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Economic reconstruction of Iran.

The Iranian President has proposed a US Dollar 80 billion budget with a deficient of US dollar 22 billion for the next year beginning 21 March 1990. It is based on an increase of 21 per cent in oil and gas revenue and 41 per cent in tax receipts, a 50 per cent rise in heavy industry, substantial investments in electricity and transport, a 60 per cent jump in capital expenditure (of which 6 per cent is in agriculture). It is in the above background and current scenario that Iran's Plans for reconstruction may be evaluated and opportunities for other countries to help Iran and help themselves assessed.

Damage and Human Toll in Iran & Iraq War

Despite Iran's position as a major oil producer, agriculture has always played an important part in Iran's economic development.

According to a recent interview given by Mr. Majid Jamshidi of Iran's Statistical Centre the country's present population is estimated at 55 million, of whom 29 million people live in urban areas. Population growth rate is estimated at 3.5 per cent for the country and 4 per cent Tehran. It has been estimated that the senseless 8 years war resulted in a death toll of a million and a half. Material losses have been colossal. Direct and indirect losses for Iran are estimated as 379 billion dollars and for Iraq 301 billion dollars. Indeed it has been estimated that even if every bit of oil income is spent on reconstruction Iran will take 90 years to repair the damage and Iraq 27 years.

In September 1988 Iran announced for the first time figures for its eight years war with Iraq. Islamic Guidance and Culture Minister Mr. Khatami stated that Iran had lost 123,220 combatants while 6,711 men were missing. Iraq had of course claimed that more than 800,000 Iranians had been killed. Besides, western analysts estimate 600,000 to 700,000 as Iran's wounded. Nearly 18,000 Iranians were in Iran prisons in July 1988.

According to one estimate economic losses suffered by Iraq and Iran in 8 years' conflict come to a staggering figure of 500 billion dollars. The reconstruction of oil installation alone is estimated to cost 25 billion dollars. At the start of the revolution in Iran in 1979 some 77 major industrial projects were on the drawing board. At the end of the war there were only 4 namely. The Bunder Abbas Refinery, The Isphan Steel Works and two power plants. Iraqi attacks had destroyed 1/10th of Iran's total electric generating capacity by 1986.

Iran realises that besides the human sufferings, the war devastated its economy and has created immense problems. Iranian Government plans to focus on small and medium size projects to get power, to rebuild homes and revive agriculture, but these pious intentions are lost between need to borrow foreign exchange and the desire for financing independently. Some observers, however, have noted that since distrust is still continuing between Baghdad and Tehran, neither of the two countries has given up avoidable expenditure on forces. It may be noted that Military expenditure in the war was reckoned as 40 to 50 per cent of the total oil revenues of the two countries.

Iran and Iraq have been tempted to boost production to rebuild their economy after 8 years of war, but no much extra oil has yet begun to flow. The problems of repairing pipelines terminals and oil fields machinery are enormous. Iraq knocked out Iran's Abadan Refinery and damaged other refineries. Iran thus lost almost 800,000 of 1.3 million barrels per day pre-war refining capacity. Iran also lost 3 off-shore oil platforms in attacks by the US Navy. Many specialists feel that in view of damage during war Iran may not be able to increase much of its oil output of 2.1 million and several drilling, geo-physical and engineering specialists are negotiating new contracts with Iran.

Offers of Reconstruction

The heavily damaged Abadan Refinery has been brought into action and contracts have been signed for two large petro-chemical complexes one at Arka in South West of Tehran and the other at Bandar Abbas on the Gulf Coast. The Arka contract went to a Japanese-Korean Consortium led by Japan Gas Company while Bandar Abbas contract was signed with Chiyoda of Japan and Snamprogetti of Italy. These contract are being funded under barter-oil arrangement and through the sale of refined petro-products.

Finance is the key snag in Iran's projects of reconstruction. The Japanese contractor Mitsui and Co., withdrew from the Bunder Khameni project after ceasefire in August 1988 and stated that it would be cheaper to build the new complex than to repair Bunder Khomeni. The Korean, West German and Italian firms have shown interest in reconstruction. It has been stated that South Korean Government will extend 3 billion dollars to Iran for post-war reconstruction efforts.

With growing public expectations after years of austerity the winning card is in the hands of the techno-crates who are proceeding cautiously towards half-open door to western technology and construction companies and, to prevent hostile criticisms by hard liners, they are seeking cooperation from Italy, West Germany and Japan, which countries do not have any history of imperialist exploitation in Iran. Observers feel that Western Nations, except West Germany, are likely to take a back seat as Tokyo and Bonn move fast to win the contracts and provide more than 15 billion dollars in credit to Tehran.

In December 1988 two top construction executives in West Germany had claimed that West German firms could expect to win a major share of billions of dollars worth of building contracts to be awarded by Iran in the next few years. This optimism arose out of a Memorandum signed between Iran and Germany in December 1988. Backre and Loeshe of Germany had estimated that Iran would be awarding construction contracts of some five billion dollars in the next few years and that Iran's needs of construction machinery over the next four years would amount to 2.5 billion US dollars. Some analysts have put a tag of 42 billion dollars on Iranian construction industry (and a 29 billion dollars market in the Iraqi construction industry). However, German Industry's share of Iranian contracts would depend on |Hermes' Export Insurance Scheme.

Iran wants to rebuild the Bandar Khomeini Petro-chemical Complex, badly damaged in its eight-year war with Iraq. A West German company is carrying out a feasibility study for the project. Under a $ 28 million contract with Iran, Japan Petro-Chemical Co. Ltd., Krupp Koppers and Dutch company Lummus Crest B.B. are to draw up a plan for rebuilding the complex in southern Iran. The West German firm is also to oversee the rebuilding of a liquefied propane gas plant and other small energy installations.

The recent decision of the US Government to return 567 million dollars to Iran may prove to be the beginning of thaw in US - Iran relations. However, we have to wait for further developments before we can be assured of US financial assistance or involvements in the reconstruction of Iran. Despite ban by the British government on the Export Credit Guarantee Department providing cover to Iran after the Islamic Revolution in 1979 some 40 firms agreed on short notice to take part in Tehran Trade Fare in September 1989. Swing against the nuclear power plants in Western countries after the CHERNOBYL disaster has provided great interest in nuclear contractors to provide nuclear power plants to Iran and Iraq.

Trading Links

Soon after the ceasefire Iran liberalised its impact policy and most businessmen in Dubai and the trade centres of the UAE realised that food and essential machinery, spare parts are the items in greatest demand in Iran. During the war Iranian traders took advantage of Dubai free trade facilities and liberal financing regulations to export carpets, dry fruits, fresh vegetables and fruits and imported a variety of products mostly on a barter basis as well as electronics, tyres, motor spares, rice and other food. Dubai served as a clearing house for Iran's foreign currency transactions. It is, therefore, felt that Dubai will play a significant part in Iran's reconstruction plans. Hundreds of Iranian businessmen who had left their country during the revolution have set up temporary bases in the UAE. In 1987 1.3 billion dirhams worth of goods had been re-exported to Iran from Dubai. This is expected to make considerable increase.

Neigbouring States in the Gulf have already taken lead in planning reconstruction aid. Along with a number of Islamic Financial Institutions several governments are reported to be putting together a financing package for both Iran and Iraq of upto 500 billion US dollars over next ten to twenty years. Gulf Bankers and businessmen anticipate a multi-billion dollars need for reconstruction of devastated cities, refineries and damaged ports. Iran and UAE had agreed to set up a joint banking committee to work for financing of reconstruction. Regional cooperation in reconstruction in Iran and Iraq should be considered a healthy sign.

With the end of Iran - Iran is trying to end its isolation and restoring links with the West and its Arab neighbours in the Gulf. At a recent meeting of the Foreign Ministers of Gulf Coordination Council in Riyadh, the Foreign Ministers stated that they would also seek friendly relations with Iran. Iran's relations with USSR, East Europe, Peoples Republic of China and Asian and Latin American States have started to grow. Iran has agreed to export three billion c.m. gas to the Soviet Union and the Soviet Union has agreed that Iran may export its natural gas through its territory.

Turkey is taking keen interest in expanding trade with Iran (and the Soviet Union) after the new awareness in Ankara due to the shelving till 1992 of Turkey's 1987 application for full membership of EEC. Moreover there is a common belief that EEC countries will not be giving special attention to the requirements of East European countries. Relations with Iran had improved by Turkey lifting all legislations banning head-scarves at universities. Due majority to an earlier dispute in oil prices, which has now been resolved, Turkish imports from Tehran fell to 99 million dollars in the first nine months of 1989 from 567 million US dollars in the same period in 1988. However, exports to Iran including machinery and clothing rose from 341 million dollars in the same period to 447 million dollars. Turkey had drawn trade benefits by remaining neutral in the Iran-Iraq War and now considers itself ideally situated to rebuild the damaged cities in Iran and Iraq.

Pakistan's Relations with Iran

Pakistan has had long and close relationship with Iran strengthened by organizational arrangement under RCD (Regional Cooperation for Development between Turkey, Iran and Pakistan, established in 1964) and recent ECO (Economics Cooperation Organization between the same three countries.) However, due to Afghan war and other geo-political compulsions Pakistan does not appear to have seized to the full the opportunity of forgoing closer links with Iran in its reconstruction efforts. Suggestions have been made to persuade Japan to collaborate with Pakistan, say, to establish a Steel - based industry in Balochistan targeted towards reconstruction of Iran and Iraq.

Recent meetings of Pakistan - Iran Joint Ministerial Commission have, however, identified several areas of cooperation. Apart from trade, Iran and Pakistan have agreed to expand the possibilities of cooperation in various fields of agricultural research particularly tropical culture, biological control, supply of pesticides, seed breeding and salinity problems. Pakistan has expressed its readiness of collaboration in water management, poultry industry, animal husbandry and fisheries. In addition Pakistan has also agreed to prepare short-term and long-term training programmes in the fields of forestry, forest stations and several other fields.

Two-way trade between Iran and Pakistan is expected to increase from 162 million dollars in 1989 to 400 million dollars in 1990. This includes increase in border trade from 20 million dollars to 200 million dollars. Pakistan hopes to supply machinery and parts for Iranian existing plants and new industrial units. Pakistan is also hoping for substantial participation of Pakistan engineers and technicians in the rehabilitation and reconstruction of Iranian economy. Of engineers in Pakistan in various fields in 1989 more than 4,000 were reported to be unemployed and there were thousands of diploma holder technicians who can be suitably employed in Iran.

Under the new protocol with Iran, the value of goods to be exchanged between Iran and Pakistan would be enhanced from the previous protocol of Rupees two crores to Rupees twenty crores each way. Under the previous protocol seven items were exported from Pakistan to Iran and five items from Iran to Pakistan. Under the new protocol sixteen items will be exported from Pakistan and fifteen items from Iran.

Pakistan and Iran have agreed to establish a joint-venture in the Banking Sector. Habib Bank of Pakistan would establish some branches in Iran while Iranian Banks would open their branches in Pakistan. In a recent interview Iran's First Deputy Foreign Ministry Mr. Ali Mohammad Bashrati while speaking of close relations with Pakistan based on Islamic brotherhood and neighbourly relations spoke of a common security framework, common economic interest, and common view points on international affairs. He mentioned that there was a great potential for increasing volume of trade between two countries through private sector development in an overall framework. He mentioned that Iran has not concluded any treaty to buy arms from Indian but emphasized their keen interest in developing economic relationships with India also.

India has succeeded in making supply of materials to Iran such as Transpek (Pte) Limited., through a West German firm supplying thionyl chloride to Iran. However, such arrangements are looked at askance by the German authorities. After visit to Tehran in September 1989, the Indian Foreign Secretary stated that Iran was very keen to take specific steps to increase two way trade and intensify bilateral relations with India.

Future Needs and Prospects for Reconstruction Assistance

While the West have started taking keen interest in the reconstruction needs of Iran and Iraq, it is suspected that the economic lure of Eastern Europe may leave Iran and Iraq in the cold. The immediate need of Iran for recovery is estimated at 15 billion dollars a year. To off-set the lack of foreign capital after making efforts to get such capital from U.K., West Germany, France and Japan, Iran is being forced to spend 4.9 billion dollars of its reserves on development projects in the next five years, which may be as much as 80 per cent of current reserves. The biggest reconstruction project in the Gulf of course will be the dredging and rehabilitation of Shatul-Arab water ways but this will have to wait settlement between Iran and Iraq.

Amongst the reconstruction plans Iran proposes to turn its Southern Port Chabahar into a free port. It may well challenge the dominance of Dubai as a major trade and export centre of the region. Iran wants to build a natural gas pipeline from eastern Iran, through Pakistan to India at a cost of $ 11.75 billion, an Iranian minister said. Deputy Minister of Mines and Metals Ali Shams Ardekani said the scheme "calls for a pipeline of 100 million cubic metres a day starting from Bandar Abbas in eastern Iran through southern Pakistan and then across India to Calcutta." Iran must be complimented with having achieved remarkably smooth transfer of authority after the death of Khomeni which was least expected. Ayatullah's Iran is now entering a period of regularisation and reconstruction, is opening up to the world and seeking organic linkages both strategic and commercial.

It is to the credit of Iran that even during the war it carried on some national building programmes under the names of Reconstruction Jehad such as community development plans of building of roads, bridges, extension of electricity, telephone network, power and irrigation, education, clinics, etc. Iran's indigenous defense production also got impetus by the embargo imposed on supply of military hardware and technology by the US and its NATO Allies, Tehran has also demonstrated other industrial achievements by exhibiting its HAWK (SHAHEEN) and EAGLE (UQAB) Ground to Ground Missiles, aircraft components and remotely controlled reconnaissance planes at the five day international exhibition in 1989 at Ankara.

Iran's Economic Policies for Reconstruction

Iran's Minister of Economic and Financial Affairs Mr. Nur Buksh recently stated that some companies with fifty per cent state ownership would be put up for sale after changes in their financial structure and shares in companies with less than 50 per cent state ownership would be traded on the stock market. It may be noted that State run firms account for 80 per cent of Iran's industrial output.

President Hashmi Rafsanjani recently offered guarantees to foreign investors to attract between 15-20 billion dollars of foreign investments which would however have to be restricted to specific projects in the fields such as gas, petro-chemicals and dam building. This is a big departure from the concepts advocated earlier. The Economic Intelligence unit has estimated that despite ban on foreign borrowings the current budget includes 1.6 billion dollars in short term finances and 2.4 billion dollars in credits to be drawn from suppliers for specific industrial and related projects.

Iran's new economic strategy is to export products other than oil, particularly petro-chemical products, Iran is planning to invest 1.8 billion dollars in petro-chemical industry over the next five years; the plan is to produce more than 20 petro-chemical products once the large petro-chemical projects come on stream. Actually due to war damage Iran had been forced to spend more than two billion dollars a year on imports of petro-chemical products. Once the damaged units are rebuilt. Iran hopes to be self-sufficient in urea fertilizers and have 50 per cent self-sufficiency in phosphate fertilizer, Italian, German, Dutch, French, English and Japanese companies have shown interests in hoping to rebuild the plants.

Iran is presently planning to spend its foreign exchange earnings on importing food and consumers goods. Major industrial plants starved of raw materials are receiving foreign exchange to increase their output above their present 40 per cent capacity. However, an important point to note is that Iran is planning to improve and rebuild its economy without selling its soul.

President Hashmi Rafsanjani feels that his main problem is how to allow the western firms to resume operations without alienating hardlined radicals. The five years economic plan due to be reviewed this spring really depends on Iran's ability to put its oil industry back in order. Secondly Iran has set a target of earning 70 billion US dollars from crude oil under the five years plan. Avoiding direct foreign investment they are hoping to achieve this by barter deals and hiding credits in the form of selling some production in advance.

In an attempt to put some order to open market dealings in foreign exchange the Central Bank of Iran recently launched an all out campaign by offering US dollars at a highly competitive rate to certain sections of trade and even the general public. Indeed Mr. Mohammad Hussain Adil recently stated "we intend to expand our plan to cover all the legitimate demands of the un-official foreign exchange market."

Iran's Oil Minister Mr. Ghulam Reza Aqazadeh recently observed that "for reconstruction we face no problem whatsoever". They believe that a lot has already been achieved through self-help ethics in reconstruction. Iran's apparent refusal of foreign involvement will make it a slow and difficult process. The present confusion in the Iranian leadership about differences between foreign investors and foreign contractors and the seeming unwillingness to borrow abroad and likely to slow pace of reconstruction.

The present Prime Minister of Iran is working with a team of technocrates. However, the conflict between radicals who advocate state-run economy and reject foreign borrowings and pragmatists who favour market-oriented policy still continues.

Iran's philosophy for reconstruction was well put by President Hashmi Rafsanjani when he said that "God willing we hope to go through the period of reconstruction with patience, understanding of where we are, greater efforts, cooperation, friendship and unity".

The total investment in the five years plan is put at 345 billion dollars, some of it raised by selling government-owned industry and predicting an annual economic growth rate of eight per cent. Gas industry is intended to be developed through joint-ventures with the neighbouring countries. Transport sector would get extra two billion dollars, telecommunication one billion dollars and agriculture 1.5 billion dollars. Apart from investment in the oil, gas and petro-chemical industry, production is proposed to be increased in minerals, cement, rubber and paper.

Quite recently indeed in the month of January 1990 the pragmatists seem to have won their battle after all as is demonstrated by the fact that Iran's Parliament approved the Five-Year Development Plan which is the crore element of President Ali Akbar Hashemi Rafsanjani's programme for reconstruction and indeed for a revolutionary change. It allows the use of upto 27 billion dollars of oil and gas revenue during the Plan period. The Plan aims for an annual growth rate of 8 per cent. Investments of 394 billion dollars at the official exchange rate are envisaged. It is hoped that the current inflation rate of 28.5 per cent would fall to 8.9 per cent. The Plan provides for 9.5 billion dollars of Defense expenditure. As approved by the Parliament, the Government has been allowed to use foreign credits of 9 billion dollars through project financing to build major projects (credit to be repaid over 5 years after start of production), 3 billion dollars of foreign investment to build 4 Dams for irrigation and electricity, 3.2 billion dollars to develop a joint gas field with Qatar in the Gulf and 2.2 billion dollars for petro-chemical projects and 10 billion dollars for to Buy Back schemes to increase fuller utilisation of industrial capacity.

The signals have gone round to foreign investors and a growing number of foreign investors are going to Iran to study prospects in the light of the Plan and liberalised foreign exchange procedures and import and export regime. A fair number of Japanese, South Korean and East European businessmen are travelling to Iran via Dubai. "Investment mood is gradually becoming active", particularly in Japan with which there has been a 30 per cent increase in trade. The utilisation of 4.9 billion dollars of foreign reserves has given confidence and has greatly improved the confidence of foreign credits, investors and traders. The Buy-back arrangements or barter agreements are being accepted by foreigners. The Soviets, for example, are supplying raw materials for a detergent factory for its finished products. France's Renault company is exchanging automatic components for cars. Turkish and Rumanian companies were also reported to be engaged in similar enterprises. Trade liberalisation has resulted in a surplus of certain commodities, thus reducing prices. However, many Western companies are watching the situation and would move in a big way as soon as they realise that these policies and programmes have become irreversible. The Plan has been ratified by the overseeing Guardian Council after initial opposition.

However, it may be noted that the Iranian President has proposed a US Dollars 80 billion budget with a deficient of US dollar 22 billion for the next year beginning 21 March 1990. It is based on an increase of 21 per cent in oil and gas revenue and 41 per cent in tax receipts, a 50 per cent rise in heavy industry, substantial investments in electricity and transport, a 60 per cent jump in capital expenditure (of which 6 per cent is in agriculture). It is in the above background and current scenario that Iran's Plans for reconstruction may be evaluated and opportunities for other countries to help Iran and help themselves assessed.
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Author:Jafri, S.S.
Publication:Economic Review
Date:May 1, 1990
Previous Article:Industrial relations - its meaning.
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