Iran tries to digest new wealth

Press, 24 February 1978, Page 8

Iran tries to digest new wealth

By

RALPH JOSEPH

in Teheran

In spite of the vast inflows of oil revenues, Iran is expected to show a decline in economic growth for the financial year, which ends on March 20. Diplomatic observers say that although Iran has made tremendous gains in recent years, particularly after the four-fold increase in oil prices from 1973, the economy has been suffering from the effects of an “uncoordinated leap forward.” The imbalances will need several years to set straight. The Shah’s eagerness to drag his country into the ranks of the industrialised nations by the end of the century has over-extended the economy generating “new and unrealistic expectations.” The Iranian ruler was one of the first to admit that his nation’s “unmatched” rates of growth in the last two or three years caused “dislocations and backlash ” One of the signs of the economic indigestion Iran is suffering is seen in the Government’s delav in publishing the sixth five-year d“velot>ment plan, for 197883. This was sunoosed to have been published in October last year, but is still reported to be “undergoing a thorough review. The investment targets for the revised fifth plan have not been met: the countrv’s "absorbtive capacity” for investment was seriously overestimated. One official estimate recentlv showed that the current nlan. now nearing its end. is 34 p D r cent under the target in disbursements. In other words, officials have not been able to snend as much money on deve’onm®nt as the Shah put at their disposal. Reri use o f the countrv’s mahilitv to absorb huge deses of fresh investments, no n°w large-scale nroiects ?r P bkely to b» undertaken for the next three or four years. Renorts indicate that the busy merging

the sixth and seventh fiveyear plans into a single 10year plan. This, at least, would help gloss over the fact that no large new projects are being undertaken while the projects of the previous plan are still being completed. The new Prime Minister, Mr Jamshid Amuzegar, has prescribed a slower economic growth and a reduced dependence on oil revenues, but he does not seem to have much of a choice. The Shah, too, has called for growth at “absorbable rates.” What Iran is going to do meanwhile with her huge oil revenues, now running at about $22 billion annually, is unclear. The Shah will have more money to spend on arms purchases (if his forces can “absorb” much more), as well as more for aid to developing countries friendly to Iran. A third choice is larger (Arab-type) investments in the West, a line the Shah has not shown much inclination for so far. But business confidence in Iran has been shaken by the demise of the “gold rush” days when profits were high and virtually unchecked, and the investment payout period was seldom more than two years. Because of high inflation and a lack of skilled and motivated workers, productivity is declining, firms are experiencing cash flow problems, and investment plans are being shelved. Though some infrastructural bottlenecks have recently been overcome, with improvements in transport, utilities and social services, several of the new industries that have been built lack water, telephones, skilled workers and power. Much of Iran’s agricultural production is not harvested “because of the great gap between the higher wage levels and the product prices realised under price controls.” Iran is estimated to have lost SI billion in the past year because of drastic decreases in wheat and rice productiqp, resulting from

problems of spoilage, transport, storage and distribution. The supply and demand disequilibrium has continued to cause inflation, which recently was reported to be 30 per cent a year. The Government responded by slapping controls on the economy, resulting in a substantial fall in liquidity. This was seen by diplomatic observers as “strong medicine,” but necessary to dampen the inflation rate, which was brought down to somewhere “in the 205.” Overcomprehensive and poorly studied price controls have contributed to the present investment doldrums. The dilemma is that if the

price controls are removed, this could result in heating up inflation, at least in the short run. Because of the huge infusions of oil money, the country’s gross national product is expected to reach $81.2 billion by March this year (an increase of 22 per cent over last year), putting the per capita income at $2366. But, say diplomatic observers, . “this latter figure is highly misleading, and not only because it reflects high inflation rates. A more realistic national per capita figure of $1250 is derived from Iran’s non-oil economy, a figure nearer that of economies such as Korea, Brazil and Argentina.”