Iran’s economy has forecast to grow at an annual average rate of 4.5% in 2016–18. Central Bank of Iran has a crucial role when comes to the future of banking in the country
Mehrdad Sepahvand, Economic Advisor to the Central Bank of the Islamic Republic of Iran explains how investment opportunities in Iran can help investors prosper off a welcoming economic environment.
1. How do you see Iran developing economically over the next five years?
I think over the next five years Iran’s economy will be growing at a minimum rate of 4% average and the maximum inflation rate might be something around 15%. I believe it is not going to get any worse than this in the future. Historically, Iran’s economy has been fluctuating around 4% growth for a long time and it was due to the combination of sanctions and oil prices dropping that drove the economy downwards with even lower than minus 6% growth rate at some point. Now we are at the beginning of a new era with a rising oil price. Most of the forecasts point to a price range of $50 to $75 per barrel for oil over the next five years. On the sanctions front, I believe that Trump, as he mentioned himself on many occasions, is not going to rip up the deal. Even a re-negotiation would come with a huge cost for the United States. That would waste all the Obama administration’s efforts to build this united front against Iran, and puts more pressure on Europeans and other allies. They may split and go their own way and well, that would not be a disaster for Iran. In fact, Iran wouldn’t lose that much in this potential confrontation. And if re-negotiation does happen, I am pretty sure in that case Europe would not follow the United States anymore and thus Iran’s economy would not be under pressure as it was before.
"...over the next five years Iran’s economy will be growing at a minimum rate of 4% average..."
2. What is the central bank doing to help stimulate the economy?
The central bank, over the last two years, has been using both the money aggregate and exchange rates as two anchors to stabilize the economy. I think the central bank has made excessive use of these tools so far. So in the future, the central bank needs to change its policy and focus more on stimulating the economy through some expansionary monetary policy. Right now, the country is struggling with credit crunch problem. The central bank is aware of this and it has already started some initiatives to help companies and households to have access to credit, but it has not been enough to make tangible changes in the economy. When it comes to the exchange rate, we have different policies and different regimes. The de-facto policy, which Iran is following right now, is a nominal constant exchange rate mainly targeting price stabilisation. With this low exchange rate, the low volatility of exchange rate does not imply low risk as in fact the pressure from inflation differentials escalating and at some point a single event may trigger a big rise in the exchange rate. I think both these policies are going to change in the future. Finally, the central bank from the beginning of this government announced its intention to go for exchange rate unification. So far it hasn’t been able to do that because of the sanctions and the problem that banking system has in building corresponding relationships with the foreign banks and free access to foreign currencies. In the future, I think as soon as the central bank can do it, it will definitely go for exchange rate unification and that would help to stimulate the economy because it reduces the cost of investment for foreign investors.
"Whatever happens, it normally ends in transactions and that implies a transfer from one account to another account. So it requires a corresponding relationship between banks and so the support from banking system is crucial to foreign investment.”
3. What kind of companies and/or investors does Iran need at the moment?
Iran needs both money and technology as it has been cut off from the world for quite a long time. Lots of investment projects have been postponed in the past. More needs to be done to attract investors. There is a big spectrum of investment projects starting from very large scale projects like oil and gas, petrochemicals and infrastructure to the very small scale projects, which are mainly in high-tech projects and start-ups. I think the flexibility of small-scale projects makes them capable of being the first on the list of selected projects. These projects typically enjoy a short return period which is very advantageous in the current situation. Also, these types of projects are more capable of coping with the underdeveloped capital market and lack of investment-friendly infrastructure. At the same time, we will see some big companies and investors come in and talk to officials over large projects in oil & gas, petrochemicals, auto industry or infrastructure and transportation. Although, these talks are limited to big players, it will pave the way for other investors in future. However, there are still lots of deals and opportunities that fall beyond this general trend.
4. How does Brexit and Trump’s Presidency effect Iran’s development?
I see both of these events as two manifestations of the same general trend that started right after the recent financial crisis. Indeed, we are heading to a period of disintegration. Regarding Brexit, if the UK is separated from the European Union, it could unilaterally lift some of the sanctions against Iran. Potentially, there are some benefits there for a single country like Iran out of this disintegration. As a part of this trend in the future, you may see more and more countries with populist and nationalist parties coming to power. Some countries like Iran may take advantage of this trend, but it’s not good for the world economy as a whole. Despite all what has been said about Trump on Iran, he is not going to rip up the deal as he said himself before the election. However, Iran definitely will have some difficult days with this new president in office because now the country will be perceived as a higher risk. That is quite understandable. Events may proceed in two ways: The United States may either act unilaterally and give Iran an excuse to walk away from the deal or, it may ask for a larger stake of the Iran’s market and investment opportunities. In fact, with Republican dominance in the senate and house, both strategies are less costly and therefore more likely than before. This may hinder the Iran’s chance to take advantage of the deal, but that does not mean the situation is going to get any worse as investors have been very hesitant before the election.
5. When will we start to see the effects of FDI into Iran given now that sanctions are easing?
Foreign direct investment needs a lot of logistics. The banking system needs to support these investments and money transfer. Whatever happens, it normally ends in transactions and that implies a transfer from one account to another account. So it requires a corresponding relationship between banks and so the support of banking system is crucial to foreign investment. There are two problems and impediments on the bank side. Obviously, first, it is the sanction and the fear of US reaction and retaliation. This mainly applies to the large banks. Second, the Iranian banks have been cut off from the world for some time and the regulation should be updated and the process of reintegration takes some time. That does not mean we will not have foreign investment till then. There are some types if the investment that still could work in such situation. For instance, we have private equity investment and large scale projects. But for the rest, it takes some time to see the rise of FDI into Iran.
Day 1, Tuesday 21st February 2017, 10.00
Presentation: Navigating Iran’s Banking System
- How can international companies make and receive payments in Iran without difficulty
- Trade Finance: how to ensure your transactions will run smoothly - How to make risk management an area of excellence in your company
