Khatami's task has barely begun
July 30, 1999 (Middle East Economic Digest) President Khatami's economic
reforms have been more limited than the political changes he has introduced
in the past two years.
Restructuring of the "sick economy" frequently cited by the
president may have to await the right political conditions in another couple
Economic officials are nevertheless proceeding with the country's third
five-year plan due to start on 21 March 2000.
Few details are known of the plan being submitted to the majlis, but
massive privatisation and utilisation of foreign finance are among its
Key economic issues facing the government include:
* Unemployment - An estimated 800,000 young people enter the job market
every year. Khatami has specifically promised to address himself to this
problem, but economic growth will be, at best, 3 per cent this year. The
services sector, including computer programming, may be alleviating the
problem. Official estimates of unemployment in recent years range from
11-15 per cent.
* Non-oil exports - Revenue from such exports has been less than $ 3,000
million a year because of bad management, bureaucracy and unfavourable
foreign exchange rules. In 1999/2000, it may approach $ 4,000 million thanks
to a relaxation of the exchange rules, but will continue to be limited.
The first two years of the Khatami government were beset by exceptionally
low oil prices, reducing hard currency revenue by about 40 per cent. Higher
oil prices so far in 1999/2000 indicate an oil income of about $ 13,000
million and a slightly brighter economic picture. In the early 1990s, annual
oil income reached about $ 20,000 million.
* Balance of payments - The country has been registering deficits in
its external accounts for more than a year. Hard currency shortages forced
Bank Markazi (central bank) in late 1999 to seek reschedulings of some
foreign debts already rescheduled in 1994, and to approach the IMF for
a possible "compensatory loan". This year's higher oil income
may help to reduce the deficit to below last year's estimated $ 2,000 million-2,500
* Currency - Important steps were taken in 1999/2000 to effectively
devalue the currency, thus opening the way for some economic restructuring.
A new official floating rate close to the black market exchange rate has
been used for most imports since June. The black market rate in late July
was about $ 1=IR 9,400, compared with $ 1=IR 4,500 in January 1998. Inflation
is rising and may exceed 20 per cent this year.
* Foreign investment - The biggest economic success of the Khatami government
has been to attract foreign investment into the oil and gas sector - bringing
the total to about $ 5,000 million since 1995. More such investment agreements
are expected to be announced in the second half of 1999 by international
oil companies that have generally reiterated confidence in the Iranian
energy sector despite the street unrest in July (see above).