Why Investors will Continue to Avoid Iran

An Iranian citizen journalist, who writes under a pseudonym to protect his identity, wrote the following article on the ground inside Iran.

 

Iran must attract foreign investment if it is to become a dynamic force able to play a part in the world economy. For years, international sanctions, coupled with the structural problems of the Iranian market, have prevented any foreign capital from coming into the country. Now that a nuclear deal has been reached and sanctions are being lifted, Iran has high hopes that foreign investment will give the economy the boost it needs.

The Iranian economy has been stagnant for a long time. Despite all efforts, the best that policy-makers and decision-makers have achieved is to remove the minus symbol from the country’s growth index.

In all these years international sanctions was the excuse given for failing economic growth. Sanctions made it difficult — if not impossible — for foreign capital investment in Iran. It was these sanctions that forced Iran’s foreign partners to put their wallets in their pockets and leave Iran, even though the Iranian market provided many opportunities. But now that the international climate for potential partners is experiencing a resurgence, the fundamental problems of Iran’s economy are clear, making investment a risky business. For this reason, foreign investors remain wary about entering the Iranian market.

Smaller components — tax laws, the ubiquitous bureaucracy, political instability, lack of security for capital, the high cost of facilities, inflation, unreliable economic conditions, unstable macro-economic policies and, more recently, stagnation or, in other words, low demand — have fused together to create an obstacle to the business environment that will not be easily shifted.

 

Punishing Tax Laws

Iran’s tax laws punish manufacturing instead of encouraging it. Manufacturers believe that today in Iran, productive sectors are forced to  pay high taxes, whereas unproductive sectors find thousands of loopholes to escape paying taxes. For example, in Iran manufacturers are required to pay value-added tax (VAT), whereas everywhere else in the world this tax is paid by the consumer at the end of the chain.

Furthermore, manufacturers argue that while the government looks to taxes to increase its income, about 80 percent of Iran's economic players are institutions and intermediaries, which are tax-exempt. For example, state-run institutions are active in the economy but they have never paid any taxes. In a draft of the Sixth Development Plan, President Rouhani’s administration presented a list of tax-exempt institutions that will be required to pay taxes when the plan goes into effect. There are also plans to grant tax exemptions to foreign investors and this might ease the tax problem.

 

Unstable Currency Prices

The instability of currency prices in Iran increases the risk for investments too. Currency in Iran has two prices — a lower official price for government-approved entities and another one in the open market for everybody else. This dual pricing and the fluctuations in the prices of currency pose a risk for long-term plans. Foreign investors who study their target markets carefully consider the situation a threat to any investment. The year 2012 provides a good example of the dangers involved: Within only a few days, the price of the U.S. dollar in the open market rose from 1,900 tomans to 3,600 tomans, in part because of this dual system. The only way out is to establish a single price for currency. Officials talk about doing this every year as part of their discussions about the annual budget, but nothing is ever done. 

 

Ease of Doing Business

According to the World Bank, when it comes to “ease of doing business”, Iran ranks 118 in the world. One of the most important factors in this ranking is the process of setting up a new business. In Iran, this process is comprised of eight stages and nominally takes up to 16 days. But those who have tried to set up businesses say in practice it can take more than three months, during which their capital remains idle and unproductive. Terminating or closing a business takes the same amount of time. Four years ago, the Iranian government passed a law to improve the environment for business, but officials under then-president Mahmoud Ahmadinejad did not successfully transfer the laws into executive bylaws. The current administration is moving very slowly to address the issue, even though the law has been praised as progressive and many believe that it can speed up the process of setting up a business.

 

Political Instability

Investors also carefully study the political situation of a country when deciding whether to invest, viewing it as a crucial component of the market. How stable a country’s laws and international policies are will tell an investor about how safe it is to invest. In Iran from 2009 to 2013, this kind of stability was at its lowest possible point and made foreign investment much more difficult.

 

Inflation and High Costs

Inflation and the cost of facilities are crucial factors in deciding the final cost for the production of a commodity. The higher inflation is the higher the cost of the product. Inflation, which had climbed to 40 percent, has been falling for the past two years, but is still too high. Facilities providers say that their profit rate is 21 percent, but manufacturers say that the final cost to them is over 30 percent. These two factors have a detrimental impact on how competitive Iranian products can be on the international markets.

 

Recession and Low Demand

For more than a year now, recession has been casting a dark shadow over production, and it is only getting darker. The drop in demand, which has been caused by the fall in consumers’ purchasing power and the fact that big industries are performing below capacity have made the Iranian market less attractive. The recession is so severe that Iranian automakers produced 50 percent fewer vehicles in October 2015 compared to a year earlier. Iranian steelmakers report that they have more than three million tons of steel in their warehouses.

Now that sanctions are coming to an end, the evidence clearly shows that the Iranian economy needs to revise its fundamentals, and adjust the way it is run. Perhaps a big earthquake in macro-economic policies can and should bring down the big barrier standing in the way of foreign investments.

 

Shahryar Bazargan, Citizen Journalist

 

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