Khatami’s Economic Record: Small Bandages on Deep Wounds

Jahangir Amuzegar served the pre-revolution government of Iran as minister of commerce and finance. He is currently an international economic consultant.

In a well-publicised and eagerly anticipated appearance before the Iranian Majlis (national assembly) on 11 March 2001, President Mohammad Khatami delivered a “state of the nation” address, covering his first four years in office. The unusual and unprecedented venture was intended to provide the president with an opportunity to defend his performance record and to answer those who had castigated his as a “do nothing” administration.

 

The long, unstructured and diffuse speech, however, turned out to be largely a saga of Khatami’s trying experiences with his idealist followers on the left and his fundamentalist opponents on the right. In a largely contemporaneous delivery (and the promise of a full report at a later date), the beleaguered president defended his role as a servant of God, saviour of the Islamic Republic, promoter of “religious democracy” and protector of the people’s constitutionally guaranteed liberties.¹ While his unrelenting critics dismissed the speech as the “mountain laying a mouse”, and his loyal supporters praised it as a candid account of his four-year struggle for reforms despite a new political crisis “every nine days”, an objective assessment of the Khatami administration’s overall record remains to be made. This short review deals with the economic side of the picture.

 

Of the two-hour-long speech, no more than twenty minutes were devoted to economic matters. And even in this relatively brief reference, the president’s account of the situation was selective, fragmentary and altogether defensive. In a desperate appeal to fairness and reason, Khatami tried to show how things were better now compared to four years earlier when he took the helm. Admitting that the people’s lot was still far from satisfactory, and that he felt their pains and sufferings, he underscored the sorry state of the economy that he had inherited in 1997 and called attention to the concrete achievements made during his presidency. In a well-calculated move to gain the nation’s sympathy, Khatami recited with great pride such accomplishments as taming inflation, reviving economic growth, creating more job opportunities, promoting non-oil exports, producing budget surplus and positive current account, reducing foreign and domestic debts, financing energy projects, obtaining new foreign export credits and bank loans, lowering investment risks, signing bilateral co-operation agreements with trade partners, and turning the overall economic climate from one of crisis to normalcy.

 

To assess these claims, and indeed the main economic tenor of the speech, one has to take a close look at the president’s early campaign promises; the actual economic conditions when he took office; the strength and effectiveness of his proposed reforms; the significance of extraneous circumstances beyond his control; and finally, the actual status of the economy towards the end of his first four-year term.

Campaign Pledges

In his brief campaign for the presidency in early 1997, Khatami promised to achieve economic development along with social justice—the two prominent national objectives of the time. His campaign strategy was (a) to accommodate the centre–right technocratic disciples of the incumbent president, Ali Akbar Hashemi Rafsanjani, who were pushing for efficiency (i.e., rapid, market-oriented, GDP growth), and (b) to appease his own left-wing supporters whose ideal model called for equity (i.e., an Islamic welfare state). When pressed for a more specific agenda, he spoke only in such vague terms as the necessity of cutting the state’s role in the economy by privatising state enterprises and reducing heavy dependence on oil exports; promoting labour-intensive projects to reduce unemployment; controlling inflation through wage/price guidelines; balancing the national budget through cost cutting; adjusting the exchange rate in accordance with the national interest; completing unfinished projects; and eliminating the housing shortage by facilitating home ownership.²

 

Everybody agreed at the time that securing his mantra of efficiency and equity simultaneously required a thorough, albeit gradual, restructuring of the country’s basic regulatory, fiscal, monetary, trade and exchange, institutions and policies. Overlapping and intrusive state ministries and agencies had to be eliminated to cut the government’s size, reduce payrolls and raise national productivity. Reliance on oil income had to be reduced through genuine diversification and deregulation of non-oil exports. Job creation called for the revision of the onerous labour code and anti-business laws to provide sufficient incentives for investment. Reliance on inflexible and across-the-board public subsidies had to be replaced by a workable safety net in order to promote social justice. Inflation had to be harnessed by eliminating deficit financing via the printing press rather than through wage/price controls. The inefficient Islamic banking system had to be reconstructed to offer more competitive services and to allow for a more effective monetary policy. Trade and exchange regimes had to be liberalised through the elimination of private monopolies and rent-seeking activities of a privileged, well-connected few. Domestic and foreign investments had to be encouraged through the establishment of a level playing field.

 

Many observers, however, doubted whether the new president and his disparate allies and supporters were able (or even willing) to tolerate the political tensions, economic dislocation and social suffering which such structural adjustment processes inevitably entailed. While Khatami’s hard-line detractors unfairly called him opportunistic and Machiavellian, the fact remained that the well-intentioned promises of “combining fast growth with social justice without imposing hardship on the working population” reflected an incredible degree of naivety on his part regarding the enormity of the challenge he faced.³

Khatami’s Inheritance

In his “state of the nation” speech, President Khatami stressed high inflation, faltering GDP growth, troublesome unemployment, large foreign debt, low credit-worthiness and an entrenched bureaucracy as problems he had to cope with after he was sworn into office. He further emphasised the emerging oil slump, agricultural drought, rising numbers of new job applicants and external sanctions as additional factors hampering his efforts. While there was much truth in these claims, he conveniently ignored the fact that the economy he took over from Rafsanjani in 1997 was in far better condition than that inherited by the former president in 1989, following Prime Minister Mir Hossein Mussavi’s disastrous wartime stewardship. In point of fact, Iran’s economy in mid-1997 was not in dire shape. The external balance enjoyed the largest ever current account surplus and foreign exchange reserves were equal to several months of imports. Inflation had been brought down to 17 per cent from 49 per cent the year before. Employment was officially at the highest level since the cease-fire with Iraq.

 

To be sure, years of revolutionary excesses, a badly flawed constitution, protracted economic mismanagement, an exhausting eight-year war with Iraq, significant international isolation, pernicious private monopolies and rampant corruption had produced considerable structural dislocations. The economy also suffered from an unhealthy dependence on oil, a perennially empty treasury drained by public and private subsidies, widespread cost/price distortions, a fundamentally weak national currency and a shortage of basic social amenities (particularly housing, healthcare and classrooms). Yet compared to the immediate period after the Iran/Iraq cease-fire, the economy was relatively better off.

 

The misfortune started with some unexpected unfolding events. By unlucky coincidence, as Khatami acceded to the presidency there began a slowdown in the world economy (particularly in Southeast Asia, the best customer for Middle East oil). While those economic storm clouds were gathering on the horizon, the Organisation of Petroleum Exporting Countries made one of its periodic blunders and decided to raise its formal production ceiling by 2.5 million barrels per day, or about 10 per cent. Although the move was simply a formal recognition of the actual oil volume supplied by members in clear disregard of their assigned quotas, the market reaction was swift and sobering. Iran’s oil export revenues during 1997–8 fell by nearly 20 per cent, as the average price received by the National Iranian Oil Company declined by $4 a barrel to $16.9 per barrel. Non-oil exports also declined by about 7 per cent to $2.9 billion from the previous year’s $3.1 billion—the lowest figure in four years. A sharp reduction in construction activities plus continual drought in the farm sector further hurt the economy.

 

In the absence of effective countermeasures by the administration, real GDP growth in 1997‑8 declined to 3.1 per cent, down from 4.7 per cent a year before. Unemployment and inflation remained in double digits. The current account surplus dropped to $2.2 billion from the previous year’s $5.2 billion. Reliance on oil export receipts increased, while imports had to be compressed to $14.1 billion from $14.9 billion. A nearly $4 billion drop in oil revenues meant that thousands of development projects were left unfinished because of lack of funds. But, in accordance with previous schedules, external debt was reduced to $12.1 billion by March 1998, down from $16.8 billion the year before.

 

Overwhelmed by the formidable challenges he faced shortly after assuming office, and seriously handicapped by a reversal in world oil prices, Khatami, in an audacious nationwide television address before the Iranian new year 1377 (late winter 1997), called the economy “sick” in production, distribution and regulation. He once again reiterated his early pledges to downsize the public sector and trim the bloated bureaucracy, stimulate private investment, increase budget transparency and raise overall productivity.

Recovery Programmes

Hamstrung by internal ideological differences within his own administration and stifled by unfortunate external developments, the cautious and unsure president made just one major economic venture during his first year in office: the submission of the 1998–9 budget to the Majlis. Despite earlier promises of increased truthfulness and transparency, the new budget followed the traditional practice of overestimating revenues and underestimating expenditures. And, by a none-too-clever sleight of hand, the budget showed an overall “balance” as borrowing requirements to cover the deficit were called “other income”. In this first annual budget, prepared in October 1997, oil revenues from petroleum exports were projected on the basis of $17.5 per barrel. Faced with a sharp slump in the world oil market, the initial revenue estimates had to be revised downwards twice during the new fiscal year.

 

Amid growing pressure from the Majlis and an impatient public for something to be done about the teetering economy, an Economic Rehabilitation Plan (ERP) was finally announced in August 1998, almost a year after the start of the new administration. The ERP identified the government’s main “concerns” as slow growth, high unemployment, chronic inflation, undue reliance on oil exports, harmful state and private monopolies, excessive regulation, low productivity, inadequate aggregate investment and imbalances in external payments. The proposals made to deal with these problems, however, lacked both a necessary road map and effective enabling vehicles to do the job, or at least meet the public’s expectations. A business leader called the ERP dead on arrival. Undermined further by a lingering fall in oil prices, the ERP was overtaken by emerging developments without being able to make a real dent in the deteriorating conditions.⁴

 

The negative external current account (including a four-year record low in non-oil exports) necessitated further cuts in imports, leading to reduced industrial output, a depressed construction sector and a further decline in the national currency value. With the budget facing an unexpected shortfall and the gap financed largely by central bank credits, the consumer price level came under new pressures. Deflationary measures subsequently adopted by the central bank to rein in the escalating inflation resulted in a slowdown in aggregate investment and pushed the economy into a mini-recession. An emergency supplementary budget later in the year (with such extraordinary sources of revenue as advance sale of crude oil, pre-paid travel by potential pilgrims to Mecca and even the sale of military draft exemptions) was followed by the second annual budget for 1999–2000, again with sizeable real deficits.

 

The economy in Khatami’s second full year in office, 1998–9, also encountered a steady decline in state oil revenues because of plummeting oil prices. Iran’s oil sold at an average price of $10.51 per barrel, 38 per cent lower than the year before. Besides a continued slump in construction and the cancellation of several public projects, a series of other events held back the economy. The most pronounced was the difficulty in September 1998 of servicing the already rescheduled foreign debt, which for the second time since 1979 tarnished Iran’s impeccable pre-revolution credit record. Increased budget shortfalls (equal to 5.2 per cent of GDP), stagnant industrial capacity utilisation and increasing worker layoffs reduced 1998–9’s annual growth to 2.1 per cent. Inflation officially exceeded 18.1 per cent (with private estimates claiming it was at least a third higher). Oil export receipts at $9.9 billion for the year were the lowest since 1986. With non-oil exports only slightly higher than in 1997–8, the current account became negative at minus $2.1 billion for the first time in four years, despite relatively stagnant imports. The most visible and highly embarrassing manifestation of the economic setback was the plummeting value of the rial (the national currency) to nearly Rls 6,500/$1 from the mid-1997 range of Rls 4,500/$1. Total external debt also rose by nearly $2 billion.

 

On the plus side, the central bank successfully negotiated a new rescheduling of foreign obligations and secured some modest new financing from West European banks. A private credit institution was authorised to operate in the housing sector for the first time since the 1979 bank nationalisation. Foreign exchange transactions, under strict controls since April 1995, were modestly liberalised. A sovereign rating of B2 was obtained from Moody’s in order to tap the international bond market. US sanctions on exports of food and medicine to Iran were lifted in April 1999. Japan agreed to resume partial payment of its long-delayed loan to Iran, and after a hiatus of close to seven years the World Bank granted two loans totalling $232 million for health and sewage projects. An interior assistance strategy report by the bank’s staff, approved by the executive board in May 2001, envisaged up to $755 million of new lending over the next two years for strictly humanitarian ends.

The Third Development Plan

As the continued decline in crude oil prices and a sharp drop in the treasury’s oil revenue made the ERP’s palliative remedies ineffective, the economy’s rescue was consigned to the third annual budget (2000–1) and subsequently to the launching of the Third Five-Year Development Plan (2000–4). The draft of both documents essentially repeated the same populist (and largely incompatible) goals, and the same vague (and largely meaningless) means, that had already been detailed in the ERP, the annual budgets and other previous plans and declarations. Social justice was to be secured through public subsidies for both production and consumption. Inflation was to be tamed through wage/price controls. Employment was to be raised through increased investment. Non-constitutional monopolies were to be eliminated through new legislation. Money-losing public enterprises were to be privatised. Non-oil exports were to be expanded through proper incentives. Fiscal, monetary and exchange regimes were to be revised and improved. The state’s bloated bureaucracy was to be downsized through the consolidation of parallel agencies.

 

Owing to the steady downward drift of crude oil prices for more than twenty months into the Khatami administration, Iran’s economy was able to muddle through only at an anaemic pace. The third annual budget bill for 2000–1, with notable improvements in its contents, was submitted to the Majlis on time. But some of its progressive new features, namely a modest increase in heavily subsidised fuel prices designed to discourage energy waste and smuggling, and a proposal to tax business profits of the lucrative bonyads (revolutionary institutions), were rejected by the conservative-dominated Fifth Majlis. However, thanks to the start of a new oil boom after March 1999, revenue cuts were made up by increased oil income and both internal and external balances became more manageable.

 

The real growth of GDP in 1999–2000 reached 2.4 per cent, a figure slightly above the previous year’s. Although both oil and agriculture had registered negative growth, all other sectors (and particularly construction) showed notable expansion. Not unexpectedly, the recovery was accompanied by higher inflation at more than 20 per cent—the highest since President Khatami assumed office. The official unemployment rate was given at 13.5 per cent, up from 10 per cent in 1997, with more than 15 per cent of college graduates among the jobless. Private estimates put both the true inflation and unemployment figures at more than 25 per cent. The current account balance improved remarkably, with a $6.5 billion surplus following a more than $7 billion increase in oil export receipts. Non-oil exports, too, had a 20 per cent edge over the previous year’s figure; but imports were cut back by more than 6 per cent in order to reduce foreign debt to about $10.3 billion, the lowest in three years. Nevertheless, the rial’s value fell during the year to a historical low of Rls 9,600/$1 in mid-1999.⁵

 

The Third Development Plan bill that was finally ratified by the Fifth Majlis was significantly gutted in its key provisions on gradually eliminating price controls and reducing runaway public subsidies, thus damaging its internal cohesion and financial integrity. Projected revenues from domestic sales of oil products were reduced; artificial caps were placed on the prices of public goods and services; and planned expenditures were raised. Some of the plan’s privatisation features were further rejected by the conservative-controlled Council of Guardians, which can veto parliamentary legislation.

Oil Blessings

Although the 2000–1 budget (which was to follow the Third Plan’s mandates) was similarly undercut by the Council of Guardians, Khatami’s fourth year in office fared better than the previous three, thanks mainly to the continued oil boom. The first year under the Third Plan began with the removal of US sanctions against Iranian exports of carpets, caviar and nuts as Washington’s goodwill gesture to the newly elected Sixth Majlis. Khatami’s diplomatic charm offensive having considerably improved Iran’s image abroad, foreign investment in the energy sector was more easily attracted. With the oil price for Iranian crude staying above $25 per barrel for the entire year, allowing increases in both public and private spending (particularly in the construction sector), the real GDP growth rate exceeded 5 per cent. Consumer inflation according to official (and widely disputed) figures averaged at 12.6 per cent—the lowest in ten years. Unemployment, officially given at 13.7 per cent by Iran’s Statistics Centre, was in fact probably much higher as the new jobs created during the year were officially estimated at 430,000 while job entrants, according to official projections, were close to 750,000. A labour official claimed that one out of four workers in Iran was jobless and only one out of eighteen had a productive job.

 

The budget, thanks to the sale of some $11 billion of increased oil revenue in the open market at a much depreciated exchange rate, was in surplus—enabling the government to pay back part of its debt to the Social Security Fund. Despite a notable increase in imports, the external current account reached about $12.6 billion—the highest level on record, thanks to a massive increase in oil receipts of some $24 billion. Non-oil exports also rose $4.1 billion because of broad tax exemptions and the sale of export proceeds at a new depreciated exchange rate. Judged by its external position, the economy was healthier than it had been in the previous ten years. Iran’s deposits with overseas banks reached $13 billion, the highest level for nearly two decades; the country’s liabilities to these banks dropped to their lowest level in eight years. Foreign debt stood at about $8 billion, and official reserves exceeded debt obligation for the first time in a decade. The rial rate, which in May 2000 had stabilised at around Rls 8,600/$1, further appreciated slightly, but was kept relatively steady at Rls 7,900/$1 for the rest of the year to March 2001. Meanwhile, the Organisation for Economic Co-operation and Development lowered the credit risk rating of doing business in Iran from six to four.⁶

The Record Examined

An impartial assessment of President Khatami’s four-year economic record can best be made through a detailed examination of claimed achievements against the backdrop of promises made during the presidential election campaign and faithfully reflected in his four annual national budgets, his Economic Rehabilitation Plan, and finally, the Third Development Plan. Of these documents, the ERP may be identified as exclusively the president’s platform since it was not subjected to parliamentary approval, was largely unaffected by partisan politics, and was not altered by Majlis amendments. His accomplishments can thus be measured against the objectives promulgated in that plan. Of the ERP’s primary objectives, seven stood out as quintessential: (1) “social justice” (i.e., reducing income gaps and eliminating absolute poverty); (2) combating inflation; (3) job creation; (4) eliminating non-constitutional monopolies; (5) privatising state enterprises; (6) reforming antiquated fiscal, monetary, exchange and welfare systems; and (7) downsizing the bureaucratic colossus.

 

Even if the sceptics are disregarded and official figures accepted as accurate and reliable, President Khatami’s four-year economic report card still shows that most of his promises remain unfulfilled. Published data reveal some slight improvements in certain quantitative indicators, but little progress in basic economic reforms. Government figures show a notable reduction in external debt, an amelioration in the external current account, a tiny rise in non-oil exports, an increase in foreign exchange reserves, a precarious budget surplus, a slight reduction in the consumer price level, an increase in GDP growth, some additional new employment, larger foreign bank credits and a reduced business risk—almost all in the third and fourth years of the first Khatami presidency, almost all externally based, and almost all still below the numerical targets of the Third Development Plan.

 

Conspicuously absent from the picture has been the crucial structural overhaul of the ailing economy:

 

• Narrowing the income gap and eliminating poverty remained distant goals. Official data and corroborating evidence fail to indicate progress on either front. Critics cite anecdotal evidence of deterioration on both.

 

• Monopolies in production, domestic distribution and external trade were hardly touched; preferential rents for favoured institutions and individuals were largely unaffected.

 

• Money-losing state enterprises absorbing two-thirds of the national budget were kept on life-support through import protection, public subsidies, low-cost credit, cheap foreign exchange and other means. Their effective privatisation was hobbled by strong resistance from their workers, managers and ideological supporters within the administration and the Sixth Majlis. By “privatising” industrial firms, official sales figures camouflage the identity of the buyers, which reportedly consisted mainly of nationalised banks, parastatal institutions, or new “private” companies created as wholly owned subsidiaries of their parent public enterprises. In two such recent examples, the Social Security Fund and the Government Employees’ Pension Fund were declared “private” entities, and thus eligible to receive shares of privatising state enterprises. Meanwhile, the ongoing new public investments in the industry and energy sectors surpassed by several fold the magnitude of actual privatisation.

 

• On structural economic reforms, the only notable progress was the elimination of one of the four existing multiple exchange rates as part of a move towards much-promised eventual unification. An Oil Stabilisation Fund was also established to deal with the effects on the national budget of future oil price fluctuations. In other fields, the Majlis authorised the establishment of private banks and insurance companies, and the conversion of quantitative trade quotes into tariffs got under way. Public subsidies, however, notably increased and the promised welfare safety net still remained to be worked out after more than four years in preparation.

 

• There was only cosmetic change as regards downsizing the inflated, incompetent, inefficient and corrupt bureaucracy. While six principal departments were reduced to three, their staff was not reduced. All the former ministers or agency heads automatically became the president’s additional “advisers”. As a result, there are now more presidential advisers than the president’s daily working hours allow him to consult. Furthermore, preparations are being made to establish a new High Council of Administration and a new State Tax Organisation to manage human resources and improve tax system efficiency.

 

• Finally, none of the other sick aspects of the economy was seriously addressed, much less effectively dealt with. Capital flight, brain drain and the number of asylum seekers all reportedly increased. Labour strikes, absenteeism and addiction-related no-shows increased. Some 1,100 industrial units were reported as being on the verge of bankruptcy. Obsolescence and out-dated technology in some industries (e.g., textiles, automobile manufacturing) continued to soak up the government’s meagre resources. The new law on attracting foreign investment still awaits final ratification. Revision of the labour code has been talked to death.

Overall Assessment

Even on the most charitable interpretation, Iran’s economic performance under the first Khatami administration was lacklustre at best. There were some notable gains in the external trade and exchange areas, and some small improvements in other economic indicators, but there was no meaningful progress towards basic structural reforms. Yet the responsibility for this unflattering record can hardly be placed on Khatami alone.

 

To begin with, Iran’s oil-based, state-dominated, highly protected, unduly regulated, under-taxed, over-subsidised and inefficiently run economy could scarcely be turned around in a short span of four years, even with the best of political intentions and managerial skills. A bloated and corrupt bureaucracy, entrenched monopolies and unfair business practices, political uncertainties and high business risks, and the existence of several semi-independent power centres beyond the government’s reach, raised further obstacles to healthy development no matter who was in charge.

 

Furthermore, the economy’s home-based growth potential during the four-year period was held back by the demagogic and unco-operative Fifth Majlis and the embattled Sixth. Some of the president’s policy proposals also were emasculated by the obscurantist and economically illiterate Council of Guardians. Nor did Khatami always fully enjoy the support of the conservative-packed Expediency Council or the inscrutable Supreme Leader, Ayatollah Ali Khamenei. There were subtle attempts at sabotage by other anti-reform quarters as well. In all, the political climate and mindset were not conducive to serious economic reform and restructuring.

 

Nevertheless, President Khatami and his administration had their share of the blame for the poor show. The president’s own hands-off economic stewardship and the mediocre character and calibre of his top economic team undeniably contributed to the economy’s lingering malaise. Khatami himself was neither adequately versed in, nor intellectually comfortable with, complex economic problems. By his own admission, he always consulted scores of economists before presenting his economic proposals. Complicating the situation was the fact that his advisers consisted of two ideologically opposed groups—a number of misguided statists left over from the Mussavi cabinet, and some ardent free-market enthusiasts inherited from the Rafsanjani administration. The high-profile and open spats on national monetary, exchange and welfare policies between these two groups (neither of which was known for its outstanding academic background or successful professional track record) turned the president’s penchant for deliberation and consensus-building into caution and indecisiveness. The cause of meaningful reform and structural adjustments consequently suffered from the tug-of-war between his economic team-mates, as well as from his own inability or reluctance to discipline them.

 

Despite these unfavourable elements, however, the most critical factor shaping the economy’s behaviour during the period under review was the movement of oil prices in the global market—a determinant which had little do with the president’s acts or omissions. Unfair as it may sound to his allies and supporters, precious few of the achievements for which the president claimed credit in his Majlis speech in March were due to his leadership. For the same reason, many of the shortcomings and failures for which he has been blamed were beyond his control.

 

The overarching dominance of oil export receipts in the Iranian economy—between 80 and 85 per cent of total foreign exchange earnings, and up to 70 per cent of the treasury’s direct and indirect revenues—makes the regime almost impervious to any type of policy initiatives in the short run. Data for the entire post-1979 period indicate that annual GDP growth in almost every year since the revolution has been closely correlated with oil booms and busts. Khatami’s first four-year tenure followed the same pattern. Global crude prices during those four years determined Iran’s oil income, and oil income determined the economy’s conditions and direction. As the foregoing discussion has indicated, the 1998–9 mini-recession started when oil prices were moving downwards, and the 1999–2001 recovery got under way when the prices of crude reversed their course. As shown in Table 1, the most sluggish year of the Khatami administration was 1998–9, when crude prices and Iran’s oil export receipts were the lowest. By contrast, when oil prices and petroleum revenues were at their peak, unemployment was down, GDP growth and the current account were at their highest, and the consumer price index and external debt were at their lowest.

 

TABLE 1
Statistical Indicators

 

	1997–8	1998–9	1999–2000	2000–1a
Real GDP growthb,c	3.1	2.1	2.4	5.6
Consumer price indexc	17.343	18.1	20.1	12.6
Unemploymentd	10.1	16.2	13.5	13.7
Oil exports (fob)e	15.47	9.93	17.0	24.2
Non-oil exports (fob)e	2.9	3.1	3.9	4.1
Imports (fob)e	14.2	14.3	13.4	15.2
Current account balancee	2.2	-2.1	6.5	12.6
External debte	12.1	13.9	10.3	7.9
Average oil price per barrelf	16.9	10.51	20.2	25.5
Free market exchange rateg	4,781	6,468	8,657	7,900

 

Sources: Central Bank of the Islamic Republic of Iran, and author’s estimates.

 

Note: The reliability and accuracy of Iran’s official statistics are not independently verifiable. Figures supplied by one public agency are also often disputed by other government units. Caution in the interpretation of data is thus warranted.

 

^aPreliminary official data.

 

^bAt constant 1981–2 prices.

 

^cPercentage change over previous year by official indication.

 

^dPercentage of the labour force by some official estimates.

 

^eBillions of US dollars.

 

^fUS dollars.

 

^gRials per US dollar (average for the year).

 

Nor is the correlation hard to detect. Oil booms (i.e., higher world oil prices and bigger Iranian oil revenues) reduce budget deficits, increase public capital investment, make larger foreign exchange available to the private sector and facilitate increased volumes of imports. These stimulants raise GDP growth, create more jobs, take the pressure off consumer prices and help pay the external debt. An oil bust operates in an opposite fashion, by depressing all major growth indicators. Oil has been Iran’s economic lifeblood: as oil prices go, so goes the Iranian economy.

 

In sum, President Khatami’s overall response to the daunting economic challenges of l997–2001 had neither a clear economic philosophy nor a workable political strategy. He himself once admitted that Iran’s economic management lacked a clear “theory” and was in fact carried out by “trial and error”. Yet the triple scourges of Iranian society, which Supreme Leader Ayatollah Ali Khamenei has described as “poverty, corruption and discrimination”, are intricately interwoven in the very fabric of Iran’s theocratic oligarchy. They are not administration-specific. In the future as in the past, any meaningful and sustainable change for a better and fuller life in Iran requires a wholesale restructuring of the economy and fundamental sectoral adjustments towards true diversification. Only a co-ordinated series of free market reforms—privatisation, deregulation, fiscal discipline, a modern banking system, open trade, a unified exchange rate and a workable social safety net—can save the economy in the long run. And only a genuine movement towards pluralistic political democracy can enable these reforms and address other social ills. All else is another recipe for a new crisis, or an emergency application of small bandages to deep wounds. 

Endnotes

1. For the text of the address in English, see the Foreign Broadcast Information Service, Daily Report, 12 March 2001.

 

2. For details of this platform, see Jahangir Amuzegar, “Iran under New Management”, SAIS Review (winter–spring 1998).

 

3. For further elaboration, see Jahangir Amuzegar, “Khatami’s Iran: One Year Later”, Middle East Policy (October 1998).

 

4. For the specifics of the ERP, see Jahangir Amuzegar, “Khatami and Iranian Economic Policy at Mid-Term”, Middle East Journal (autumn 1999).

 

5. See Jahangir Amuzegar, “Iran’s Virtual Democracy at a Turning Point”, SAIS Review (summer–fall 2000).

 

6. For further discussion, see Jahangir Amuzegar, “Iran’s Post-Revolution Planning: The Second Try”, Middle East Policy (March 2001).