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Investment in Iran





Investment in Iran



January 2016



Iranian government used to look at the income from oil export as a major source of its expenditures. This policy made the country experience a high inflation rate in addition to a slow growth for the past four decades. Incorporating the above policy dates back to periods before the 1979 revolution. Nowadays it is doubtless thatDutch disease is the apparent causal result of this approach which has negative impacts on production and export of tradable goods.



During last two years, however, the current government has tried to overcome this problem and it seems successful in this regard. This is in spite of the fact that we have evidences in the past, for instance in the period of president Khatami from 1997 to 2005, that some forces and institutions in the society may fail the government to sustain this policy. This could be the current risk for the investment in Iran, though for the same evidence we can conclude that the learning process in the government will lead the current government to undertake a moderate and sustainable approach by which the economy would not follow the previous path.



During Rouhani’s tenure the general policies of the government has clearly moved to an open economy. Furthermore, by streamlining rules and eliminating unnecessary regulations, the government is trying to ease the businessin Iran. However, operational procedures may be sticky and take a longer time to be activated.



Overall, given the above issues a foreign investor needs to take precautions toward this risk. Keep in mind, however, investment is about taking risk and a large need of country's access to finance could make potential large profits for the potential investor as well. Followings are some potentials in Iran’s untapped market.



First, the labor market in Iran is a very important potential for any foreign investor. Young and educated labor force with a rather low relative wage could be a driving force in profitability of a suitable production process.



Secondly, energy is an important sector with huge potentials. However, this importance is twofold. On one hand, being deprived of investment, the energy sector has a thirst for new investment and technology. On the other hand, relative low price of energy has been one of the main features of production in Iran which could be a potential for more profitability.



Transportation sector is another potential. While there has been a huge capital accumulation in transportation sector in Iran, it has been mostly limited to roads. Therefore while roads have increased accessibility, the lack of investment in other forms of more efficient transportation opens a huge potential in the sector. This issue is very important for special economic zones because their efficiency is very much connected to their low cost of transport.



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Finally I suggest some new policies and procedures to facilitate investment inflows into Iran. Because of the threats and potentials of investment in Iran one need to find a way to limit the magnitude of vulnerability in response to the aforementioned risks. Many suggest the government to use oil income to stabilize the economy. This may be done by a form of oil income fund. However, this approach has not yet proved itself practically. Another suggestion would be making the length of deals with Iran longer. In this manner political risks would be transferred to the investor with a lower interval, if at all. In addition, to restrict the macroeconomic risks it would be interesting to ask the Iranian parties to compensate for the Iran-specific macroeconomic risks, e.g. too high inflation. To be more specific, consider "Public-Private Partnership" as a method among different forms of investment inflows. Using more flexibility and longer length in contracts helps investors to accept lower risk and achieve more sustainability.



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