Iran Overhauling Economy as Well as Mending Gulf Political Fences

By John T. Haldane

The 12 years since the creation of the Islamic republic of Iran in March 1979, following the departure into exile of the Shah and the return from exile of Ayatollah Ruhollah Khomeini, have been turbulent. Only with the election of Ali Akbar Hashemi Rafsanjani as president, in July 1989, did even a semblance of order appear in Iranian political and economic spheres.

The bloody eight-year war with Iraq crippled Iran's industrial and petrochemical infrastructures and the tanker war caused a sharp drop in oil revenues. Clearly a major reconstruction effort would be needed to return Iran's economy to its pre-war state.

Unfortunately, declarations by the late ayatollah that Iran could "go it alone" revealed his naivete about how a country dependent upon a single export, oil, for over 90 percent of its income could possibly remain in isolation. At the time he spoke, Iran's agricultural sector long had been unable to produce the food needed to maintain a satisfactory standard of living. The industrial sector was operating at less than 50 percent of capacity because of a lack of spare parts and replacement machinery. The oil sector, crippled by Iraqi bombing, was producing at levels far below pre-war production.

The new Iranian regime was facing a politico-economic problem common to many Third World nations: the need to guarantee political stability in order that the economy could develop to a point where dangerously high inflation rates, high unemployment and shortages of basic consumer goods could be brought under control. Failure to accomplish this traditionally has led to serious social unrest.

President Rafsanjani was aware that the population had remained quiescent since the revolution, even through the terrible human suffering caused by the Iran-Iraq war, mainly out of devotion to Ayatollah Khomeini, the man who had delivered them from what they considered to have been the Shah's oppressive regime. Unfortunately, despite Khomeini's pledge to alleviate the plight of the poor, the gap between lower class and affluent Iranians had only grown wider.

Even before his election, Rafsanjani realized that the population was tired of the privations of war and the economic hardships caused by Iran's isolation from the world community. Without providing some reassurances that material improvement was possible, he knew he would have difficulty remaining in power. The Iranian president therefore immediately proposed a priority allocation of national resources to economic reconstruction, announced the drawing up of a new five-year plan, and began a public relations campaign to convince his political opposition and the "man-in-the-street" of the dire need for foreign financial and technological assistance.

Rafsanjani has managed to meld a remarkable consensus, pushing Iran toward moderation without alienating too many of the revolutionary radicals. Swiftly taking control of key power centers in the country's complex government, he has stacked decision-making bodies with people he can trust to support freeing the economy and ending Iran's international isolation.

Rafsanjani has managed to meld a remarkable consensus.

Iran's needs are huge: An estimated 10,000 towns were damaged in the war with Iraq, as well as most of the country's oil and gas installations. Power stations, agriculture and the transportation sector all need massive infusions of investment capital.

The effects of disinvestment brought on by eight years of economic dislocation are still apparent in low and sluggish rates of growth, especially in the industrial and oil sectors. The exodus of trained Iranians and the lack of expatriate technicians have combined to create an adverse impact through constraining the availability of skilled managerial and technical personnel. The basic indigenous sector, agriculture, is still recovering from the damage done to it by the flight of landlords in 1979-89 and the uncertainties surrounding the revolutionary government's policies toward the sector after the 1989 land reform.

The Rafsanjani administration has come to grips with the fact that an economic takeoff will not occur without an enormous injection of capital, technical know-how and specialized training from abroad. Thus the announcement last June by Iran's minister of finance, Molisen Nourbakhsh, that Tehran is seeking a total of $27.7 billion in foreign financing for the current five-year plan. He advised that Iran was negotiating with foreign governments and international banks to secure investments and foreign credits worth $17.7. billion, and that another $10 billion in the form of export credits was being sought. The governor of the Central Bank subsequently advised that 70 percent of the $17.7 billion had been raised, largely from French banks, and that the balance would be negotiated within a year. He added that Iran would seek loans only for project finance, not for balance of payments support.

The level of Iran's oil revenues will be decisive for the rate of economic growth. The 1991/92 budget forecasts oil export earnings of approximately $22 billion. This should be sufficient to fund the main areas of the economy but will not provide a surplus for major industrial expansion.

A Former Footing

Thus Tehran is making a serious effort to put its oil industry on a firmer footing for the rest of the 1990s. About $5 billion will be spent to expand oil production capacity to close to 5 million barrels per day (b/d) by March 1993, from a present level of about 3.4 million b/d. Of this amount, $3 billion will be allocated for development offshore and $2 billion onshore. In addition, a further sum of $1.4 billion has been earmarked for oil and gas exploration over the next three years.

The main objective of this effort is not to add new production capacity but to restore capacity which once existed but was undermined by lack of investment and maintenance during the Iran-Iraq war as well as by severe war damage. Before the revolution, Iranian crude production was running at over 5.5 million b/d.

Tehran also has decided to welcome foreign oil firms into joint ventures in the oil and gas sectors. Iranian Deputy Minister of Oil Heday Atzadeh Razavi stated recently that his country is looking for international cooperation in the areas of hydrocarbon development, refining and petrochemical production.

Rafsanjani has not been shy about soliciting foreign assistance, as revealed by his wooing of the European Community (EC), the Soviet Union and the Gulf Arab states.

Tehran now enjoys diplomatic relations with all EC member states, having settled the acrimonious Salman Rushdie affair to London's satisfaction. Rafsanjani won European approval for his firm anti-Iraq stance after the invasion of Kuwait. As a result, the EC established a permanent representation office in Tehran. This new office permits the 12-nation group to promote more actively trade with Iran and encourages West European participation in dozens of industrial, petrochemical and housing projects.

Rafsanjani's foreign policy strategy already has been rewarded by the extension of an estimated $12 billion in credits from France, Germany and other EC states. His recent invitation to French President Francois Mitterand to visit Iran has been accepted, with the trip scheduled for later this year or early in 1992.

One of the larger awards to an EC state was to Germany's Kraftwerk Union, a subsidiary of Siemens, for the single biggest power contract since the revolution. Worth an estimated $1.2 billion, the job calls for construction of a turnkey combined-cycle plant south of Tehran capable of generating 2,080 megawatts.

Another major award was to a French company which will help Iran reconstruct its major oil terminal at Kharg Island, which suffered heavy war damage. The cost of this two-year effort is estimated at $255 million.

Shortly after being named president, Rafsanjani flew to Moscow to sign a comprehensive 10-year economic agreement. The projects within the pact are estimated to have a value of about $6 billion and include oil exploration and development, energy projects, joint development of water resources and a resumption of Iranian natural gas shipments to the southern part of the Soviet Union. In May 1990, a 15-year contract was signed to supply the Soviet Union with three billion cubic meters of natural gas annually. Iran's profit from these sales was set at about $300 million per year.

Special Attention to Saudi Arabia

At the same time that closer relations with the EC and the Soviet Union were being pursued, Tehran made special efforts to mend fences with Saudi Arabia and the other Gulf Arab states. This was done for both political and economic reasons. Relations have now been renewed with all Gulf nations, with special attention being given to Saudi Arabia.

In fact, past ill feelings because of Saudi restrictions on the number of Iranian pilgrims permitted to visit Mecca have been resolved to the point that both Saudi Foreign Minister Prince Saud Al-Faisal and Minister of Petroleum and Mineral Resources Hisharn Nazer recently visited Tehran for consultations with senior officials on political and economic issues.

According to Saudi Arabia, the monthly newsletter of the Royal Embassy of Saudi Arabia in Washington, Prince Saud emphasized the importance of enhanced Saudi-Iranian relations in the economic and political areas. Before his departure from Tehran, Prince Saud delivered a message to President Rafsanjani officially inviting him to visit Riyadh.

In keeping with the new Iranian-Saudi relationship, Tehran has moved closer in OPEC to the Saudi preference for keeping oil prices under control and production high.

The improvement in overall Iranian-Arab relations is a direct result of Rafsanjani's extending an olive branch to all of the Arab states of the Gulf, stating that Iran had only peaceful intentions in the region. His firm anti-Iraq position during the Kuwait crisis also resulted in a more friendly attitude by not only Kuwait but other Gulf Arab nations. The Iranian leader undoubtedly will profit from increased trade ties and may even reap some financial rewards.

The United States as well as Iran would benefit from a resumption of open trade.

The only major world power with whom Tehran does not presently enjoy friendly relations is the United States. It is not for President Rafsanjani's lack of trying. He is most anxious to secure the American business community's participation in his petrochemical and industrial reconstruction and modernization programs.

Two recent political moves by Tehran may have softened Washington's hard position vis-a-vis Iran. Rafsanjani's announcement pledging Iran's support of the UN Security Council resolutions ordering an economic embargo against Iraq is known to have pleased President Bush, who had sent several conciliatory messages to Rafsanjani urging Tehran's adherence to the sanctions. This was followed by Iran's assumption of a leading role in attempts to release Western hostages in Lebanon. President Bush told reporters after the release of two hostages, one of whom was the American Edward Tracy, that "I'd like to express our appreciation to the government of Iran, which used its influence with the Lebanese groups involved in order to gain the unconditional release of these hostages."

Tehran's increasingly more cooperative attitude may well have prompted Washington to pay a $200 million claim in the largest case before the international tribunal in The Hague, which is charged with reviewing billions of dollars of Iranian assets frozen by the United States after the 1979 revolution.

Another Washington move to better relations with Tehran was the December 1990 relaxation of a three-year-old ban on Iranian oil imports. American firms now are permitted to import limited quantities of crude oil on a case-by-case basis. The Coastal Corporation is importing 2.5 million barrels, the Chevron Corporation 2 million barrels, while Amerada Hess and the Mobil Corporation are negotiating for the purchase of several million barrels each. It is estimated that the various contracts will total at least $200 million.

The United States as well as Iran would benefit from a resumption of open trade. In 1972, for example, American exports to Iran of non-military goods and technical services totaled $480 million, representing a healthy 17 percent share of the Iranian market.

While the Iranian economy probably will not achieve pre-revolution levels of performance within the next five years, it has made more progress than many experts had predicted. President Rafsanjani's courting of the EC, the Soviet Union and the Gulf Arab states should insure a steady inflow of financial and technical assistance. This combined with better management, the return of expatriates and the return of many state enterprises to the private sector should enable Iran to look forward to a brighter economic future.

John T. Haldane is an international economist and Middle East specialist.