclude cgi output welfnet hh
$libinclude cgi output Activ i
file dump         /%cgicase%.sol/; put dump;
parameter result;
result("FxSub      , "%cgicase%') = FxSub
result("OilSub   ""%cgicase%") = OilSub
result("FoodSub ","%cgicase%") = FoodSub
result('TmRev    ","%cgicase%") = TmRev



result('OilRent  ',"%cgicase%-) = OilRent
result('Fiscal   ",-%cgicase%") = Fiscal
result("RealWage-,"%cgicase%") = RealWage;
result('ReturnK   ",%cgicase%") = ReturnK
result(-Exhrate ',"%cgicase%") = Exhrate
result('AvTar   ',"%cgicase%-) = AvTar
result(sExports *,"%cgicase%") = Exports
result("FodPrice-,"%cgicase%-) = FodPrice;
result('FopPrice-,-%cgicase%") = FopPrice;
result(ISugPrice,"%cgicase%") = SugPrice;
result('MedPrice- "%cgicase%") = MedPrice;
result ('Welfare * "%cgicase%-) = Welfare
result("WelfGDP *,'%cgicase%") = WelfGDP
set     nhh     /rnOlIrnlO,unOl*unlO/,
nhhmap(hh,nhh) /
rOl.rn0l,rO2.rnO2,rO3.rnO3,rO4.rnO4,rO5.rnO5,rO6.rnO6,rO7.rnO7,rO8.rnO8,rO9.rnO9,rlO.r
nlO
uOl.unOl,uO2.unO2,uO3.unO3,uO4.unO4,uO5.unO5,uO6.unO6,uO7.unO7,uO8.unO8,uO9.unO9,ulO.u
nlO /;
set     alti    /
FRMp,LVSp,OAGp,MNGp,EXTp,SGRp,FOOp,PPPp,CMTp,BRKp,GCMp,GLSp,
NMPp,TXTp,CLOp,LEAp,PLCp,PHAp,KERp,FOIp,GNEp,GILp,LQGp,OCPp,
METp,CALp,MPSp,MACp,RTVp,MEQp,OIPp,ELEp,WATp,NGSp,CONp,TRDp,
RNTp, HOTp,LTRp,PTRp,COMp,OTTp,OSVp/
altimap(i,alti) /
FRM.FRMp,LVS.LVSp,OAG.OAGp,MNG.MNGp,EXT.EXTp,SGR.SGRp,FOO.FOOp,
PPP.PPPp,CMT.CMTp,BRK.BRKp,GCM.GCMp,GLS.GLSp,NMP.NMPp,TXT.TXTp,
CLO.CLOp,LEA.LEAp,PLC.PLCp,PHA.PHAp,KER.KERp,FOI.FOIp,GNE.GNEp,
GIL.GILp,LQG.LQGp,OCP.OCPp,MET.METp,CAL.CALp,MPS.MPSp,MAC.MACp,
RTV.RTVp,MEQ.MEQp,OIP.OIPp,ELE.ELEp,WAT.WATp,NGS.NGSp,CON.CONp,
TRD.TRDp,RNT.RNTp,HOT.HOTp,LTR.LTRp,PTR.PTRp,COM.COMp,OTT.OTTp,
OSV. OSVp/;
set     altj    /
FRMe,LVSe,OAGe,MNGe,EXTe,SGRe,FOe,PPPe,CMTe,BRKe,GCMee,GLSe,
NMPe,TXTe,CLOe,LEAe,PLCe,PHAe,KERe,FOIe,GNEe,GILe,LQGe,OCPe,
METe,CALe,MPSe,MACe,RTVe,MEQe,OIPe,ELEe,WATe,NGSe,CONe,TRDe,
RNTe,HOTe,LTRe,PTRe,COMe,OTTe,OSVe/
altjmap(j,altj) /
FRM.FRMe,LVS.LVSe,OAG.OAGe,MNG.MNGe,EXT.EXTe,SGR.SGRe,FOO.FOOe,
PPP.PPPe,CMT.CMTe,BRK.BRKe,GCM.GCMe,GLS.GLSe,NMP.NMPe,TXT.TXTe,
CLO.CLOe,LEA.LEAe,PLC.PLCe,PHA.PHAe,KER.KERe,FOI.FOIe,GNE.GNEe,
GIL.GILe,LQG.LQGe,OCP.OCPe,MET.METe,CAL.CALe,MPS.MPSe,MAC.MACe,
RTV.RTVe,MEQ.MEQe,OIP.OIPe,ELE.ELEe,WAT.WATe,NGS.NGSe,CON.CONe,
TRD.TRDe,RNT.RNTe,HOT.HOTe,LTR.LTRe,PTR.PTRe,COM.COMe,OTT.OTTe,
OSV.OSVe/;
set     altx    /
FRMx,LVSx,OAGx,MNGx,EXTx,SGRx,FOOx,PPPx,CMTx,BRKx,GCMx,GLSx,
NMPx,TXTx,CLOx,LEAx,PLCx,PHAx,KERx,FOIx,GNEx,GILx,LQGx,OCPx,
METx,CALx,MPSx,MACx,RTVx,MEQx,OIPx,ELEx,WATx,NGSx,CONx,TRDx,
RNTX,HOTx,LTRx,PTRx,COMx,OTTx,OSVx/
altxmap(i,altx) /
FRM.FRMx,LVS.LVSx,OAG.OAGx,MNG.MNGx,EXT.EXTx,SGR.SGRx,FOO.FOOx,
PPP.PPPx,CMT.CMTx,BRK.BRKx,GCM.GCMx,GLS.GLSx,NMP.NMPx,TXT.TXTx,
CLO.CLOx,LEA.LEAx,PLC.PLCx,PHA.PHAx,KER.KERx,FOI.FOIx,GNE.GNEx,
GIL.GILx,LQG.LQGx,OCP.OCPx,MET.METx,CAL.CALx,MPS.MPSx,MAC.MACx,
RTV.RTVx,MEQ.MEQx,OIP.OIPx,ELE.ELEx,WAT.WATx,NGS.NGSx,CON.CONx,
TRD.TRDx,RNT.RNTx,HOT.HOTx,LTR.LTRx,PTR.PTRx,COM.COMx,OTT.OTTx,
OSV. OSVx/;
set     altw    /
FRMw,LVSw,OAGw,MNGw,EXTw,SGRw,F00w,PPPw,CMTw,BRKw,GCMW,GLSw,
NMPw,TXTw,CLOw,LLEAw,PLCw,PHAw,KERw,FOIw,GNEw,GILw,LQGw,OCPw,
METw,CALw,MPSw,MACw,RTVw,MEQw,OIPw,ELEw,WATw,NGSw,CONw,TRDw,
RNTw,HOTw,LTRw,PTRw,COMw,OTTw,OSVw/
altwmap(i,altw) /
FRM.FRMw,LVS.LVSw,OAG.OAGw,MNG.MNGw,EXT.EXTw,SGR.SGRw,FOO.FOOw,
PPP.PPPw,CMT.CMTw,BRK.BRKw,GCM.GCMw,GLS.GLSw,NMP.NMPw,TXT.TXTw,
CLO.CLOw,LEA.LEAw,PLC.PLCw,PHA.PHAw,KER.KERw,FOI.FOIw,GNE.GNEw,
GIL.GILw,LQG.LQGw,OCP.OCPw,MET.METw,CAL.CALw,MPS.MPSw,MAC.MACw,
RTV.RTVw,MEQ.MEQw,OIP.OIPw,ELE.ELEw,WAT.WATw,NGS.NGSw,CON.CONw,
TRD.TRDw,RNT.RNTw,HOT.HOTw,LTR.LTRw,PTR.PTRw,COM.COMw,OTT.OTTw,
OSV.OSVw/;
set     altl    /
FRMl,LVSl,OAGl,MNGl,EXT1,SGR1,FOOl,PPPl,CMTl,BRKl,GCMl,GLSi,
NMPl,TXTl,CLOl,LEAl,PLCl,PHAl,KERl,FOIl,GNEl,GILl,LQGl,OCPl,
METl,CALl,MPSl,MACl,RTVl,MEQl,OIPl,ELE1,WAT1,NGS1,CON1,TRD1,
RNTl,HOT1,LTR1,PTR1,COM1,OTTl,OSVl/
altlmap(i,altl) /
FRM.FRM1,LVS.LVS1,OAG.OAG1,MNG.MNG1,EXT.EXT1,SGR.SGRl,FOO.FOOl,
PPP.PPP1,CMT.CMTI,BRK.BRK1,GCM.GCM1,GLS.GLS1,NMP.NMP1,TXT.TXT1,



CLO.CLOI,LEA.LEA1,PLC.PLCI,PHA.PHAI,KER.KERI,FOI.FOIl,GNE.GNEl,
GIL.GILl,LQG.LQGI,OCP.OCPl,MET.MET1,CAL.CALl,MPS.MPS1,MAC.MACl,
RTV.RTV1,MEQ.MEQI,OIP.OIP1,ELE.ELEl,WAT.WAT1,NGS.NGS1,CON.CON1,
TRD.TR1D,RNT.RNTI,HOT.HOT1,LTR.LTRI,PTR.PTR1,COM.COM1,OTT.GTTI,
OSV.OSV1/;
result(hh,"%cgicase%')   = welfhh(hh);
'.result(nhh,"%cgicase%") = sum(nhhmap(hh,nhh),welfnet(hh));
result(i, "%cgicase%')   = activ(i);
result(alti, "%cgicase%") = sum(altimap(i,alti),domcost(i));
result(alti, "%cgicase%") = sum(altjmap(j,alt,) ,erp(j));
result(altx, "%cgicase%") = sum(altxmap(i,altx),export(i));
result(altl, "%cgicase%") = sum(altlmap(j,all),emplev(j));
result(altw, '%cgicase%") = sum(altwmap(i,altw),explev(i));
5libinclude gams2txt result