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Iran: falling into a financial quagmire.

In only a few months, Iran's short-term debt has plumbed depths not even reached during the worst periods of the war. Chris Kutschera looks at why the optimistic mood that prevailed in the parliamentary elections last spring has vanished like a mirage.

TEHRAN IS SHOWING signs of economic detente: under the energetic impulse of its young and dynamic mayor, the capital is going through an "uplifting" period badly needed in this sprawling city of over 12m inhabitants. The facades of the buildings are being painted again; the parks are being re-designed, flowers are being planted and fountains are sparkling. Fleets of brand new Korean-made taxis have appeared beside the pre-revolution American cars that are slowly but surely falling apart. The big stores run by the bonya (foundations that run the shops and companies confiscated after the revolution) have opened new departments that are in themselves a kind of a revolution. Inside these huge stores, private merchants have set up small shops selling almost all the consumer goods available in the West, albeit at prohibitive prices, following the rate of the US dollar. Crowds of Iranians flock to the stores to window-shop, just for the pleasure of seeing products they had almost forgotten existed. Most leave without buying anything. "I could once buy these sweets for my children," says Hassan, a father of three who is looking over a beautiful display of chocolates; "But I will not do it now. I don't want them to know that such products exist since I could not afford to buy them again."

Hassan, who works in a government office, feels slightly more at ease because the government recently doubled his salary, from RS110,000 to RS220,000. With his colleagues he now eats lunch in a government-run coffee-shop paying only 200 rials for a meal. But to make both ends meet Hassan has had to leave his home, and go to live in his mother-in-law's flat. Hassan is clearly bitter. Everyday, he says, life is more difficult.

The optimistic mood that prevailed after President Rafsanjani got rid of the so-called "radicals" in the parliamentary elections of last spring has vanished like a mirage. Despite a seductive campaign launched by Iranian officials - the finance minister, the oil minister, the director of the central bank - to convince foreign journalists that Iran is a paradise for investors, the economic situation is far from being as rosy as is claimed. Paradoxically, this country which produces nearly four million barrels of oil a day and which should be enjoying the benefits of four years of peace, is going through an acute financial crisis. The hard currency reserves of the Central Bank have fallen to a four billion dollar low, only haft of which is in cash. This meagre two billion dollars represents the value of just one month's imports.

Unable to meet their commitments, the Iranians have had to postpone sine die the contracts they signed only recently. In only a few months their short term debt has reached levels not even reached during the worst periods of the war. Estimated to be running at around $10bn by most observers, it could even reach $14-15bn. Meanwhile, the middle term (5 year) debt fluctuates around $12-14bn.

How have the Iranians fallen in this financial quagmire? "They made two mistakes," explains a Western diplomat based in Tehran. "They were unable to control the level of imports last year, and they also overestimated the amount of the oil income for this period."

Eager to satisfy the huge appetites of a population of frustrated would-be consumers, the Iranian government was faced with an astronomical bill of $28bn for imports in 1991, and with a deficit of $5-7bn.

Iranian experts anticipated oil income with unjustified optimism, based on a production rate of 4 million barrels a day (in fact current production fluctuates at around 3.4m b/d), and Iran will not be able to export more than 2.3m b/d until the oil terminal at Kharg is rebuilt, which will not now be before the summer of 1993, at the earliest. The Iranian experts had based their calculations on there being a price increase, this did not take place; and a fraction of the exports was probably allocated to contracts that are not listed in the budget - weapons for oil. Having exported $16bn worth of oil in 1991, the Iranians hoped this figure would reach $18bn in 1992 but they have to content themselves with an identical amount of $16bn plus an additional $2.5bn of non oil exports.

Western diplomats based in Tehran admit that the long term economic perspectives are undramatic. In one or two years Iran will produce between 44.5m b/d, a comfortable amount for a country like Iran, even with its population of 60m.

The solutions to the present crisis are fairly obvious. Iran should build a new treasury by using its drawing rights with the IMF, and by rescheduling its short term debt in mid-term loans. But to do so the government needs the approval of the majlis, the Iranian parliament - and President Rafsanjani will not ask for it, because he knows parliament would automatically veto such a move.

It is clear the political dimensions of the present financial crisis have been underestimated. "This financial crisis takes place at the worst moment, when the country should have had money. It is the whole future of the economic 'reform' that is at stake," explained a European diplomat in Tehran. President Rafsanjani had hoped that his victory of last spring would allow him to achieve his programme of economic reform, which followed the usual prescriptions of the IMF encompassing unification of the exchange rates, privatisation of the economy, suppression of the subventions and of the price controls.

The government did begin to liberalise the exchange rates, controls at the borders have been almost totally abolished and Iranian nationals are free to buy dollars at the market price. But there are still four different exchange rates, the official one (RS70 for one dollar); the preferential (RS600); the

floating (RS1,450) and the market (RS1,500).

The "official" rate, which is totally artificial, is still used to finance some basic imports (food stuff, raw materials) while the "preferential" rate is used by the Iranian administration, some industries, and the embassies. The next step is to abolish this variety of rates that leads to clear economic aberrations, such as the estimation of economic assets in totally absurd dollar values. "Either the unification of the exchange rate is adopted for the next budget, in March 1993 or it will be indefinitely postponed," says an Iranian economist.

Most probably members of the majlis, suddenly aware of the huge social cost of such an economic reform, will slowly but surely bury it by multiplying the obstacles. "One should not hesitate to use an axe to implement such a far reaching reform, without being afraid of using coercive measures if necessary," says an observer.

It is likely that the coming two years will be difficult for Iranians.

Iran

GDP: IR46.8 trillion; $71.3bn GDP per capita: $1,212 Population: 58.8m GDP growth: 1992 6.1%; 1993 6.4% Inflation: 1990 7.6%; 1991 17.1%

* The regime is likely to become yet more unpopular at home and respond with additional repression. Secular movements will be attacked and the media will be kept on a tight rein. President Ali Akbar Rafsanjani will stay in control, but conservative and radical elements in the political hierarchy are far from being a spent force. For the sake of a quiet life, Rafsanjani may be willing to allow his more radical allies in the hardline element greater sway in domestic and foreign policy. Moderates and hardliners have a mutual interest in reinforcing one another.

* No need, therefore, to look forward to a more conciliatory foreign policy. Iran's relations with the Arab word will be envenomed by its forthright support for Islamic fundamentalist movements and by its aggressive stance in the Gulf. The enticement of improving ties with the West for commercial benefit will be outweighed by kneejerk antipathy towards the United States.

* The foreign debt situation will worsen as overseas suppliers retreat from providing cheap credit. Oil revenues will increase only modestly, leaving less foreign exchange for imports. Food subsidies will have to be cut, all causing stress on the domestic front.
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Title Annotation:Outlook 1993; includes related article
Author:Kutschera, Chris
Publication:The Middle East
Date:Jan 1, 1993
Words:1395
Previous Article:Banking: a timely shock to the system.
Next Article:Iraq: "we want food not fancy talk." (includes related article) (Outlook 1993)


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