Investors to enter Iran after changes in foreign and domestic policy

Business Materials 11 February 2011 10:40 (UTC +04:00)
Iran must reconsider its foreign and domestic policy to draw foreign investments necessary for economic development, experts believe.
Investors to enter Iran after changes in foreign and domestic policy

Azerbaijan, Baku, Feb. 8 / Trend T. Konyayeva /

Iran must reconsider its foreign and domestic policy to draw foreign investments necessary for economic development, experts believe.

"Iran should carry out drastic changes in its own politics and international relations to draw foreign investments. Without fulfilling this condition, we cannot expect to draw huge investments. Some structural and legal changes are required, former Chief Adviser to the Central Bank of Iran Bijan Bidabad told Trend over phone.

Last week, Behrouz Alishiri, the head of the Iranian Organization for Investment, Economic And Technical Assistance, reported that during the 10 months of the Iranian year (from March to December 2010), Iran managed to draw $2.7 billion of foreign investments.

However, according to the 20-year development plan of Iran, the Islamic Republic must ensure receipt of $500 billion of investments to achieve the 8 percent economic growth, i.e., $25 billion per year. It is much more than the figure specified by Alishiri.

In 2005, Iran adopted the 20-year development plan for the country until 2025. This document is the first long-term strategic plan for the development of Iran. It consists of the so-called "five-year plans," i.e., medium-term socio-economic programs.

Most of its objectives, particularly in improving macroeconomic indices, were not fulfilled during the first 5 years. In particular, there are difficulties in consistently increasing investments in key industries - gas, oil, petrochemical, metallurgical, and construction. The inflow of investments to maintain the desired dynamics of the industrial development of Iran is insufficient. Many individuals think that the sanctions of western countries are serious obstacles, especially the unilateral restrictive measures of the European Union and Japan, which previously were the main investors for Iran.
Bidabad said that foreign investors will not be interested in investing funds in Iran's economy due to a number of tense moments in international relations.

"Foreign investors must be confident that they will easily return their investments," he said.

A whole re-thinking of the policy is needed if Iran is to reverse the decline in its relative competitive position in the world economy, said Mehrdad Emadi, EU economic advisor, who agreed with Bidabad.

Bidabad, expert on economic issues, said that it is necessary to determine the macroeconomic indices, approve the rules of control over them and prevent the falsification of these indices by official representatives of the country to overcome this situation.

"Moreover, it is very important to work to stabilize the monetary currency policy and tariffs," he said.

Bidabad noted that the amount of investments specified in the 20-year development program - $500 billion - is not sufficient; it is necessary to increase it.
In the last 10 months the government has stopped publishing its regular reports on the economy. This leads us to believe that the government has not achieved any or at least most of the key objectives despite withdrawing substantial sums from the special foreign reserves account, Emadi said.
The expert thinks it is essential that most investments were drawn over the last 5 years to implement the projects. Their technical justification did not correspond with the proper level.
"Even these projects, according to the parliament's budget commission, show a significant gap in output due to incompletion caused by poor management and inadequate financial transparency," Emadi said.
Given these observations, even with a price per barrel of $85 as average, the Iranian economy will not achieve even a 4 percent growth rate, or less than half of the promised growth rate, Emadi said.

Among OPEC member-countries, Iran ranks third on the largest proven oil reserves (after Saudi Arabia and Venezuela) and second on its production (after Saudi Arabia). According to BP, the proven oil reserves in Iran amounted to 137.6 billion barrels as of Jan. 1, 2010. In 2008, oil production in the country exceeded 215 million tons with the domestic consumption of more than 86 million tons.

Nevertheless, Iran cannot effectively increase production due to lack of investments.
The production capacity is decreasing as a result of the imposed sanctions. The country produces 12 percent of the total oil extracted in OPEC member-countries and 5 percent of world production. It exports nearly 60 percent of its products.

Moreover, it is necessary to remember about increasing the number of unemployed in the country, Emadi said.

"Given the population growth rate and the existing unemployment rate, in less than 20 months the economy will experience an addition of 750,000 to 1 million to the unemployment figure, taking the rate to well above 18 percent unemployment with possibly an unemployment rate of above 25 percent for those under 30 years old," he said.
Iin 2008, the unemployment rate in the country increased to 25 percent. They managed to reduce it up to 11.8 percent in 2009. It is substantially less than the government's promise to keep unemployment at a level of 7 percent and create 1 million additional jobs.
To attract investment, Iran needs to restrict the control of security forces on the civilian economy, encourage financial transparency in its banking system, and adhere to the basic rules of foreign trade with regards to smuggling, Emadi said.
"Assuming these conditions are met, construction, petrochemicals, semi-precious metals and transport goods all show promise of profitability and growth given the relative cost of production and the ease of trade given the access to water and land routes for exports," he said.
Perhaps the most ignored area is the processed food and high-value agricultural products, which given the climate diversity of the country and the existing demand from neighboring countries, could become a sustainable source of foreign income, Emadi said.
"Unfortunately, the existing macro- and microeconomic management policies, instead of rewarding growth in this area, actually encourage unregulated import at the cost of forcing domestic producers out of the market," he said.

The main items of export in Iran are crude oil and refined oil products.

According to the Iranian data, agricultural products amounting to $3.13 billion were exported from Iran for 2005-2010. The volume of agricultural exports amounted to $1.4 billion from March to September 2010, while in 2009 the volume of agricultural exports amounted to about $4.2 billion.

T. Jafarov contributed to the article.