Gross fixed capital formation in Iran reached its lowest level over the past decade in fiscals 2019-20 and 2020-21.
Statistics provided by the Central Bank of Iran show that GFCF nearly halved from 5,249,984 billion rials ($20.99 billion at current exchange rate) in the beginning of 2010s to 2,618,838 billion rials ($10.47 billion) in fiscals 2019-20 and 2020-21, suggesting that asset and business owners chose to put their money in places and for purposes other than production.
Gross fixed capital formation, also called “investment”, is defined as the acquisition of produced assets (including purchases of secondhand assets), including the production of such assets by producers for their own use, minus disposals. The relevant assets relate to assets that are intended for use in the production of other goods and services for more than a year.
The term “produced assets” means that only those assets that come into existence as a result of a production process are included. It, therefore, does not include, for example, the purchase of land and natural resources. Higher the growth rate of capital formation, higher would be productivity capacity of the economy, whereas its paucity leads to low level of production with higher cost.
In Iran, GFCF is calculated separately for two sectors of “construction” and “machinery”. Statistics show that in the early 2010s, over 5,000 trillion rials ($20 billion) were fixedly invested to generate new added value. Given the business indicator, capital owners would invest in construction or machinery sectors to gain profit via creation of added value though the production of a commodity or provision of a service. Such a process would lead to a decline in unemployment and, of course, inflation. But economic developments of the past decade have prompted investment in places other than production, a report by the Persian-language daily Etemad reads.
GFCF reached 2,400 trillion rials ($9.6 billion) in the year ending March 2020, as the investment rate in machinery and construction sectors decreased by 10% and 4.3% to hit 185 trillion rials ($740 million) and 2,180 trillion rials ($8.72 billion), respectively.
GFCF in Iran is highly dependent on oil revenues. Improvement in oil revenues and the performance of governmental bodies, thanks to the rise in government spending, resulted in high GFCF figures from the Iranian year ending March 2006 to the year ending March 2012.
The imposition of international sanctions during the two consecutive years ending March 2013 and March 2014, however, reversed the growth in GFCF rates.
GFCF saw a 24% and 11.6% decline respectively during those two years. Nuclear negotiations and optimism regarding the future of business in Iran led to a 7.1% increase in GFCF in the year ending March 2015.
However, GFCF has not registered any growth since that year. Foreign currency exchange rate fluctuations and economic instability drove down capital formation by more than 15% in the year ending March 2019.
Iran’s National Business Environment report by Iran Chamber of Commerce, Industries, Mines and Agriculture shows that “unpredictability and fluctuations of the prices of raw materials and products”, “uncertainties about policies, rules, regulations and business formalities” and “difficulties associated with getting credit from banks” are the most undesirable factors affecting Iran’s business friendliness.
Political tensions are also contributing to the decline in fixed capital formation in the country. Improving investment in infrastructures, equipment and machinery, transfer of technology and renovation of industries will be the most serious challenge facing the incoming government.
