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Last Updated: Friday, 13 February, 2004, 08:04 GMT
Iran: Economy in transition
Analysis
By Myles Neligan
BBC News Online business reporter

Map of Iran
Iran's parliamentary elections later this month could determine whether the country achieves its potential as a regional economic superpower.

Iran's great strength is its abundant energy resources: It holds 7% of the world's proven oil reserves and its supplies of natural gas are second only to Russia's.

Moreover, having avoided the conflict that has engulfed neighbouring Afghanistan and Iraq in the last three years, Iran is currently enjoying something of an economic boom.

The economy has grown by more than 7% for each of the past two years, and is forecast to expand by a further 6.5% in 2004 and 2005.

Low levels of public debt, a healthy trade surplus and rising government expenditure complete the benign picture.

Downside

But despite these encouraging signs, analysts remain highly cautious about Iran's future prospects.

Whoever is in power will eventually have to come to terms with the same problems
Dr Ali Ansari, University of Exeter
Ratings agency Fitch describes investing in Iran as "highly speculative," carrying a similar degree of risk as putting money into the Ukraine, Indonesia, Lesotho, or Cape Verde.

One reason for this health warning is that Iran's fortunes remain closely tied to oil, despite efforts to diversify the economy.

Its current strong performance contrasts starkly with a period of stagnation in the late 1990s, when oil prices were a third lower than they are now.

A second difficulty is that the Iranian economy is dominated by a sprawling, inefficient state sector, with private enterprise largely limited to small trading and service businesses.

Opportunties for foreign trade, meanwhile, are restricted by sanctions imposed nearly nine years ago by the US, which accuses Iran of sponsoring terrorism.

These problems are exacerbated in turn by Iran's extraordinarily youthful population.

Nearly a third of its 68 million people are below the age of 14, putting immense pressure on the country's labour markets.

With unemployment officially estimated at 16% of the workforce, but thought in reality to be far higher, Iran needs to create about 800,000 new jobs a year just to stand still.

This puts the country under pressure to at least maintain, and preferably surpass, its current growth rate.

Stand-off

But perhaps the greatest source of uncertainty regarding Iran's economic prospects is its unstable political situation.

Since 1997, power in Iran has been finely balanced between supporters of reformist President Mohammad Khatami and conservatives anxious to preserve the ideals of the 1979 Islamic revolution.

oil installation
Oil is the lifeblood of Iran's economy
"Iran is unusual," says Fitch analyst Ed Parker.

"The economy is doing quite well, but there is a high degree of political risk."

That risk will be at the forefront of Iran-watchers' minds as the country prepares to go to the polls on 20 February.

The vote will be a crucial test for President Khatami, who has attempted to modernise the economy since coming to power in 1997.

Backed by a large majority in the legislative assembly, the President has focused on sweeping away restrictions on foreign investment.

He has also set up a fund aimed at buffering the economy from oil price fluctuations, and he has eliminated many barriers to foreign trade.

Voter apathy

But his initiatives have run into stiff resistance from unelected conservative elements in the government, especially the powerful Council of Guardians, a panel tasked with ensuring that all legislation complies with Islamic law.

Mohammad Khatami, Iranian President
President Khatami: Reformist agenda
More seriously, President Khatami's economic achievements have come as a disappointment to ordinary Iranians, most of whom remain no better off than they were before he came to power.

This has diluted the electorate's previously fervent support for the reformists, with voter turnout falling steadily over the past three years.

Now there is speculation that voters who supported pro-Khatami candidates last time, disillusioned by their failure to deliver tangible economic improvements, may stay away from the ballot box in record numbers.

This could hand control of the assembly to the conservatives, casting doubt over the entire economic reform process.

Iran's conservatives are in no mood to compromise, as demonstrated by the Council of Guardians' decision earlier this month to ban 2,500 reformist candidates from running for office.

No going back?

However, many analysts believe that even an outright conservative victory need not necessarily spell the end of efforts to overhaul the economy.

Iranian marketplace
Iran's private sector is under-developed
Dr Ali Ansari, lecturer in Middle East history at the University of Exeter, argues that President Khatami's reforms may now have gathered enough momentum to survive a shift in the balance of power.

"Fixing the economy will require a considerable effort of political will," he says.

"But whoever is in power will have to come to terms with the same problems," he says.

And according to Fitch's Ed Parker, support for economic modernisation has already spread beyond the reformist camp.

"A lot of the impetus for reform is now coming from within the establishment, including the central bank and planning agencies," he says.

Whatever the result of the elections, Iran's commitment to shaking up its economy will be put to the test in its new Five Year Development Plan, due to be finalised later this year.

Those in favour of reform, both inside and outside Iran, will be hoping that the final blueprint prioritises a further reduction in the role of the state, and more private sector competition.

In the meantime, Iran has one economic trump card up its sleeve.

Oil prices are expected to remain at their current high level for the next two years, giving the country a better than even chance of prolonging its current boom.



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