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Economic Commentary:
Iranian oil industry produces revenues but not new jobs

Published by Daily Star on 2003-11-07

BEIRUT: President Mohammad Khatami of Iran told union representatives in Tehran the other day that it was high time that the theocracy weaned itself away from its traditional reliance on oil export revenues, which this year are expected to exceed $20 billion, or about 80 percent of the Islamic Republic's export income. "So far as basic needs are financed through selling our natural wealth," the president said, "then we will tread a wasteful and fruitless path. Iran lives on oil export revenues."
With proven reserves of more than 130 billion barrels, and daily production of some 4.2 million barrels, Iran can afford to live off its oil revenues for a very long time. Indeed, oil export revenues have risen typically at 9.6 percent annually--exceeding planned targets by some 60 percent--and have accounted for a significant increase in imports of industrial raw materials and semi-processed goods. From 2000 to this year, imports rose from $15 billion to $24 billion.
But the oil industry isn't generating the volume of jobs required to adequately tackle Iran's reported unemployment rate of 16 to 17 percent. Among those younger than 30 years of age, the jobless rate may be even higher; already, there is marked social tension across the nation of 66 million people as a realization has lodged in the popular mind that the ayatollahs running Iran simply haven't delivered fully on their economic promises. Khatami himself was elected in May 1997 on a pledge to create more jobs for young Iranians. Moreover, annual inflation is running at nearly 16 percent.
Perhaps recognizing this, the 60-year-old Khatami said: "The economy needs to produce a sufficient level of employment and production so that the treasury can bring in higher tax receipts."
So what's Khatami's solution? Industrial productivity needed to be enhanced, he said, and the country's management and training projects warranted overhauling. And Iran, he added, should be seeking more foreign direct investment through already proven successful vehicles such as the issuance of Eurobonds and other measures.
It's not going to be easy for Iran to attract foreign capital in the volume it would like. Iran has been severely affected by the US-imposed sanctions, which have discouraged large multinational companies from fully tapping the Iranian market. Analysts say that unless the economy opened up more to foreign competition and unless there was greater inflow of foreign technical know-how, Iran's chances of reviving its moribund non-oil sector remained weak.
That sector was once much more vigorous. For example, exports of Caspian caviar sturgeon have fallen nearly 90 percent since the 1979 Islamic revolution that toppled the regime of Shah Mohammed Reza Pahlavi. A report in Reuters said recently that handwoven Persian carpets, Iran's second most valuable exports, have been "bludgeoned" by foreign copies. Only exports of pistachio nuts--a key agricultural product--have shown continued strength. Non-oil exports are expected to be about $6 billion in 2003.
The International Monetary Fund estimates that Iran's overall economic growth rate for the next four years will be 5.2 percent a year, hardly sufficient to make up its budgetary deficits as the country continues ambitious domestic development projects, reinforces its long neglected infrastructure, and also continues major agricultural and gasoline subsidies.
There have been reports in recent days that President Khatami's exhortations for more streamlined bureaucracies and reduced governmental corruption have resonated well with Iran's supreme rule, Ayatollah Ali Khamenei. It remains to be seen how much the spiritual can affect the temporal, however. Iranians can rightly point to some domestic reforms in cutting through nightmarish red tape for foreign investors. Still, the money mandarins who make the big decisions in Western financial centers know that investing in Iran remains risky because of the political volatility. It is hard to see how President Khatami--his good intentions notwithstanding--is going to be able to provide much assurance at this moment.

Pranay Gupte,
Senior Writer and Global-Affairs Columnist

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