Slump in Oil Prices Feeds Border Tension

5 October 1998
By Adel Darwish

Almost 20 years after the Islamic revolution, Iran's mullahs are facing the music. Like the Soviet Union leaders before them, the are now realising that two decades of totalitarian rule not only be bad for the nation's health but also harm the pockets- hence the comparison, some commentators made, between President Mohammed Khatami and Mikhail Gorbachev in the dying days of the soviet Union.

Iran has been struggling for month to service its foreign debts because of a shortage of hard currency. As the Islamic republic strategists killed off almost all-foreign investment option and let the budding projects rot, they found that the nation is relying on almost a single commodity: Oil 

But like in the case of Saudi Arabia, there was a sharp fall in the world price of oil and is likely to continue in the current economic climate.

The government of President Khatami has opted for making secret agreements with its creditors to delay amortisation and interest payments. '' It had to be secret,'' one source told Middle East News,''it would be just the hard-liners' golden opportunity to force a show down with Khatami.''

Another question was raised, now the Iranians might go to war against Taliban militia in Afghanistan: What effect will this cash shortage have on the defence budget? 

In 1996 and 1997 the economy was boosted by buoyant oil prices - but then the price fell by 40%. The economy declined and so did the government's tax revenue and its foreign exchange reserves. 

By the World economists predict foreign exchange reserves to be just under $ 3 billion (dollars) by the end of the 1998-1999 fiscal year.

The government's efforts to promote non-oil exports have failed.misrabley, while oil amounts to about 85% of Iran's total exports, some 55% of state revenue and 16% of gross domestic product. For every dollar decrease in the price of a barrel of oil, Iran loses about $1 billion.

But there is also some other bad news of increasing cost and further borrowing as Iran's domestic oil consumption grows by 7%-10% a year this is about three times the planned annual increase rate which the government planners have estimated at 3%. If this goes on, Iran will have to stop exporting oil by 2010. The government will have to end its subsidies on the domestic price of petrol and has started to do so.

Experts say that President Khatami has no choice but cut expenditure sharply. 

Meanwhile the persisting troubles in neighbouring Afghanistan mean the defence budget will be exceeded. If and when the troubles fade, experts say the defence budget to be cut. So will Iran's Generals opt for escalating the tension to save their budget? 

Watch this space .

© Copyrights Adel Darwish & Mideastnews 1998

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