Iranian reformists have always advocated broader economic, political and social freedoms to increase trade and job opportunities. The second and third Iranian economic plans call for downsizing the governmental administrative apparatus for the purpose of ceding power to the private sector.

Hand in hand with the philosophy of economic freedom has come a focus on privatisation and the attraction of foreign investment to offset government liabilities and reinforce the economy. The present reformist government had targeted European countries as well as certain Asian and Middle Eastern countries to invite their involvement in Iranian markets.

The ratification of the so-called "Law on Attraction and Support of Foreign Investments" was passed for the purpose of encouraging investors to partake in Iran's economic projects. However, the way these programs were implemented by the government of President Mohammad Khatami left little difference between the reformists and hardliners. Many observers feel that forums such as the Expediency Council - a quasi-judicial body that adjudicates disputes between clerical authorities and parliament - have set up obstacles to true reform: For example, by creating onerous conditions for foreign investors seeking local partnerships and by restricting the entry of foreigners into necessary fields.

He went on to say that at present, different teams of international financial sectors are visiting Iran to help implement reform programs; but, one by one, they have all become convinced that this show of reform is just that - a show - and will be restricted from proceeding beyond certain limits beyond which the political interests of both reformers and hardliners demand the status quo.

The major drain on the Iranian economy is currently its banking system. It does not follow any discipline and works under political will. At present, nine state-run banks operate in Iran: Bank Tijarat, Refah Bank, Bank Sepah, Bank Sedarat Iran, Bank Milli Iran, the Export Development Bank, the Industrial and Mineral Bank, the Agriculture Bank and the Housing Bank. The first five are involved in consumer and retail banking, while the others deal with specialized sectors.

Each retail bank has a branch in every area of Tehran as well as other important cities in the country. For instance, Bank Tejarat alone has 1,874 branches as well as three overseas branches. This bank has 18,743 employees. The situation in all other banks is more or less the same.

Interestingly, these banks provide about 16 to 17 percent interest to depositors ("interest" in banking terminology; in Iran, it is known as "profit"). On the other hand, the mark-up rates on loans are equally exorbitant, ranging between 20 and 22 percent.

"As a result of this unreasonable banking system, the financial sector is like a hollow tree and can collapse at any time", the financial expert said. "International financial institutions have recommended that the Iranian government take steps to rationalize these negative trends - for instance, the downsizing of human resources, the privatisation of banks - but the Iranian government has avoided these reforms, for obvious reasons".

State-run banks are the patronage centres for all those in power, whether they belong to hard line Basij force or any of the moderate reformist parties. The criteria to provide jobs in these institutions are not professional, but purely political. Employees in these banks are given exorbitant benefits. Every year they are given a salary raise (last year it was 26 percent), beside bonuses and other benefits.

Aside from high administrative expenditures, the recipients of loans are not mainly professional traders or businessmen but "those who served the revolution and in the Iran-Iraq war", the expert said. As a result, many of these loans are defaulted. However, they are not shown on the books as defaulted loans, but as rescheduled ones. Only by financial juggling can banks show themselves as profitable.

The World Bank had warned the Iranian government about these problems and advised it to privatise the financial sector, with the result being that the government allowed three new private banks to operate in Iran. All three were owned and operated by Iranians. However, government refused to implement any reforms in the public sector banks. Now these three new banks are struggling for their survival in the presence of huge interest rates and the presence of state run banks' branches in every corner of the country.

The Iranian government is unlikely to change these policies over the next several years because these banks provide jobs to thousands of workers and in this way guarantee loyalty to the government. If the government were to introduce any radical change in the banking sector - downsizing, for example, or putting a stop to political loans - the government would lose a source of power. It is one of the few things on which both the hard line clerics and reformist politicians agree, and it is the reason that there has been no internal pressure to privatise banks or reform the lending sector.

These observations apart, in the past many foreign banks have requested permission to launch banking operations in Iran, to no avail. However, many foreign, and especially European banks have studied the bureaucratic structure and found areas of leakage that they can exploit to their benefit. At present, there are 45 foreign banks in Iran. But they offer no mainstream banking business; they are all mere representative offices. Thirty-four are European, 10 are Asian and one is Australian. Their operations are restricted to refinancing of lines of credit, discounts and confirmations. ENDS BANKING FIASCO 81202

Editor’s note: Asia Times published the above article on its 7December issue.

Highlights are from IPS