The presidential election for 12th government after revolution took place on 18th May 2017 and Dr. Rouhani got 23.5 million votes, leading by 8 million ballots from his nearest rival Ebrahim Raeisi, who got 15.7 million votes, indicating a 57% to 38% victory. It means that around 73% of eligible people in Iran have participated in this election. This was among one of the elections with highest rate of participation. His major competitor had some promises about increasing subsidiaries and he said that if he became president he will triple the amount of subsidiary. This promise looks populistic and he wanted to get the vote of majority but it seems that political point of view of people in Iran has been improved during the last few years and they didn’t like this promise as they used to do so. People instead voted to the moderate point of view of Dr. Rouhani which means better relationships with international world, stable economic growth and long term policies in order to have a better economic situation.
After many years of difficult situation for Iran, four years ago, when Dr. Rouhani became Iran`s president, the economic situation was not in a good position. GDP growth was -1.9% in 2013 when he became president. Another trouble during his presidency was the price of oil which hadn’t been around those prices since 2004. One of his most important promises was lifting sanctions against Iran and with many days of negotiation and his powerful diplomacy team he did it.
For more than 26 years, inflation rate in Iran was double digit unlike most of the developed and developing countries around the world. President Rouhani were able to decrease inflation to single digit after 26 years. It should be mentioned that after Islamic revolution in 1979, the inflation rate just in 1986 and 1991 was single digit as it shown in the chart below. Based on economic principles it is a difficult situation when a government want to control inflation rate and bring growth to the economy at a same time. President Rouhani and his financial team of advisors focused on decreasing inflation rate as the main target. They have applied contractionary fiscal policy and in order to do so they gathered liquidity in the market by issuing bond and treasury bills.
Foreign Investment during the last 4 years of President Rouhani
There are lots of opportunities for investment in Iran specially in tourism industry, oil and gas fields, fast moving consumer goods(FMCG), renewable energies and etc. However, before removal of sanctions, foreign investors were not confident enough to considering investment in Iran but after lifting of sanctions, there are lots of institutional and natural investors who came to Iran and they tried to do research about available opportunities in Iran. Based on an official report by the government, the value of FDIs was around 12 billion Dollars during 2016.
The main focus of President Rouhani is attracting foreign investment in technology and infrastructure (banks and other financial institutions). In addition, he tries to increase export of oil and non-oil products and especially petrochemical products. Iran holds 18.3% of gas reserves but it has a share of 1% in the global market. This can show the huge potential of investment in this field.
What is the main problem regarding foreign investment?
The main issue in foreign investment is banking issue. Most of the banks around the world try to escape from working with Iran and it seems that it is mostly because of their concern regarding snap back. Also, after presidency of Mr. Trump in United States this concern became more highlighted. But unlike what President Trump was saying in the beginning regarding Iran, he signed the waiver of sanctions on 17th May 2017. It seems that it was not an easy decision to disobey this agreement because it is a strong agreement. On the other hand, Iranian banks have technical issues in order to be connected to international system. There are some differences between Iran`s infrastructure and rest of the world in terms of coding, compliance, risk assessment and etc. but recently, some of Iranian banks have started to improve their infrastructure. On the other hand, another good news about Iranian banks is that 3 of them will open their branches in Munich during the current year and this can be a very good sign for international banks and it can bring confidence for them. In addition, regarding to get closer to international standards, a number of companies have started to report their financial statements based on IFRS. The good point is Iranian standards in financial reporting are around 80% same with IFRS and it means that it doesn’t need too much time in order to do so. Ernst & Young and Deloitte are among well-known international companies which have started to provide their services in Iran and they work closely with Iranian partners.
What is President Rouhani`s plan for next 4 years in terms of foreign investment?
It seems that the most important thing for President Rouhani in order to ease the inflow of investments to Iran is to find a solution for banking issue because at the moment there are few banks that work with Iran in terms of money transfer to and from Iran. On the other hand, President Rouhani and his financial advisor team are trying to keep inflation rate as the main target and via contractionary fiscal policy but the point is they can’t keep the interest rate on deposits very high for a long time because the gap between inflation rate and risk free rate is more than 10% at the moment and this is in conflict with growth of the economy. Little by little they have to decrease this rate and by financing project from outside of Iran they can control the inflation.
It should be mentioned that regarding the priorities of the government for reaching stable economic growth as it is mentioned in the sixth five-year development plan (2016-21), President Rouhani has no other way than focusing on foreign investment. One of the most important factors in attracting foreign investment is stability and as the main goal of the government is to control inflation, it seems that with resolving banking issue we could see more inflow of foreign investment in Iran and it is expected that Rial will depreciate with a smooth trend and therefore it won’t affect the attractiveness of investment for foreigners. In addition, the government plans to unify the different rates for foreign exchanges and this can lead to a clearer path of economy and also more stable conditions.