Investments are declining chiefly due to the unpredictability of Iran’s business environment.
The growth rate of investment or gross fixed capital formation in the Iranian economy has been negative over the past decade and the situation is going from bad to worse by the year, such that by the Iranian year ending March 2020, the level of investment was outdone by depreciation of accumulated capital.
The share of investment in relation to the total gross domestic product, which was 30% in the 1980s, declined to 18% in the year ending March 2020 and 15% in the year ending March 2021, according to a report by Persian monthly Ayandehnegar published by Tehran Chamber of Commerce, Industries, Mines and Agriculture.
A study shows that the share of investment in Iran’s GDP has decreased by 9% from the fiscal 2004-5 to fiscal 2019-20. The highest ratio of investment to GDP was recorded in the year ending March 2009 and the lowest in the year ending March 2018 (less than 20%). As little as 980 trillion rials ($3.45 billion) were invested in Iran in the year ending March 2020, which was the lowest in 15 years.
Investment rates went downhill even faster in the 2010s. According to a report published by the Economic Studies Department of the Tehran Chamber of Commerce, Industries, Mines and Agriculture, the general trend of investment in the country has been declining over the 10 years to March 2021, averaging -4.79% in the fiscal 2020-21.
The report says the year ending March 2021 saw the lowest level of investment, i.e., 1,000 trillion rials ($3.52 billion), indicating a significant decline when constant prices of the year ending March 2012 are used. An increase of 20 trillion rials ($70.42 million) in investment in the fiscal 2020-21 is not enough to compensate for the fall in overall investment.
The depreciation rate exceeded the investment rate in the fiscal 2020-21 for the second year in a row, meaning that if the current trend persists, not only new investments will not be made but also past investments will be lost
Estimates show that if the country registers an annual growth of 5% in investment from the fiscal 2021-22 onward, the real investment will reach the fiscal 2011-12 level in the fiscal 2034-35. If this annual growth hovers around 10%, the return to the early years of the 2010s will be possible in the fiscal 2027-28.
The depreciation rate exceeded the investment rate in the fiscal 2020-21 for the second year in a row, meaning that if the current trend persists, not only new investments will not be made but also past investments will be lost; the longer this trend keeps going, the wider the gap between new investments and depreciation will get.
Different sectors of the economy saw a decline in investment during the 2010s: investment in machinery and construction averaged at -7.3% and -3.6% respectively. The worst performance of these two sectors were recorded in the fiscal 2019-20; the investment rate improved relatively in the fiscal 2020-21, but there is still a clear daylight compared to rates registered in early 2010s.
Investments by the private sector averaged -3.7% in these years; it reached 750 trillion rials ($2.64 billion) in the fiscal 2018-19. A slight improvement in investment has been recorded over the past two years but there is still a significant gap compared with the early 2010s when the average investment was at 1,260 trillion rials ($4.44 billion).
Investment Security Index
The latest report by Majlis Research Center, the research arm of the Iranian Parliament, on Investment Security Index in different Iranian provinces shows that the trend of investment security is on the decline chiefly due to the unpredictability of business environment. ISI was in poor conditions in the fiscal 2019-20 and 2020-21; this unfavorable state has been stabilized despite a slight improvement of the index score from 6.46 to 6.37. The poor downward trend of the index was recorded amid the outbreak of Covid-19 pandemic since March 2020, which gradually pushed down the sales of many manufacturing enterprises.
Studies show the peaks and troughs in the foreign exchange market, seasonal inflation rate, relative instability of raw material prices, secondary effects of sanctions, changes in laws and regulations, promises made by officials and their behavior, crises such as the sudden collapse of the stock market, Covid-19 pandemic and its side effects, as well as the instability of economic variables are manifested in the Investment Security Index.
When capital flows in sectors other than production, or remains static due to instability and lack of security, the share of investment in the GDP declines constantly. Capital stagnation is like refusing to sow seeds over Iran’s metaphorical economic ground.
No capital is being given to manufacturers and creators of new ideas for them to provide employment opportunities. The investment crisis is set to become evident in the coming years in rising unemployment, declining economic growth and productive activities.
Social ills arising from unemployment can be seen in the interconnected chain of crises linked to the reduction of investments. These ills can be attributed to the consequences of lower investment and lack of security for investment in the Iranian economy.
