U.S. To Block World Bank Aid To Iran

by Emad Mekay

"The bank is an important foreign policy tool for the United States, and is a vehicle for leveraging our foreign assistance resources throughout the globe," Deputy Assistant Secretary of Treasury William E. Schuerch told members of the U.S. Congress on October 29.

"I want to assure you that the Treasury Department and the U.S. executive director at the World Bank, while not fully successful, have consistently and actively sought to block all proposals for World Bank Group assistance to Iran," Schuerch told the House of Representatives Financial Services Subcommittee.

U.S. officials say they are concerned about abuse of human rights in Iran, the country's programs for weapons of mass destruction (WMD) -- particularly nuclear -- and its positions against Israel's policies in the Middle East.

Treasury department officials have also previously said that Tehran needs to aggressively pursue economic reforms.

Iran denies the U.S. government's allegations that it sponsors terrorism and is developing nuclear weapons.

"The administration will continue to oppose bank lending until meaningful political, economic and human rights reforms have taken place," Schuerch said. "We will also continue efforts to marshal support among other donor countries, with bank management and other shareholders to limit World Bank Group support to Iran."

The meeting was called by lawmakers who say that the World Bank should help put pressure on Iran.

In May, Washington ended secret talks with Tehran after blaming it for harboring members of the al-Qaeda terrorist group thought to be responsible for a series of attacks in Saudi Arabia that killed 35 people.

Since then, the International Atomic Energy Agency has applied pressure to Tehran to permit inspectors to verify that the country's nuclear program is for peaceful uses only.

Representative Brad Sherman, a California Democrat, has threatened to introduce legislation that would cut Washington funding for the bank if it does not stop loans to Iran.

Sherman says the nation is still part of what President George W. Bush in January 2002 called the "axis of evil," along with Iraq and North Korea. And he has loudly criticized the World Bank for publishing reports that said Iran's economic policies have placed strong emphasis on human development, social protection and "social justice."

Bank officials have previously said that if Iran follows their recommendations it could soon be eligible for as much as 500 million dollar in funding a year.

The World Bank now has four projects in the pipeline for Iran that Washington seems set to obstruct.

These include a $50 million project to set up a local development fund, an $80 million initiative for low-income housing, $120 million for water supply and sanitation and a $295 million project to re-establish villagers who moved to cities in rural areas.

The World Bank has 183 member countries. The United States is its largest single shareholder with a voting share of 16.4 percent. But Washington does not own a controlling interest in the institution nor a veto on specific lending decisions.

The Bank was established to assist the reconstruction and development of borrowing countries and to reduce world poverty.

But critics say it, and its sister institution the International Monetary Fund (IMF), have become economic and political tools for the group of seven (G-7) most industrialized countries.

Washington was successful in imposing a seven-year hiatus in the bank's lending activities to Iran from 1993 until May 2000, when European countries shifted direction saying that they favored a policy of engagement with Iran.

As many of the G-7 countries began to eye lucrative contracts where U.S. companies could not compete due to U.S. sanctions, shareholders approved World Bank lending to the Persian Gulf state.

The U.S. sanctions, imposed after students took over the U.S. Embassy in Tehran in 1979, ban virtually all trade and transfer of technology to the Islamic Republic.

Since 2000, the bank has lent Iran $432 million, or less than 150 million dollars a year, mostly as loans for social programs to assist areas devastated by earthquakes, sewage projects and environmental protection.

But Iran experts downplayed the effectiveness of denying the country loans to deal with issues of the alleged WMD without international backing for the U.S. stance or without a sharp decline in oil prices. Iran's economy depends heavily on oil revenues.

"The suspension of World Bank loans to Iran can make an impression on the recalcitrant theocracy only if they are part of a larger, multilateral strategy," said Ray Takeyh, professor of national security studies at the National Defense University.

"The mere denial of such loans to Iran, absent other measures, will have only a marginal impact and is unlikely to fundamentally alter the demarcations of the debate within Iran's corridors of power," he told the subcommittee.

But in his testimony, Patrick L. Clawson, deputy director of The Washington Institute for Near East Policy, a hawkish pro-Israel Washington-based think tank, said that withholding bank funding to Iran could in fact dent Teheran's will to confront the United States.

Quoting a recent study by the International Monetary Fund (IMF), Clawson argued that Iran needs to mobilize at least $4 billion a year in foreign loans and direct investment if it is to achieve a level of growth that stabilizes unemployment, now at 15.7 percent.

Iran needs growth of 5.4 percent yearly to be able to create enough jobs for its young population, says the IMF.

"If Iran did not have access to that kind of foreign capital, it would suffer directly from the four billion dollar a year shortfall and it would suffer further from the loss of the expanded oil exports that those funds would finance," he said.

Clawson, whose institute has helped shape U.S. policy in the Middle East to favour Israel, warned that World Bank lending has a catalytic effect on other lenders and investors, sending the message that those countries that receive bank funding have an adequate business climate and economic policies for investment.

"In other words, World Bank lending could have a significant impact on Iran's ability to raise international capital and therefore on its economic prospects," he warned.

Lack of access to international capital could have serious effects on Iran, if combined with a sharp decline in oil prices, something that is expected if the United States manages to put huge quantities of Iraqi oil on world markets soon.

"If Iran faces tough economic times due to low oil prices and lack of access to international capital, that could strengthen popular protests against the hard-line government; at the same time, that government could well decide to make whatever sacrifices are needed to keep the nuclear program on track," Clawson said.

He advised Washington to not appear political in its lobbying of the bank for fear that other countries could block loans to U.S. allies in retaliation.

Instead, Clawson suggested that Washington lobby the bank's management and executive board about the "inappropriateness of lending to a country with as poor economic policies as those of Iran. Raising explicitly political objections is a different matter."