Iran Tries to Manage Impact Of Opening Its Economy

High inflation, lifting of subsidies have hurt consumers

A GLANCE at downtown Tehran takes one by surprise these days. Passersby feast their eyes on the latest Japanese cordless phones while BMWs cruise the streets. On Ferdowsi Avenue, computerized currency exchange shops do a roaring business, taking advantage of new laws legalizing trade in foreign currency and unifying the exchange rate.

President Hashemi Rafsanjani's economic reforms have liberalized much of the former state-owned sector and private individuals hold stock in newly-privatized companies.

Iran's trade with the United States topped $750 million last year. It trades many times that amount with Europe, proving that its economy has finally emerged from the isolation of the 1980s.

Yet reform has come at a price. Inflation has soared to alarming heights. The rial has been devalued. Local newspapers reported a 30 percent leap in the prices of household goods this spring. The lifting of subsidies on some basic foodstuffs has caused much popular discontent. The country's short-term debt has skyrocketed to $32 billion, slashing its credit rating and jeopardizing its long-term financing plans.

"Iran has very quickly got into very serious trouble with its short term loans," says a Western diplomat in Tehran. "So far the six-month loan commitments have been extended to 12 or 18 months, but who knows how much longer that can go on?" Iran still oil-dependent

Over 90 percent of Iran's revenue still comes from oil. At 93 billion barrels it has the world's fourth largest reserves. Yet with OPEC production ceilings agreed at under 5 million barrels per day, the country is unable to increase its earnings by pumping more oil.

For ordinary Iranians, constant price rises cut into a steadily shrinking pay packet. Many juggle two or three jobs to pay the bills. "We earn in rials and pay in dollars," is a common refrain.

The Central Bank's unification of the complex system of exchange rates has effectively ended a subsidy to importers.

Previously, the government allowed Iranian businesses to buy dollars at a preferential rate in order to import raw materials cheaply, and then to charge the full market rate for the finished product.

"The unification of the exchange rate changed things," says Hamid Alizadeh, trade development officer at the New Zealand embassy in Tehran.

"Subsidy used to be an important element in trade. It's not going to be that easy now," he says.

Western companies are also refusing to accept Iranian letters of credit after the Central Bank decided to delay hard currency payments for up to six months. "Due to liquidity shortage of a short term nature, we will pay within a reasonable time, but not exceeding six months," ran an explanatory telex to a German auto parts dealer working in Tehran.

For importers, the situation has become critical. "We cannot import vital computer equipment now," says Hamid Sarshad, director of Tehran-based Pajoohesh Limited. "Foreign companies have refused to accept anything other than cash, but the government here will not allow us to pay in cash." Economy rattles politicians

Iran's political leaders are so worried about the economy that many expect a Cabinet reshuffle after Mr. Rafsanjani is inaugurated on Aug. 17.

Jalal Saadatian, a leading deputy in the parliament, said he thought six or seven Cabinet ministers would be dropped or transferred. "The sword of reshuffling hangs over the head of each and every minister," he told the English-language daily Tehran Times. Job insecurity has hit Tehran's ministries: A somber atmosphere pervades the corridors and few officials are willing to talk.

In the last two weeks, the Tehran Times, which is close to Rafsanjani, has quoted several officials critical of the government's economic policy, leading some Iranian observers to predict the political demise of Finance and Economics Minister Mohsen Nurbakhsh. "Someone has to take the responsibility for the economy," says one businessman who asked not to be named. "Nurbakhsh has just brought ruin."

Rafsanjani, reelected in a sparse June vote, claims to have the answer. He is trying to attract large-scale foreign investment to several Iranian islands and ports designated as free trade zones. Kish Island - a would-be consumer paradise and rival to Dubai for its Gulf discount tourist business - and Qeshm - a duty-free, low-rent industrial development zone - are the centerpieces of his efforts to bring the country back into international fold.

Glossy magazines and efficient PR, both a rarity in today's Iran, extol the virtues of the Gulf islands. The government has dubbed Qeshm the "Singapore of the Gulf" and has already persuaded Japanese, German, and Malaysian companies to move in.

Many Iranian importers use the islands as an avenue through which to pay for foreign goods.

"All my customers order their goods sent to Dubai," says the German auto parts dealer. "Then they smuggle them into Iran through the islands."

It's not quite what Rafsanjani had in mind by "free trade," but the money is undoubtedly starting to come in. Yet serious competition with the Gulf states is still some way off.

"The islands are not going to compete with Dubai any time soon," scoffs a visiting Western diplomat. "They still only have two types of vacuum cleaners."

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