Monetary and Capital Market Exclusive, March 2004

Monetary and Capital Market in Iran

Finding a Balance between
Finance and FDI

All officials are unanimous that financial procurement through attracting investments is better and more useful.

Mohammad Khazaei, Deputy Minister of Economic Affairs and Finance

With the expansion of international relations in a world that is becoming ever more intertwined and interdependent, the legal frameworks by means of which companies and countries conduct their bilateral and multilateral economic endeavors are also constantly changing. Today some of these frameworks are foreign direct investment, finance, buyback, BOT and so on. A key question for any country is which one of these frameworks work best for me and my national interest. Mohammad Khazaei, Deputy Minister of Economic Affairs and Finance sought to answer this question in regards to Iran in the interview that follows.

Why does everybody stress the attraction of foreign investment instead of finance?

All officials that believe in attraction of foreign investments believe that attracting foreign investments is less costly than finance and it will be easier to take advantage of. If we separate methods used for providing financial resources into loan and non-loan facilities, in the first approach, the country receiving the loan promises to repay that loan. In this state, the bank or the government that has extended the loan would accept no commitments as to how the project should be implemented and only reclaims the loan at the due time. In this alternative, all risks related to the implementation of the project as well as the received loan would be undertaken by recipient of the loan. Usually, such loans are more expensive than other facilities in view of the risk that they entail, Of course, interest rate on received loans or the insurance extended by insurance companies for those loans would depend on the country’s risk, as well as external factors and regional conditions of the loan recipient. Therefore, under similar conditions taking advantage of finance would be more costly than attracting foreign investment. However, in the non-loan alternative many risks are covered by the investor. They provide finance that take the risks of investments and correct implementation of the project. Meanwhile, this method does not increase the burden of government’s commitments to repay loans. We must not forget that the Iranian governments previously used usance, which was much costlier. Based on the new law for attracting foreign investments we have paid attention to the issue of technical know-how as part of the investments brought into the country by the foreign investors. Access to foreign markets, taking advantage of up-to-date technology, improving management and increasing productivity of workforce are other advantages of foreign investments.

What economic and political conditions should be present in a country to enable it to make a decision about using foreign investment in place of loan or the loan-taking method that you referred to?

Any country under any economic conditions can decide which alternative to use; either finance or foreign investment.

Do you mean the economic conditions were not determining and officials decide which one to use? Sometimes, taking advantage of foreign capitals would not be possible even if the officials intended to do so.

The conditions are determining. Under certain circumstances, a country embarks on taking loans for the implementation of its projects. Under these conditions, loans are prepared more rapidly and the government uses it anyway that it deems expedient. In some instances the government may have to do so while foreigners are not willing to invest in the country. Various factors such as the domestic atmosphere, foreign issues, and speed of implementing underway projects influence the choice of method. In reality, however, all officials are unanimous that financial procurement through attracting investments is better and more useful. Now what situations should be there to pave the way for the attraction of foreign capitals? There are many factors. The country’s image at the international level is a very influential factor. Anything that would affect that image in a positive or negative manner will be influential too. Sanctions also play a part. The Americans have limited Iran’s use of financial resources provided by some international bodies to which Iran is a member. Such pressures on a country ready to take in capital would be very effective. Investment must become legal in society. When a society moves to encourage investments, it succeeds. However, when investors are called opportunists, investors and entrepreneurs will not be attracted. Capital is like a bird that would be scared at the least sound. Therefore, domestic developments in a country could affect attraction of investments. Regional crises, wars, political skirmishes and social challenges all affect attraction of foreign investments. I, as the official in charge of attracting foreign investments, announce that newspaper titles, speeches that are made, Majlis discussions, communiqués issued by parties and political groups all influence the attraction or discouragement of foreign capitals. Therefore, a society that intends to attract foreign investments must have good control on all social developments.

In view of what you said about conditions in the international arena and factors affecting the attraction of investments for receiving a loan, I gather that Iran has not entered the stage to attract foreign investments and still wonders which alternative to choose. Am I right?

Partially yes and partially no. I have, so far, explained factors affecting attraction of foreign investments in general and have not talked about Iran. Therefore, part of what you say is correct. Economic factors in a country are very influential. The situation of the banking system, inefficiency of the domestic capital market, problems related to mobilization of domestic deposits, inflation, and reduction of social and bureaucratic capitals in the course of investment as well as production of economic factors all affect investment. In Iran, we have challenges with regard to all economic, political and cultural factors despite progresses that have been made thus far. Iran is currently passing from the stage of procuring its needed financial resources as finance to procurement of financial resources through investment. During the past 3-4 years, especially the past year, this process has been ascending. The reason was amending laws and regulations, the foreign investments attraction act, tax regulations related to amending tariffs and considering a single foreign exchange rate. A glance at the process of using foreign investments during the past years would reveal that using foreign investments is substituting use of loans. Let’s not forget that in Iran we were once used to procure needed financial resources through usance, which was more costly that loans.

Has a consensus been reached among top decision-makers for attracting foreign investments?

Fortunately, attraction of foreign investments is one of rare instances about which all officials and political groups are unanimous. Of course, there are controversies about how to do it at less cost to the country, but not about the original concept. At present, Expediency Council which comprises all thoughts and political groups is discussing optimal use of foreign investments. So there is no discrepancy in this regard.

In your opinion, how much foreign investment should have been attracted by the Iranian economy, which enjoys an annual growth rate of 7.4%?

Studies carried out on the basis of economic, political and social realities of Iran or other countries with similar conditions, show that the potential to attract foreign investments in Iran must be about $5 billion. RCRJ Institute has presented figures noting that average attraction of foreign investment in countries enjoying similar conditions with Iran should be about $5.4 billion. The figure mentioned by European Monetary Institute is 5.7%. Of course, some institutes have quoted less than $5 billion figures. Therefore, Iran must attract $5 billion in foreign investments per year.

So why despite the consensus that you said existed on attracting foreign investments and widespread economic and political changes, our country has failed to even attract one fifth of the above figure?

There are many reasons. Dependence of the country’s economy on oil; economic rents; lack of up-to-date economic laws such as labor and trade laws as well as laws encouraging competition and the law for supporting small and medium producers; obsoleteness of the country’s judicial and legal system in software and hardware terms (we would need special laws for foreign investments); as well as weaknesses in the Foreign Investment Attraction Organization, which is responsible for attracting foreign investments, in terms of personnel and budget.

In fact, a burden has been put on the organization without being designed in proportion to that burden. For example, a comparison between the organization’s budget and that of other organs would prove this. Annual budget of the organization for attracting foreign investments is about 0.8 billion rials; that is, about 80 million tomans (800 billion rials). While average budget of similar organizations elsewhere in the world is 9.2 billion rials, average budget in developed countries for investment agencies is 16.7 billion rials. The figure is 2.5 billion rials for undeveloped nations and 12.6 billion rials in developing countries. Therefore, we can do nothing with the current budget.