Foreign Investment to Help Remedy Recession, Inflation

EghtesadOnline: Iranian President Hassan Rouhani, who is beginning his second term after an overwhelming electoral victory in May, has promised to fix the economy but one huge obstacle stands in his way: deep recession.

News ID: ۷۴۳۳۷۲

20 August 2017

The moderate president should maintain a delicate balance in his economic policies, as the economy is teetering on a knife’s edge between inflation and recession, reads an article published by Azerbaijani Trend News Agency. According to Financial Tribune, below is the full text:

The country over the past years has plunged into deep recession amid efforts to beat the raging inflation rate.

Ahmad Mojtahed, the former head of Monetary and Banking Institute of Iran, suggests that luring foreign investment and reforming the country’s isolated banking system would contribute to efforts aimed at creating a balance between inflation rate and recession.

Stumbling Blocks to Investment

Mojtahed believes that encouraging investment at both levels, domestic and foreign, could offer an effective solution to the recession and unemployment problems.

“The Iranian administration nowadays suffers from the shortage of domestic resources and capital due to the sharp drop in oil revenues,” he said.

Although the Islamic Republic witnessed a significant boom in oil output following the implementation of the nuclear deal back in January 2016, the dramatic slump in oil’s global prices has left a negative impact on the Middle Eastern nation’s revenues, as Iran heavily relies on oil incomes. Therefore, Iran’s domestic investment capability is limited.

“On the other hand, domestic investors currently show interest in low risk investments with high returns, such as high interest savings and government bonds,” Mojtahed said.

In the meantime, industrial activities such as establishing factories and plants pose higher investment risks, which eventually cause domestic investors to refrain from investing in the industrial sector.

Under the circumstances, many consider prompting foreign investment as an enormously helpful solution. Iran’s Sixth Development Plan (2017-22) has envisaged luring about $50 billion in foreign direct investment, which could play a key role in rebuilding the country’s economy by developing the industrial sector and creating new jobs.

“Foreign direct investment is very unlikely to leave a negative impact on the inflation rate but it is capable of boosting the industrial sector. The flow of foreign investment can help generate jobs and eventually lead the economy out of recession,” Mojtahed said.

However, shortcomings within the Iranian banking system in adopting international standards remain a serious obstacle in the path of luring foreign direct investment.

Banking Reforms

Although the nuclear deal has removed most of the nuclear-related sanctions on Iran, leading European banks still appear reluctant to do business with Tehran, as they are worried about running afoul of the US regulations.

The failure of Iranian banking system to fully adopt the required international standards, including anti-money laundering and combating the financing of terrorism, is another reason behind the reluctant behavior of large banks.

In June 2016, the Financial Action Task Force welcomed Iran’s high-level political commitment to address its strategic AML/CFT deficiencies and the organization decided to continue the suspension of counter-measures.

Nevertheless, the FATF said it will keep monitoring progress in the implementation of the Action Plan and Iran will remain on the FATF Public Statement until the full Action Plan has been completed.

The FATF Public Statement indicates the crying need of the Iranian banking system to fully address its AML/CFT deficiencies to benefit from foreign investment.

“In the meantime, Iran should comply with other international standards such as International Accounting Standards and also needs to improve its credit rating,” Mojtahed said.

Government Budget Deficits

Mojtahed suggested that another solution to the economic recession could be countering the government’s budget deficits through the issuance of securities, including treasury bills and bonds.

Iran’s short-term Islamic bonds, also known as Islamic Treasury Bills, have recently become the most desirable commodity for the country’s traders.

Over the past few years, to reduce its debts, in particular to contractors, the government issued thousands of Islamic bonds.

“Contractors, who have difficulties due to the lack of cash and cash flow, sell off the bonds, offering generous discounts to entice traders,” Mehrdad Seyyed Asgari, a Norway-based Iranian financial analyst, told Trend.

Inflation Is Still High

“Considering the global standards, Iran’s inflation rate is still high, though President Rouhani’s administration has made a breakthrough in tackling the galloping inflation,” Mojtahed said.

Iran’s inflation rate had climbed above 40%, before President Rouhani came to power in mid-2013. Nonetheless, for the first time in the past 26 years, that figure declined into a single digit, bottoming out at 8.6% in June 2016. However, the rate has taken on an uptrend even since and is now above 10%.

“Iran’s non-oil economic growth over the past year hit 4%, which indicates that the economy is improving but it is still slow in the lack of adequate foreign investment,” Mojtahed concluded.

According to the Central Bank of Iran, FDIs worth $11.8 billion were attracted over the past four years. The figure stood at $3.4 billion and $3.9 billion in the first and the second terms of former president, Mahmoud Ahmadinejad, respectively.