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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 of years.

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 central features.

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 million.

* 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).


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