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Iran: Lenders Take More Positive View

Recent visits by EU leaders to Iran have emphasized both sides' desire to expand their economic relations. In the second part of a three-part series on foreign investment in Iran, RFE/RL correspondent Charles Recknagel reports on how international lenders now view Tehran.

Prague, 23 March 2000 (RFE/RL) -- As Iran seeks to expand its economy to create new jobs, the government has repeatedly said it needs billions of dollars in foreign loans to carry out its development plans.

But for most of the past decade, Iran has been in poor shape to convince international creditors to provide it with large new loans. Instead, Iran has been struggling to meet debt repayments on huge amounts of past borrowing.

Now there are signs that the recent leap in the price of oil -- Iran's main source of hard currency -- will enable Tehran to meet its external debt obligations with increasing ease over the next five years. And that could markedly improve Iran's image in the eyes of many of the world's credit agencies.

Iran's credit woes began in the early 1990s, when it sought major loans from European Union and Asian banks to help it reconstruct after an eight-year war with Iraq, which ended in 1988. Experts estimate that by 1993 Iran owed more than $30 billion, or about 34 percent of its total gross domestic product. But repaying the debt was complicated by the volatility of oil prices, which plunged to record ten-year lows through much of 1998 and 1999.

Simon Williams, a regional expert at the Economist Intelligence Unit in London, says that the oil price plunge forced Iran to reschedule its debt repayments, creating a heavy burden for itself over the next years. While full details of the rescheduling -- conducted in bilateral negotiations with creditors -- have never been released, the repayment burden is believed to have reached almost $12 billion at the end of last year.

"Iran took on a large amount of debt in the early 1990s. A lot of it was short-term, and it got itself into repayment difficulties in the early to mid 1990s and came up with a rescheduling agreement then, which converted a lot of short-term debt into long and medium-term debt. It began its repayment schedule of this debt fairly well during the strong oil price years, but in 1998 and early 1999 it came under pressure and was forced to reschedule again. The details of that rescheduling, [in] 1998 and 1999, are very unclear ... the data which come out of [Iran's] central bank change each and every quarter ... and I don't think anybody precisely knows what its obligations are."

The rescheduling was a gamble that could have been perilous for Iran but instead has turned out well. Benchmark oil prices, which reached levels as low as $10 a barrel in the last two years, have now jumped to current levels of almost three times that amount. The rapid rise came as OPEC members late last year agreed to curtail production, an accord which has largely held since.

Williams says that if oil prices remain high, Iran should be able to get over what he calls a credit hump -- the years in which Iran has promised to repay the biggest part of its rescheduled debts -- during its next fiscal year, which begins this month.

"If oil prices hold and there is no need for further rescheduling, and the additional short-term credit flows that are available at the moment continue to come in, then the hump in repayments -- which is the coming fiscal year 2000/2001 -- will be the repayment hump. And if Iran can get itself past that, then the situation looks a lot better."

The Economist Intelligence Unit estimates that Iran committed to loan repayments totaling some $4 billion in the current 1999/2000 fiscal year. The group expects Iran will pay another $3.5 billion over the coming fiscal year and $2 billion the following fiscal year.

Analysts say that this repayment schedule remains demanding and can be met comfortably only while oil prices remain firm. They caution, too, that while they expect oil prices to stay up, the oil market has proved to be extremely volatile over recent years.

Raquel Ajona, a regional expert at Deutsche Bank's Research department in Frankfurt, Germany, says that nervousness over oil price volatility means that creditors will give Iran short-term loans but will be reluctant to extend medium or long-term loans.

"If we were to see more stability in oil prices, then [Iran] could have access to medium to long-term loans, but not right now. It is [still] regarded as a high-risk country."

Although creditors view Iran as a debtor which is willing to meet its obligations and in general has done so, it receives a high-risk rating due to a combination of several other factors.

These factors include Iran's perceived political instability and its ability to turn to only a part of the world's capital markets. The United States refuses to lend to Iran -- which it accuses of backing terrorism and seeking weapons of mass destruction. And several multilateral agencies, notably the World Bank and the International Monetary Fund, also have been reluctant to lend in recent years.

Recently, there have been signals that the World Bank could be ready to discuss loans to Iran for the first time in six years. Its last loan to Iran was in 1994, before the U.S. accused Tehran of sponsoring state terrorism and imposed new sanctions.

News reports this month said that the World Bank could discuss in April or May two proposals from Iran for loans worth a total of $231 million for sewage and medical projects. The bank needs only a simple majority of votes by its members to approve the loan. But analysts say that so long as Washington resists such loans, the bank is unlikely to make them. Simon Williams says:

"There was some talk that the World Bank could be preparing to make some new funds available to Iran. That may or may not occur. I tend to think it won't do this year. The [Iranians] seem to have a couple of bids in, but really the World Bank is always quite keen to avoid political controversy where it can, and I can't imagine them pushing the U.S. on it at the moment."

In theory, Iran also can get loans from the IMF, where its special drawing rights quota is almost $2 billion, but this amount remains untouched. Some observers say Iran is unwilling to accept IMF-required adjustments in its heavily state-controlled economy to obtain the money, while others say the money is blocked by Washington's resistance to loans to Tehran.

That means that Tehran's main sources for the foreseeable future are likely to be European Union states and Japan. All are interested in investing in Iran's energy sector, and their willingness to work with Iran on its credit needs is likely to give them an advantage as they seek to do business there.

(The third part of this three-part series looks at the political battle within Iran over how open its economy should be.)