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Iran tries to kick its oil
habit
By Hooman Peimani
In an
interview on January 12, Hossein Afarideh, head of the
energy commission of the Iranian parliament, expressed
doubts about the Iranian government's ability to earn
US$15.3 billion through its oil exports in the new
Iranian fiscal year, beginning on March 21. The figure
is important, because it is assumed in the Iranian
budget presented to parliament.
Reflecting the
Iranian economy's heavy dependence on oil-generated
revenues, the persistence of its resulting budget
deficits demonstrates the failure of the Iranian
regime's long-promised policy of ridding it of that
dependency through diversification.
Despite the
existence of large industrial and agricultural sectors,
Iran in fact has a single-product economy. Following an
import-substitution strategy, the post-1979 Iranian
economy has mainly aimed at satisfying the domestic
market by addressing shortages caused by the rapid
population growth (from about 34 million in 1979 to
about 70 million in 2003), various economic sanctions
and limited available foreign currency. This strategy
made sense during the Iran-Iraq War (1980-88) when the
country had practically no other choice.
Facing
a growing financial challenge caused by post-war
reconstruction projects and the implementation of
various overdue development plans, the Iranian regime
sought to increase its revenues by adding an export-led
growth strategy to its economic planning. The result was
initially impressive, as Iran increased the value of its
annual non-oil exports to over $4 billion in the early
1990s, a high jump from limited revenues of the 1980s
(mainly generated by export of carpets and caviar).
Added to those products, non-oil exports included
metals, consumer goods and light industrial products,
which demonstrated a right export direction.
However, the initial momentum did not last very
long because of a major handicap: the public sector
domination of the economy. Thanks to massive
nationalizations and confiscations of large and small
enterprises, Iran's state economy, which accounted for
about 40 percent of the pre-1979 economy, grew in the
early years of the Islamic republic. The creation of
various foundations benefiting from all government
services and privileges, while practically being run as
private enterprises by the elite, has further expanded
the public sector to control about 80 percent of the
economy.
Being in a practical monopoly position,
the huge public sector has all the deficiencies of the
Soviet economy, while suffering from years of
mismanagement and rampant corruption. There is therefore
a "natural" limit to what it can export. For this
matter, the value of Iran's annual non-oil exports has
fluctuated between $4 billion and $6 billion since the
early 1990s. In the current Iranian fiscal year ending
on March 20, it is expected to be about $4 billion.
The Iranian regime's economic policy since 1979
has sought to marginalize the private sector. Being its
official objective in the 1980s, this has remained its
practical goal despite a degree of economic
liberalization. Although the Iranian government has
realized the necessity of a strong private sector to
address major economic problems such as low non-oil
exports and investments and unemployment, its
liberalization policy since the early 1990s has only
allowed the latter's limited degree of growth.
Iran's existing economic system has an in-built
flaw against the private sector as evident in the
uncertain status of private property and in government
economic policies' ambiguity. Factors such as constant
changes of such policies, their contradictory
interpretations by various official and unofficial
decision-making bodies, and many restrictions on
investments and exports have simply discouraged private
investments in the industrial and agricultural sectors.
Confronting an uncertain future, the post-1979 private
sector has mainly grown in the form of small- and
medium-size enterprises in the service sector engaged in
low-risk short-term projects requiring relatively small
investments. By and large, big business overlaps with
the ruling elite, who takes advantage of its ties with
the government to secure a free hand in its
transactions, while enjoying government services and
protection.
Many official and unofficial rules,
regulations and practices exempt most of the
profit-making pubic enterprises, foundations and
elite-run private enterprises from taxation,
export/import fees and/or paying for government services
such as utilities and sea, air and land cargo
transportation. Unsurprisingly, the government non-oil
income is largely confined to indirect taxation and
heavy direct taxation levied on Iranians with fixed
incomes and on small- and medium-sized businesses,
another factor inhibiting growth. Consequently, annual
oil revenues become the main source of government income
when the government has to finance its traditional
activities while trying to undertake the private
sector's investment role in major industrial and
agricultural projects.
In such a situation, any
decrease in oil prices will reduce government incomes on
which annual budgets are based. Given this fact, central
economic planning since 1979 has become meaningless as
each year the government has to modify its projects to
function within its shrinking financial means. To
address this chronic problem, in April 2000 it created
the Surplus Foreign Exchange Reserve Fund (SFERF) to
prevent the adverse impact of fluctuations in oil prices
on its budgets. With the Iranian parliament's approval,
the government may withdraw from the SFERF to offset its
oil-related revenue reductions.
Against this
background, Mr Afarideh criticized the presented annual
budget on the ground of its doubtful assumption of oil
income of over $15 billion based on oil prices in the
range of $27-28 per barrel when, according to him, "it
is feared that basket price for crude [oil] may even
reach $20". Correctly, he referred to factors, ignored
in the price assumption, with depressing impact on oil
prices such as the "de-escalation of crises in Venezuela
and Iraq" within the next Iranian fiscal year.
To that, one should add the apparent reluctance
of OPEC oil exporters to let oil prices go up
significantly for fear of losing market to non-OPEC
exporters eager to expand market share and revenue. This
is apart from OPEC's concern about the negative effects
of high oil prices on their ties with major economies.
The SFERF provides for financing budget deficits
without adding to Iran's domestic and foreign debt, but
its very existence is a reminder of the Iranian
economy's main handicap, its heavy dependency on
oil-generated revenues. Although a long-term solution
for eliminating constant budget deficits is geared to a
fundamental change in the economy, the Iranian
government's half-hearted measures toward this goal
arising from its concern about its weakening impact on
the political system has forced it to resort to
quick-fix measures (eg, selling 500 million euros' worth
of euro bonds in 2002), which will only worsen its
economy by adding to Iran's foreign debt.
Dr Hooman Peimani works as an
independent consultant with international organizations
in Geneva and does research in international
relations.
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