Iran Business Climate Lethargic

EghtesadOnline: A study by the Majlis Research Center, the R&D wing of the legislature, shows the security of investment declined slightly during the second quarter (June 21-Sep. 22, 2018) of the previous fiscal (ended March 20) compared to spring.

News ID: ۷۴۷۱۵۷

27 April 2019

The report said investment security index in summer was 6.32 out of 10 (10 being the riskiest), up 0.17 point compared to the same quarter in the previous season when it was 6.15.

To say the least, the subtle decline in business safety rating shows that the key factors contributing to the secure business environment have not improved.

The study, published on MRC's website, is the third of its kind on investment security in Iran. Researchers premised the outcome on the opinion of business owners and data from official organizations. Results are published on the basis of provinces and business sectors, Financial Tribune reported.

A combination of two sets of data indicates that Qom Province (5.94), Markazi Province (5.95), South Khorasan Province (5.99), and Ardabil Province (6.02) had the desirable environment for existing and potential businesses.

Kohgiluyeh and Boyer-Ahmad (6.85), Tehran (6.8), Alborz (6.73), and Chaharmahal-Bakhtiari (6.7) were found to be the most inappropriate regions in terms of investment security in the second quarter of the previous fiscal.

As per the opinion of businesspeople on 21 factors perceived to affect the business climate, the irresponsibility of officialdom regarding pledges they make on the campaign trail, and collusion and corruption in government interaction with business tycoons were rated among factors that contributed the most to downgrading the business environment.

On the flip side, theft, including of cash, goods, and machinery, smuggling plus violation of intellectual property rights were rated as among less influential factors on business and investment environment.

MRC ascribes results mainly to two factors, namely, “unprecedented volatility of foreign exchange rates starting last summer and US withdrawal” from the 2015 Iran nuclear deal last May.

President Donald Trump pulled out from the historic nuclear deal between Iran and six world powers last summer and imposed new economic and banking sanctions on Iran.

The rial lost approximately 70% of its value last summer before recovering slightly in autumn, disrupting foreign trade and pushing up inflation fourfold in September.

Macroeconomic Variables

According to the influential think tank, stability and security of investments is sustainable in its entirety if macroeconomic variables (such as inflation and forex rates) are stable, or at least predictable.

It delineates that for “creating a safer business environment, regulations, decisions and procedures must be consistent, transparent” and easy to implement. And if and when there are changes, everyone concerned must be notified within a reasonable timeframe before implementation.

Also, a safe investment climate demands that lives and property of all citizens are fully protected and  ownership rights accurately defined and guaranteed.

In addition, in a secure business context, the judiciary and supervisory bodies should function in a manner that renders any encroachment on people’s intellectual and physical properties uneconomical and costly.

In terms of security of investment across economic sectors, industry (6.96), livestock, aviculture and fishery (6.87), and mining sector, minus oil and gas (6.85) had the worst rating.

Communication and distribution (including transportation, warehouse management, wholesale and retail) sector (6.66), hospitality (hotels, restaurant and food) industry (6.68), and energy-related industries (oil, water, gas and power distribution) (6.72) were rated as the best sectors.

This is while for businesses from livestock, aviculture and fishery had the worst ratings (6.8) in the previous study.

The research presents eight instances of “violation” of investment security commonly voiced by business leaders as evidence of insecurity in their operating environment:

1- Failure on the part of administrative and executive bodies to meet their financial commitments

2- cumbersome and costly judicial processes when pursuing cases of violations and other breaches

3- irresponsibility of officials regarding pledges they often make on the campaign trail

4- unpredictable laws and regulations such as the constant and swift changes to commercial tariffs

5-Instability of macroeconomic variables such as forex, inflation and lending rates

6- potential for corruption in government interaction with business tycoons

7- legal and illegal meddling of government in businesses

8- Divergence and differing interpretations of laws plus lack of transparency when it comes to upholding the rights of business owners.

Drawing on the above complaints, the MRC published its report based on seven indicators, namely government performance, macroeconomic stability, pledges, honesty, administrative transparency, ownership protection, stability and predictability of rules and executive procedures and immunity of people’s life and property.

The findings show that government performance was the worst-performing factor registering 7.52 points followed by macroeconomic stability and keeping pledges and honesty, respectively with 7.36 and 7.09 points.

“Immunity of life and property of the people” indicator contributed most to investment security index and got a score of 3.97 in the second quarter of the previous fiscal. It was followed by “stability and predictability of regulations and executive procedures” with 5.73 points.