Economic Update

Published 22 Jul 2010

Iran looks intent on boosting much needed foreign investment after a bumpy start to efforts meant to ease curbs on foreigners doing business there.

The country’s Expediency Council passed on May 25th the foreign investment law aimed at attracting foreign money from overseas after a long dispute between the reform-minded government and the Guardian Council, a powerful legislative body which oversees legislation.

The law affords foreign investors the same rights and services given to local investors and protects foreign investments from possible seizure by the government. Foreign investors will also be allowed to repatriate their capital and interests in hard currency, and they can claim compensation due to losses incurred because of legal complications.

Foreigners have invested $10bn in Iran over the past five years. But the country is keen to increase that figure to meet the demands of a growing population and a sluggish economy. Most investment is made in the energy sector.

Also included in the law, foreign investors can own no more than 25% in any one sector and only 35% in a given branch of a sector.

Iran’s total share of foreign investment is paltry compared to countries of similar size and much smaller markets. The country is expected to garner only 0.4% of global FDI over the next five years, according to a recent report by the Economist Intelligence Unit.

The report said only Nigeria was a less attractive place to invest than Iran, and revised downward a previous estimate of FDI. The London-based group had predicted that Iran would receive 0.7% of foreign investment world-wide, at an average of $650m between 2001-2005.

A possible deal towards greater economic co-operation between the European Union and Iran could help the country’s drive towards much needed investment. European foreign ministers in early June approved a series of measures that may lead to greater economic co-operation.

Ebrahim Ghanipour, an Iranian working for Turkish dye exporter Setas Kimya, says this is the time to invest.

“This is the time to make money. You can get a lot on your investment,” he says. And the government is keen to keep hard currency in the country.

But as the country opens to more investment and restrictions on foreigners are lifted, the government must induce businesses to keep their money in the country.

But the perception of many businessmen of an unfriendly business environment hostile to foreigners offers its own hurdles.

“[Foreign businessmen] have bias, misconceptions of Iran. And that is why they don’t consider it for investment,” Ghanipour says.

However, foreigners willing to take the plunge could be rewarded with favourable government loans – upwards of 80% on an investment according to some estimates. And Iran is expecting help in the way of technology transfer, which will come as more and more foreign companies set up shop there. Greater foreign investment is also expected to mean lower prices for consumers. Iranian importers will benefit from investment because they will be able to avoid restrictions and bureaucratic headaches involved in importing foreign goods, says Ghanipour.

Additionally, Europe could be a major backer of Iran’s bid to join the World Trade Organisation, with the United States currently blocking the country’s accession. Iran has requested membership into the WTO, but its bid has stalled in the General Council, where the United States has said it would not vote for talks to begin because it is currently re-examining its relationship with Tehran.

An informal grouping of developing countries has countered the US approach, protesting that the WTO should be inclusive of all countries.

Iran could have a long way to go before membership, notwithstanding the current impasse in the General Council. Its bid would go to a working party group, which would then formulate a roadmap towards full membership. But after years of strict state protection of the economy, Iran will have to show that it is prepared to provide a favourable trading environment.