global investment house- kuwait – iran economic & strategic outlook – current account – Trade liberalization in Iran has been put on hold pending the negotiations regarding its admittance to the WTO. At the moment Iran’s tariff is still around 25% which is relatively high.
World oil market developments, new foreign trade regulations, and increase in imports affected the Iranian government’s balance of payments. Factors like deregulating foreign trade, giving exporters more free hand in managing their resources, reducing LC payments, extending facilities in IR and foreign exchange to foreign trade sector, exempting exports from taxes and levies, extending export rewards and subsidies, and creating stability in the foreign exchange market have contributed to the improvement of Iran’s trade balance.
Foreign exchange revenue from total exports rose by 36.9% in 2005/06 to reach US$60,012mn. As a percentage of GDP, Iranian total exports were 32.1% in 2005/06 while imports were 21.9% for the same year. The increase in exports was due to a surge in the oil and gas exports which formed an 81.4% of total exports. Oil and gas exports increased by 34.4% in 2005/06 to reach US$48,823mn from its level of US$36,315mn in 2004/05. Non oil exports increased by 48.5% in 2005/06 to reach US$11,189. Total exports increased at a compounded rate of 28.5% during the period 2002/03 to 2005/06. Imports have also exhibited an increasing trend throughout the four year period of 2002/03 to 2005/06which has increased at a CAGR of 23% to reach US$40,969mn in 2005/06. Thus Iran has enjoyed a trade surplus during the period of 2002/03 to 2005/06 with CAGR of 45.4%. In 2005/06 trade surplus amounted to US$19,043mn, a huge increase of 236.9% over the previous year’s trade surplus.
Capital account in 2005/2006 registered a deficit of US$411mn, after enjoying a surplus in the earlier years of the study, 2002/03-2004/05. This was a direct result of a decrease in both, short term as well as long term capital accounts. The short term capital account decreased in 2005/06 to reach a deficit of US$821mn. The short term account included banks’ foreign assets, net bilateral account and the reserves in the OSF. Long term capital account, on the other hand, decreased by 75.3% in 2005/06 to reach US$410mn surplus from its previous level of US$1,659mn. Long term account constituents include repayment of previous obligations resulting from finance, indebtness to World Bank, and oil pre-financing.
Iran’s foreign reserves comprise principally of its foreign exchange balances, which have grown significantly by 55.5% in 2005/06 to reach US$13,574mn, a CAGR of 42.7% over the period of 2002/06-2005/06. The growth in reserves in recent years reflect improved oil earnings as a result of an increase in the global oil prices. It also reflects a reduced external debt repayment obligations. External sector developments laid the foundations for a rise in the country’s foreign exchange reserves to reach a safe level, which places Iran at the level of countries enjoying high levels of reserves.
Iran’s total external debt increased in recent years to reach US$24,264mn, a CAGR of 24.6% during 2002/03-2005/06 and it increased in 2005/06 by 5.2%. The increase in external debt was a direct result of an increase in short term external debt which increased at a CAGR of 72.6% during the period of 2002/03 to 2005/06, and that of medium and long term external debt which grew by a modest CAGR of 9.1%. The Iranian government has increased foreign borrowing to satisfy its subsidies program. It has also drew on the Oil Stabilization Fund for that purpose as well despite increasing government revenues generated from oil exports. The total external debt forms 12.98% of GDP. However, there still remains the issue of subsidies that needs to be addressed by the government.
Foreign investment in Iran is allowed for the purpose of development and rehabilitation of productive activities in the areas of industry, mining, agriculture and services. The legal framework of Iran’s foreign investment regime had been defined under the Law for the Attraction and Protection of Foreign Investments (LAPFI) in 1955, which was substituted by the new Foreign Investment Promotion and Protection Act (FIPPA) in 2002. The FIPPA recognizes new modes of foreign capital exposure in addition to foreign direct investment, like project financing, buy-back financing arrangements, and build-operate-transfer (BOT) investment schemes. It also called for the creation for the Centre for Foreign Investment Services at the Organization for Investment, Economic and Technical Assistance of Iran (OIATAI). The FIPPA provides protection and security of the interests and rights of foreign investors against non-commercial risks which are insured by the export credit and investment insurance agencies. It also provides for investment in all economic areas in Iran into its two broad categories: Foreign Direct Investment by way of direct equity foreign participation, and Foreign Indirect Investment for projects in which direct participation is not permissible by law.
Capital Intelligence, an independent ratings agency, assigned in 2007 a stable outlook for Iran. Their outlook was primarily based on solid performance of the Iranian economy. Factors like low levels of government debt, substantial liquidity on the back of high oil prices, recent economic growth driven by the introduction of several policies helping the economy in Iran to switch into a market-based as opposed to state-led. Although unemployment and inflation remain relatively high, fiscal sustainability was a key factor in promoting the Iranian economy to a “Stable” outlook
