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Sehaty Foreign Exchange

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Backing Iran

Financial Times
May 22, 2000

The World Bank's decision to resume lending to Iran in spite of US objections shows the extent of Iran's rehabilitation in the international community. In the past seven years, the US had counted on support from Japan and Germany to block new lending. Last week, it cast the sole vote against Dollars 232m of loans for two projects.

The resumption of World Bank lending is a welcome endorsement of reformist President Mohammad Khatami, at a time when he is under intense attack from conservative opponents.

The loans make sense on economic and social grounds. Intended to develop the Tehran sewerage system and a project on primary healthcare, they are designed to improve basic human needs. Iran's ability to repay is not at issue. Tehran has had trouble servicing its debt in the past. But Moody's, the rating agency, estimates that next year's debt service ratio will not exceed 15 per cent. Meanwhile, total debt as a percentage of GDP is only 22 per cent.

The loans will boost foreign exchange reserves and could encourage export agencies to lend more to Iran. Most important, however, they should act as an incentive for Mr Khatami to push through much-needed economic reforms. The Bank's board has stressed that further loans would be considered only if reforms yield results.

Iran is the third largest exporter of oil but its rulers have made a mess of its vast natural wealth. With a fast growing population of 60m, per capita income is only Dollars 1,650. Unemployment reaches more than 15 per cent and public finances are plagued by high budget deficits.

The reformist coalition which will soon dominate parliament is united in its demands for more individual freedom and accountable government. But many reform-minded members remain attached to Socialist policies. The government's five-year plan, starting this year, projects nearly Dollars 7bn in foreign credits and investment. To have a shot at attracting foreign money, however, the new parliament must overhaul contradictory investment regulation, liberalise the archaic banking system and privatise state-owned industries.

Parliament must also curb the powers of the bonyads, the revolutionary foundations that manage assets confiscated from the monarchy in the 1979 Islamic revolution. The bonyads still operate above the law and enjoy generous government subsidies.

Credits from multilateral institutions carry an important message of support. But to produce sustained growth and create new jobs for Iran's young population, Mr Khatami must show a serious commitment to economic reforms.


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