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A privatization of moment in
Iran
By Hooman Peimani
After
about a year of deliberations, on January 8 the Iranian
Deputy Minister of Economic and Financial Affairs, Mehdi
Karbassian, announced his government's decision to
privatize all Iranian banks, excluding the National Bank
of Iran (Bank-e Melli Iran). If fully implemented, this
economic initiative will have a major long-term impact
not just on Iran's economy, but also on its political
system.
Prior to the 1979 Islamic revolution,
all major banks (some 15 units) were privately owned
institutions, excluding the National Bank of Iran and
the Sepah Bank (Bank-e Sepah). As part of the
politically motivated economic plan aimed at eliminating
big business, the revolutionary regime confiscated all
large enterprises, including the private banks, which
were subsequently merged into a few super-large
government-run banks.
For the same reason, the
Iranian private sector lost its right to establish
banks. That law remained in effect until about year ago
despite the introduction of an economic liberalization
plan in the second half of the 1990s. Under heavy
pressure of economic realities, ie, the clearly-evident
inability of the public sector to run the financial
institutions and the inefficiency of the public banks,
the Iranian regime had to accept a degree of private
banking about a year ago. As a result, the Central Bank
of Iran authorized the establishment of a few financial
institutions with limited banking functions, mainly in
the form of savings companies operating at the city
level.
Facing numerous economic difficulties
caused mainly by the mismanagement of the Iranian
economy since 1979, the devastating impact of the
Iran-Iraq War (1980-88) and various economic sanctions,
the Iranian government has had to accept its inability
to continue the existing economic system.
The
latter is characterized by a very large public sector in
control of about 80 percent of the economy directly or
indirectly through various foundations benefiting of all
the available public resources, including funding, but
run by the ruling elite as private corporations.
Attached to this, there is an elite-created
post-revolutionary big business in practical monopoly of
all the major economic activities taking place in the
private realm. High and growing unemployment, officially
about 15 percent, but unofficially close to double it,
low investments, rising prices and rampant corruption
have been just a few major outcomes of the post-1979
economic policy.
Given this undesirable
situation, with a weakening impact on the Iranian
regime's legitimacy, the Iranian government has sought
to address some of the economic problems over the past
few years. Its two major objectives have been to stop
capital flight from Iran to safer places such as the
United Arab Emirates and Western countries and to
encourage both domestic and foreign investments.
Added to accelerating the privatization of small
and medium-size public enterprises, which began in the
early 1990s to a limited extent, the government has been
successful in a few areas. They include the
stabilization of the value of Iran's currency (rial),
the elimination of the multiple exchange rates, an
increase in Iranian foreign exchange reserves (about $15
billion in January 2003) and a decrease in its foreign
debt to about $6.5 billion. While being far from ideal,
the achieved degree of financial stability was a major
domestic factor in the repatriation to Iran of about $7
billion of Iranian capital held mainly in the United
States, apart from a growing concern about the safety of
financial assets of Middle Eastern businesspeople in the
United States and Europe in the post-September 11 era.
In such an economic environment, the Iranian
government made its bank privatization decision.
According to Karbassian, it has already determined the
"necessary framework" for transferring the public banks
to the private sector, but he did not elaborate.
However, he added that the only remaining barrier to
implementing the privatization plan was to decide on "a
method of transfer", which he predicted to be determined
"in some days". He added that Iranian President Mohammad
Khatami's cabinet would most probably finalize all the
privatization plan's details in the next Iranian month
beginning on January 21. Afterwards, the government
would take "a practical measure to achieve this
objective", ie, to implement the plan.
It is not
yet clear when the actual privatization will begin. Nor
is it clear whether the banks will be privatized as they
are now or as they were before 1979, which requires
their division into their forming units. Yet it is
almost certain that there should not be a mad scramble
for their purchase on the part of would-be buyers unless
the Iranian government addresses certain deficiencies
that detract from their attractiveness.
Thanks
to years of mismanagement, Iranian banks have various
major financial difficulties, including the following
ones, in addition to an economically insensible number
of personnel. Reportedly, many of them have been
operating at loss for a long time. By and large, they
suffer from large debts and gigantic bad loans granted
to many publicly owned economic entities, various
foundations and many influential individuals with strong
ties to the top echelon of the Iranian regime. These
loan-holders are either unwilling or unable to pay their
debts due to bankruptcies or shortages of funds.
Additionally, many existing restrictions on the free
movement of capital inside Iran and between that country
and its foreign economic partners as well as foreign
currency restrictions impede banking transactions.
Nevertheless, if everything goes well, the
privatization of banks will have a fundamental impact on
the Iranian economy. By addressing the absence of a
reliable and predictable financial sector independent
from the Iranian government and accountable to private
investors, this initiative should help remove a major
barrier to the growth of the Iranian private sector
whose growth has been retarded by the Iranian regime
since 1979. As well, a large private banking system will
likely accelerate the slow-paced privatization of the
gigantic public sector by providing a reliable source of
capital for privatized enterprises.
If fully
implemented, the privatization initiative will weaken
the practical economic monopoly of the Iranian ruling
elite despite the wish of its planners. As a growing
number of Iranians question the legitimacy of their
political system, any weakening of its economic basis
will have an inevitable accelerating impact on the
Iranian people's desire for a fundamental change in
their country's political system.
Dr
Hooman Peimani works as an independent consultant
with international organizations in Geneva and does
research in international relations.
(©2003
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