FDI More Beneficial Than Foreign Finance for Iran

EghtesadOnline: Iranian economist Farrokh Qobadi said foreign direct investment tends to have more advantages over finance deals.

News ID: ۷۷۹۵۸۷

07 October 2017

Iran has attracted more and more foreign investment and signed billions of dollars worth of finance deal after the nuclear deal it signed with world powers in 2015, especially following the deal’s implementation in 2016.

According to First Vice President Es’haq Jahangiri, $14 billion of foreign direct investment have been attracted by Iran after the nuclear deal.

Governor of the Central Bank of Iran Valiollah Seif recently said given the myriad of investment opportunities in various economic sectors, Iran has the potential to attract more than $3.5 trillion worth of investments over the next two decades, Financial Tribune reported.

Iran signed its biggest credit line deal in recent years with South Korea’s Eximbank in August. The deal envisages as much as €8 billion in loans provided by South Korean companies to finance various projects in Iran.

Another agreement was signed between China’s CITIC Trust and five Iranian banks in Beijing earlier this month for the company to extend a credit line worth $10 billion for supporting projects in Iran.

And more recently, in what were the first finance deals clinched with cautious European banks after Jan. 2016, Iran signed two agreements worth a total of €1.5 billion ($1.8 billion) with Austria’s Oberbank and Denmark’s Danske Bank on Sept. 21.

In an editorial published on Monday in the Persian daily Donya-e-Eqtesad, Qobadi urged the government to use the credit lines opened as a result of foreign finance deals wisely and avoid the risk of incurring heavy foreign debts. The translation of the editorial follows:

Manifestation of Trust

Over the past weeks, several billion-dollar finance deals were finalized between Iran and foreign banks and it seems more deals are underway, just as Governor of the Central Bank of Iran Valiollah Seif said “countries are queuing up to sign finance deals with Iran” and “massive investments are underway”.

This is happy news for the government of President Hassan Rouhani and a disappointing one for the critics of Iran’s nuclear deal—formally known as the Joint Comprehensive Plan of Action.

The government sees these contracts as the facilitators of domestic investments and a manifestation of foreign financiers’ trust in its performance and the promising future of the Iranian economy.

In addition, the foreign finance deals would help improve relations with foreign banks and eliminate any chance of fault-finding in the nuclear deal on the part of its naysayers.

Need to Handle With Caution

Nevertheless, those in charge of the country’s economy need to handle these “massive investments” with caution. We should not forget the fact that these funding deals are loans that should be paid back, so the money must be invested in economically viable projects.

On the importance of such finance deals, the CBI governor said, “One of the fundamental resources that should be tapped to achieve the objectives of the Sixth Five-Year Development Plan (2017-22), including the 8% economic growth and rise in employment, is foreign resources. The plan has envisioned the use of $65 billion in foreign resources annually.”

However, foreign resources in question are not limited to credit lines.

The country needs to attract $28-50 billion in foreign investment a year to attain an 8% economic growth, a recent study found.

Special Presidential Aide for Economic Affairs Masoud Nili, who has overseen this research, underlined that what was labeled as foreign investment refers to foreign direct investment and not foreign finance.

More Advantages

International institutions define foreign direct investment as establishing a direct business interest in a foreign country, such as buying or establishing a manufacturing business and owning at least 10% of the shares of that business.

FDI is usually accompanied by transfer of advanced technology, modern management and technical know-how. Foreign companies have fewer problems in exports, thanks to their sales network, vast markets and well-known brands.

Over 75% of China’s total exports are by companies that have been established through FDI or joint ventures. Furthermore, indigenization of China’s advanced technologies has paved the way for the country’s long-term growth.

As mentioned before, credit lines are loans that should be repaid. When finances are allocated to non-viable investment projects with outdated technology that lack competitiveness in export markets or when a part of these loans are used to pay the government’s debts or wasted in bureaucracy, then the repayment of these loans would add further problems to the economy.

The government is responsible for the repayment of finances whereas the likely losses of FDI or joint investments do not trouble the government.

Unimpressive Record

Iran does not have an impressive record when it comes to utilizing financial resources.

From 2005-6 to 2013-14, the country gained $703 billion in oil and gas revenues (if you add the income of petrochemical exports, the figure will exceed $780 billion).

A significant fraction of these revenues was spent on projects categorized as “investments with short payback period”. The outcome of such investments was increasing the capacity of factories, the products of which were not suitable for export.

Since the local market cannot consume all these products, the factories are now operating at half their capacity. Most are loss-making and defaulting on their loans.

Now imagine that over the period under review, oil revenues were half of what it was i.e. $403 billion and the rest were gained through credit lines. In other words, we attracted $300 billion in foreign credit and spent it the way we spend our oil income.

Under this scenario, the government had to pay back $300 billion of its foreign debts plus their interests. The consequences of such practices were fiscal austerity measures the country had to face.

Hence, the government should not be satisfied with only receiving finances, rather it must think of investments in industries that employ up-to-date technologies, improve productivity and competitiveness, and manufacture high quality products that can be exported or at least compete with imported goods.

The government needs to define the strategy and priorities of domestic industries, reform infrastructures and set the stage for sound investments. These measures would both lure domestic investors and prepare the ground for FDI.

Despite the efforts of US President Donald Trump and his allies to isolate Iran, the government’s success in attracting foreign finances is an outstanding breakthrough. The government needs to use these finances wisely and avoid the risk of incurring heavy foreign debts.

A better approach would be putting in more efforts to attract FDIs, as the consequences of their failure won’t boomerang on the government.