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In Iran, an economic
stalemate
By Syed Saleem Shahzad
TEHRAN - Lost in the recent attention on
political turmoil in Iran has been the potential impact
of several key economic reforms launched this year.
 The need for reform is clear: Mismanagement of
the economy by the conservative Iranian government over
the past decade has led to visible economic
deterioration. The unemployment rate currently stands at
25 percent; the official inflation rate stands at 13.5
percent (although unofficial figures suggest a true
inflation rate closer to 30 percent); and the price
index increase stands at 30 percent.
Iranian
reformists have always advocated broader economic,
political and social freedoms to increase trade and job
opportunities. The second and third Iranian economic
plans call for downsizing the governmental
administrative apparatus for the purpose of ceding power
to the private sector.
Hand in hand with the
philosophy of economic freedom has come a focus on
privatization and the attraction of foreign investment
to offset government liabilities and reinforce the
economy. The present reformist government had targeted
European countries as well as certain Asian and Middle
Eastern countries to invite their involvement in Iranian
markets.
The ratification of the so-called "Law
on Attraction and Support of Foreign Investments" was
passed for the purpose of encouraging investors to
partake in Iran's economic projects. However, the way
these programs were implemented by the government of
President Mohammad Khatami left little difference
between the reformists and hardliners. Many observers
feel that forums such as the Expediency Council - a
quasi-judicial body that adjudicates disputes between
clerical authorities and parliament - have set up
obstacles to true reform: For example, by creating
onerous conditions for foreign investors seeking local
partnerships and by restricting the entry of foreigners
into necessary fields.
"These slogans on
privatization, liberal economic reform and
investment-friendly policies look very attractive. But
they are simply hollow promises and cannot be fulfilled
by the present Iranian establishment - whether they are
hardliners or reformers," observed a foreign financial
expert posted in Tehran.
He went on to say that
at present, different teams of international financial
sectors are visiting Iran to help implement reform
programs; but, one by one, they have all become
convinced that this show of reform is just that - a show
- and will be restricted from proceeding beyond certain
limits beyond which the political interests of both
reformers and hardliners demand the status quo.
The major drain on the Iranian economy is
currently its banking system. It does not follow any
discipline and works under political will. At present,
there nine state-run banks operate in Iran: Bank
Tijarat, Refah Bank, Bank Sipah, Bank Sedarat-I-Iran,
Bank-I-Milli Iran, the Export Development Bank, the
Industrial and Mineral Bank, the Agriculture Bank and
the Housing Bank. The first five are involved in
consumer and retail banking, while the others deal with
specialized sectors.
Each retail bank has a
branch in every area of Tehran as well as other
important cities in the country. For instance,
Bank-I-Tejarat alone has 1,874 branches as well as three
overseas branches. This bank has 18,743 employees. The
situation in all other banks is more or less the same.
Interestingly, these banks provide about 16 to
17 percent interest to depositors ("interest" in banking
terminology; in Iran, it is known as "profit"). On the
other hand, the markup rates on loans are equally
exorbitant, ranging between 20 and 22 percent.
"As a result of this unreasonable banking
system, the financial sector is like a hollow tree and
can collapse at any time," the financial expert said.
"International financial institutions have recommended
that the Iranian government take steps to rationalize
these negative trends - for instance, the downsizing of
human resources, the privatization of banks - but the
Iranian government has avoided these reforms, for
obvious reasons."
State-run banks are the
patronage centers for all those in power, whether they
belong to hardline Basij force or any of the moderate
reformist parties. The criteria to provide jobs in these
institutions are not professional, but purely political.
Employees in these banks are given exorbitant benefits.
Every year they are given a salary raise (last year it
was 26 percent), beside bonuses and other benefits.
Aside from high administrative expenditures, the
recipients of loans are not mainly professional traders
or businessmen but "those who served the revolution and
in the Iran-Iraq war", the expert said. As a result,
many of these loans are defaulted. However, they are not
shown on the books as defaulted loans, but as
rescheduled ones. Only by financial juggling can banks
show themselves as profitable.
The World Bank had
warned the Iranian government about these problems and
advised it to privatize the financial sector, with the
result being that the government allowed three new
private banks to operate in Iran. All three were owned
and operated by Iranians. However, government refused to
implement any reforms in the public sector banks. Now
these three new banks are struggling for their survival
in the presence of huge interest rates and the presence
of state run banks' branches in every corner of the
country.
The Iranian government is unlikely to
change these policies over the next several years
because these banks provide jobs to thousands of workers
and in this way guarantee loyalty to the government. If
the government were to introduce any radical change in
the banking sector - downsizing, for example, or putting
a stop to political loans - the government would lose a
source of power. It is one of the few things on which
both the hardline clerics and reformist politicians
agree, and it is the reason that there has been no
internal pressure to privatize banks or reform the
lending sector.
These observations apart, in the
past many foreign banks have requested permission to
launch banking operations in Iran, to no avail. However,
many foreign, and especially European, banks have
studied the bureaucratic structure and found areas of
leakage which they can exploit to their benefit. At
present, there are 45 foreign banks in Iran. But they
offer no mainstream banking business; they are all mere
representative offices. Thirty-four are European, 10 are
Asian, one is Australian. Their operations are
restricted to refinancing of lines of credit, discounts
and confirmations.
(©2002 Asia Times Online Co,
Ltd. All rights reserved. Please contact content@atimes.com
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