Iran: Pinning hopes on economic reforms
Middle East Economic Digest
Weekly Special Report
June 9, 2000
The latest figures from Iran's Bank Markazi (central bank) show that
the economy is starting to react to the recovery in oil prices since March
1999*. As OPEC's second largest oil producer, Iran's fortunes are closely
tied to the price of oil. Ambitious reforms under the stewardship of President
Khatami aim to reduce the economy's vulnerability to external shocks and
also remove many of the distortions and inefficiencies that plague the
* Growth Heavily dependent on oil export revenues, the economy was hit
hard by the slump in petroleum prices during 1998 and early 1999. Figures
for the Iranian fiscal year to 22 March 1999 show a slowing of real gross
domestic product (GDP) growth to 1.6 per cent from 3.2 per cent in the
previous year and 5 per cent in 1996/97. The economic expansion that did
occur was due largely to higher agricultural output. Official figures for
GDP growth in 1999/2000 have not been released, but estimates suggest the
oil price recovery boosted the economy by about 2.5 per cent in real terms.
Unemployment remains high, at about 14 per cent. Annualised consumer price
inflation at the end of last December was 21 per cent compared with an
average annual rate of 26.9 per cent in the three years to March 1999.
* The budget With oil income accounting for about 50 per cent of government
revenues, public finances have improved significantly with the recovery
in oil prices. In 1998/99, the budget deficit grew more than six-fold to
IR 17.7 million million ( $ 10,136 million) as income from oil and gas
tumbled 36 per cent, reducing total government revenue by 14 per cent.
Central bank figures for the first nine months of 1999/2000 show a sharply
lower deficit of IR 2.2 million million ( $ 1,240 million), down from IR
7.2 million million ( $ 4,130 million) in the first three- quarters of
1998/99. Government revenues rebounded some 54 per cent on the back of
higher oil prices to more than offset a 35 per cent hike in spending, caused
by a sharp increase in development expenditure. According to revised government
figures, the continued rise of oil prices in the last three months of the
fiscal year resulted in a 1999/2000 budget surplus, equivalent to 1 per
cent of GDP against a deficit of 7 per cent in the previous year.
* Balance of payments The trade balance and current account are heading
for healthy surpluses, thanks to higher oil prices which account for about
80 per cent of the country's export earnings. Central bank figures show
that oil and gas exports earned $ 11,410 million in the first three quarters
of 1999/2000, up from $ 9,933 million received for the whole of 1998/99.
With non-oil export revenue also rising, total hard currency income was
$ 14,016 million.
Imports were limited to $ 9,484 million, helping to produce a nine-month
trade surplus of $ 4,532 million against a deficit of $ 545 million in
the first three quarters of 1998/99. The current account was in surplus
by $ 3,579 million compared with a deficit of $ 1,884 million in the same
period the previous year. With oil prices continuing to rise in the final
quarter of the Iranian year, surpluses over the full year should be the
biggest since 1997/98. There continues to be a steady reduction in the
country's external obligations. Total external debt is estimated to have
fallen to about $ 10,000 million today from $ 13,999 million in March 1999
and $ 21,928 million three years earlier.
* Outlook With oil prices remaining robust, the fiscal and external
accounts should continue to improve this year. Economic growth is expected
to quicken to about 4.5 per cent. The relaxation of trade sanctions by
the US will help boost non-oil sector exports. The carpet industry should
be one of the biggest beneficiaries; experts say the US market could be
worth at least $ 1,000 million a year to Iran. Sanctions have also been
lifted on caviar, pistachio nuts and dried fruits.
Nevertheless, the economy needs to grow by at least 6 per cent a year
to make a dent on unemployment. The latest five-year plan, which began
in March 2000, aims to deliver higher growth. The plan sets out ambitious
goals centred around structural reform and removing distortions in the
A partial float of the rial is being considered and there are also plans
to harmonise the tariff structure and remove subsidies. The removal of
energy subsides, which represent about 12-14 per cent of GDP, will provide
the government with fiscal resources to finance other reforms such as social
security and banking sector restructuring.
Other goals in the programme include privatising some 2,000 state enterprises
across a range of sectors - a move aimed at reducing the government's ownership
of banks and insurance companies and ending the state's monopoly on airlines,
the railways and other transport systems as well as telecoms, water and
The country is also hoping to attract billions of dollars worth of foreign
investment by creating a more favourable investment climate. This would
involve a variety of measures, including possible constitutional amendments
to reduce red tape, overhaul investment regulations, reduce restrictions
and duties on imports, create more free-trade zones and increase security
for foreign investments.
Various forums have been organised in London and elsewhere by the National
Iranian Oil Company and its affiliates aimed at attracting investment by
the oil majors. To boost foreign participation at the Tehran Stock Exchange,
the central bank has eased regulations on overseas investors.
Observers say that economic reforms must be accompanied by political
changes if public confidence is to improve significantly. Specifically,
curbing the powers of the bonyads, the religious foundations that manage
assets confiscated from the shah after the 1979 Islamic revolution, is
seen as an essential step. The bonyads enjoy almost complete autonomy and
receive generous government subsidies. Hopes are pinned on the pro-reform
majority that will dominate the new majlis and which is expected to push
for individual freedom and a more accountable government.