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
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
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
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