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Forcing reform in
Iran
By Hooman Peimani
The
Iranian government announced on January 27 the issuance
of a large amount of savings bonds in the next Iranian
year beginning on March 21. As such bonds have been
issued regularly since the 1990s, the announcement's
importance lay not in their issuance itself, but in a
major increase in their value, a significant financial
development added to the recent Iranian government's
authorizing the issuance of additional bonds by the
state-owned enterprises (SOEs) and the Iranian private
sector.
According to the announcement, the
government will issue 5,400-billion rials worth of
savings bonds known as participation bonds (oragh-e
mosharekat in Persian). At the current exchange rate
of US$1 equal to about 8,000 rials, this would amount to
US$676 million. After years of constant devaluation of
the Iranian currency against major foreign currencies,
including the US dollar, the Central Bank of Iran (CBI)
has succeeded in keeping this rate stable since 2000.
The announcement indicated a substantial
increase of 125 percent in the value of participation
bonds compared to that of the current year equaled to
rials 2,400 billion ($300 million). If the Iranian
government achieves its targeted sale of bonds in its
domestic financial market, the generated revenue will be
mainly spent on major infrastructural projects. Of the
expected revenue of $676 million, the share of road and
transportation projects and water-supply projects will
be $250 million (rials 2,000 billion) and $125 million
(rials 1,000 billion), respectively. The remaining $300
million (rials 2,400 billion) will be spent on
unspecified "other projects".
Apart from the
mentioned bonds, the Iranian government's budget for the
next year, which was tabled to parliament in early
January, allows the SOEs to publish $325 million (rials
2,600 billion) worth of participation bonds to finance
the various projects for which the government lacks
adequate financial means. Furthermore, as stated
recently by Iranian Minister of Economy and Finance
Tahmasb Mazaheri, Iran's private sector has received
government authorization to sell bonds next year in
order to meet its financial needs. The
public-sector-dominated Iranian banking system has
proved unable to meet such needs, a major reason for the
government's January decision to privatize the banking
system.
As announced on January 27, Iran's
Management and Planning Organization will be responsible
for "regulating the rates of free bonds", ie, bonds
issued by the SOEs and the private sector. Having "an
independent rating mechanism for its bonds sale", the
CBI will issue and administer the government bonds. The
interest rates of the three mentioned types of bonds are
yet to be announced. To encourage buyers, they will
likely be close to the participation bonds' high rates
of the past few years set at about 17 percent.
Through the CBI, the Iranian government has
issued participation bonds to meet certain objectives
since the 1990s. They have included financing budget
deficits and major development projects for which there
is no adequate amount of public funding when the private
sector is either unable or reluctant to ease the
government's financial burden. Since the 1979 Iranian
revolution, deliberate government policies have reduced
its share of Iran's economy to about 20 percent.
Those objectives have also included addressing
certain fiscal and monetary problems, namely freezing
and reducing growing liquidity, curbing inflation and
decreasing interest rates. While any economy may face
such problems from time to time, they have become
permanent features of the Iranian economy since 1979
thanks to its mismanagement, to the extent that it is
now dominated by a gigantic public sector. Being the
symptoms of an ailing economy, these features have in
turn worsened its malaise as they have discouraged
investments by both the Iranian private sector and
foreign investors. Since their return to Iran in the
late 1990s after years of absence, the latter have
mainly limited their activities to the oil and gas
industry.
For example, the growing volume of
liquidity has been a major factor behind Iran's
double-digit inflation rate over the past two decades, a
result of would-be investors' reluctance to invest in
productive industrial or agricultural projects in an
unpredictable economic environment. To curb this
problem, the Iranian government's resort to setting high
interest rates on savings and term deposits to encourage
savings in the banking system has certainly achieved
that goal, but at the expense of further diminishing
interests in investments outside the financial market.
High rates of return on term deposits ensure
trouble-free large incomes for investors who find no
strong incentive in investing in industrial and
agricultural sectors characterized with major
government-created troubles. Among other factors, the
numerous economic hurdles created by the government,
frequent changes of investment and export/import laws
and regulations and rigid labor laws make the majority
of investors inclined to settle for the easiest and
safest possible type of investment, ie, term deposits,
with a guaranteed income even if investments in
productive projects could potentially yield much higher
rate of profit.
In general, the participation
bonds are meant to address the mentioned fiscal,
monetary and financial problems. Added to them, the
Iranian government seems to be planning to achieve other
objectives next year. If fully realized, its allowing
the SOEs to issue their own bonds will likely help the
government reduce its heavy financial burden, while
enabling some of the underfunded public enterprises to
embark on their overdue repair, maintenance, expansion
and/or modernization projects. Under the same condition,
the private sector's bonds will help the weakened sector
to address some of its financial needs through
non-government means.
The heavy weight of
difficulties created by the inefficient state economy,
which is unable to meet basic necessities such as the
growing needs for employment and investment, has imposed
economic reforms on the Iranian government. As part of
this initiative, implemented at best half-heartedly over
the past few years, the government's allowing the sale
of private sector bonds, if not restricted somehow, will
be a significant move towards economic liberalization
with a weakening impact on Iran's monopolistic public
sector.
Dr Hooman Peimani works as an
independent consultant with international organizations
in Geneva and does research in international
relations.
(©2003 Asia Times Online Co, Ltd.
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