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Iran: the uncertain path to reform.

Iran's leadership is putting a brave face on the difficulties encountered on the road to restructuring the economy. Peter Feuilherade reports on the government's strategy to increase hard currency income and contain social discontent.

PRESIDENT ALl AKBAR RAFSANJANI has pledged that government subsidies on basic commodities will continue after the proposed unification of Iran's three-rate foreign exchange system, an economic reform which seems likely to result in steep price increases, boosting inflation well above its estimated current level of 20% in the last Iranian year. The agriculture minister, Issa Kalantari, predicted in remarks cited by the newspaper Jomhuri e Eslami that unification would lead to rises of between 85% and 130% in guaranteed prices of key crops. But the president played down this scenario, saying, "Contrary to views expressed by some sections of the press that such a move would lead to inflation and a rise in prices, there should be no cause for concern." He painted a generally rosy picture of Iran's economic prospects, predicting an increase in the government's hard currency revenue, a drop in expenditure and the elimination of the budget deficit in the new Iranian year beginning next March.

Unifying the exchange rate system has been the primary goal of the reforms through which President Rafsanjani is trying to transform Iran's economy, still recovering from the effects of the eight-year war against Iraq which ended in 1988, into a market-oriented system. Apart from absorbing surplus rials, the move is designed to reduce inflation and increase the government's supply of dollars. But industries may have to pay up to 20 times as much as they do now for imports of raw materials.

According to some cabinet ministers in Tehran, the single exchange rate could be in place by the start of the new Iranian year. The Central Bank governor, Mohammed Hossein Adeli, said in October that preparations had been completed for unification, which will in effect devalue the rial. But bank officials will not commit themselves beyond saying that the Central Bank is committed to introducing it by the end of the five-year economic plan in March 1994. Iranian analysts say that despite the inevitable soaring of prices, a unified exchange rate is preferable to the existing system which they blame for undercutting domestic industry, muddling pricing mechanisms and promoting corruption.

Bringing in a single exchange rate will inevitably have unpleasant side-effects which could well lead to socio-political problems, the Tehran Times warned in an editorial. "Have we thought of suitable measures to deal with the problem of the unemployment of thousands of government factory workers? Or have we provided enough foreign exchange to replace the present local currency available in the market?," the paper asked.

Iran's economic indicators over the last 18 months reflect a mixed picture. GDP grew by some 10% in the year ending March 1992. Imports over the same period reached a record high of 28bn dollars, an increase of 31% over the previous year, creating payment problems, as Mohammed Hossein Adeli admitted.

But in the six months to September, imports by weight fell to 8.4 million tonnes, a drop of 60% from the corresponding period a year ago. Non-oil exports doubled in value, and exports of industrial goods increased by over 500%, between March 1991 and March 1992. Officials predict that Iran's non-oil exports will rise 60% to 4bn dollars in the current Iranian year, while the target for revenue from oil exports is 16.5bn dollars. But inflation at just below 20% per year remains a major factor for social unrest, and may worsen temporarily once the single exchange rate comes into force.

Iran's efforts to broaden and consolidate its international trading links were evident at the Tehran Trade Fair in October, which was attended by 54 countries and 200 foreign companies. First-time participants included Kuwait and Qatar, the former Soviet republics of Azerbaijan, Georgia and Moldova, as well as Croatia and Bosnia-Herzegovina. Germany, Japan and Italy - Iran's three leading trade partners - as well as Britain, had the highest profiles at the fair. In 1991 Iran bought goods and services valued at $4bn from Germany, $2.5bn from Japan and $1.8bn from Italy, while British exports to Iran brought in $920m last year. France, with exports of $915m dollars, was Iran's fifth largest supplier, while imports of US goods in 1991 were worth $527m.

This summer, the Jomhuri e Eslami newspaper had urged the Iranian government to prevent British business executives and companies from taking part in the trade fair, in retaliation for London's expulsion of three Iranians for what British officials said were "reasons of national security". Earlier in July, Tehran had asked a British diplomat to leave Iran for allegedly "violating diplomatic norms". Iranian media accused the diplomat of spying. Jomhuri e Eslami had also argued that the volume of trade between Iran and Britain should be reduced to the minimum. The call was echoed by the Tehran Times, which suggested that instead Iran should "promote its economic relations with countries with which it is not in political opposition."

Apart from increasing commercial links with its well-established trade partners, Tehran is also eager to promote regional economic cooperation. The Economic Cooperation Organisation - founded by Iran, Turkey and Pakistan almost a quarter of a century ago, and revived at a summit in Tehran earlier this year - has admitted five of the Muslim republics of the former Soviet Union and now aspires to transform itself into a Muslim common market.

The opening of this year's Tehran Trade Fair also coincided with the first meeting to set up yet another regional grouping, the Caspian Cooperation Council. Bringing together the five Caspian Sea states of Iran, Azerbaijan, Turkmenistan, Kazakhstan and the Russian Federation, the Council is intended to promote cooperation among its members in the areas of trade, shipping, gas and oil resources, and environmental protection.

While Iran strives to combine trade with enhancing its diplomatic influence in the region, all is not well on the domestic economic scene. Observers point to the soaring population growth rate, high inflation, shortages in urban housing, government bureaucracy, and inefficiency in state-controlled industries as some of the main problems which are frustrating President Rafsanjani's attempts to make his economic reforms work.

His radical opponents accuse him of betraying the egalitarian legacy of Ayatollah Khomeini, by hitting the pockets of the poor with his plans to curb or do away with food subsidies. Conservative critics of the President, like Ayatollah Ahmad Jannati, on the other hand, denounce what they see as his policy of encouraging the return of rich exiled Iranian entrepreneurs so that the economy could benefit from their investment and expertise. "If these people return, it will be the end of the values for which we fought the revolution," Ayatollah Jannati warned during Tehran's Friday prayer ceremonies. But President Rafsanjani shows little sign of heeding his critics and appears resolved to press on with at least some of his proposals to liberalise the economy.
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Title Annotation:Business & Finance; economic reform
Author:Feuilherade, Peter
Publication:The Middle East
Date:Dec 1, 1992
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