Iran attracted an estimated $1.425 billion in foreign direct investment in 2021, according to the United Nations Conference on Trade and Development’s latest World Investment Report.
The FDI volume registered a more than 6% rise compared to $1.342 billion in 2020.
UNCTAD puts the volume of FDI inflows to Iran at $3.372 billion, $5.019 billion, $2.373 billion and $1.508 billion from 2016 to 2019.
The rise in FDI inflows to Iran came as the wider South Asian region saw the volume decline from $70.957 billion in 2020 to $52.417 billion in 2021.
The report noted that the volume of FDI outflow increased from an estimated $78 million in 2020 to $82 million in 2021.
The volume of outflows from 2016 to 2019 has been put at $104 million, $76 million, $75 million and $85 million.
The volume of FDI inward stock, the value of foreign investors' equity and net loans to enterprises active in the reporting economy has been put at $60.136 billion in 2021, up from $28.953 billion in the preceding year and $2.597 billion in 2000.
FDI outward stock rose from $411 million in 2000 to $1.713 billion in 2010 and $4.139 billion in 2021.
Following the signing of the Joint Comprehensive Plan of Action (JCPOA) in the fiscal 2015-16, foreign investment grew in the fiscal 2016-17, but after that, due to the US policies and talk of the country's withdrawal from JCPOA, the volume began to decline and after the withdrawal of the US from the accord in the fiscal 2018-19, it again decreased sharply.
According to the Economic Studies Department of Tehran Chamber of Commerce, most foreign investments in Iran have been in the form of direct investment. Investment in securities and stocks account for a small share of foreign investment.
In the fiscal 2020-21, foreign investment in securities and stocks stood at $165 million, 69% higher compared to the fiscal 2019-20 and accounted for about 12% of total foreign investment in Iran.
Implications of FATF Blacklisting
According to former president, Hassan Rouhani, Iran’s non-compliance with FATF (the Financial Action Task Force, the global anti-money laundering watchdog) regulations has cut off Iranian banks’ ties with international monetary institutions and created unwanted problems in accessing forex income.
“When there is no banking interaction with the world, the result is lack of investment and capital. Mega economic projects cannot be implemented when there is no [foreign] investment,” he was quoted as saying by IRNA in July 2021.
In February 2020, FATF lifted the suspension of counter-measures on Iran and called on its members and all jurisdictions to apply effective counter-measures against Tehran.
FATF has asked Iran to pass four bills to get out of its blacklist. The Rouhani administration approved and enacted amendments to the counter-terrorist financing and anti-money laundering rules.
But the government failed to get approval from the top legislative bodies for the two remaining bills, namely Palermo (convention against transnational organized crime) and terrorist financing conventions, despite the fact that the key bills were passed both by the government and parliament.
Observers say failure to comply with FATF norms has compounded the impact of the US economic blockade.
Rouhani said the FATF blacklist and the categorization of Iran as a “high-risk country” have discouraged foreign investment and undermined banks’ role in investment.
“Normally, banks are involved in big investment projects. Funds are made available either by domestic and foreign lenders, or sovereign wealth funds,” he said.
Known officially as the National Development Fund of Iran, the sovereign fund holds a portion of oil and gas export revenues.
Global Recovery
Global flows of foreign direct investment recovered to pre-pandemic levels last year, reaching $1.6 trillion.
Cross-border deals and international project finance were particularly strong, encouraged by loose financing conditions and infrastructure stimulus. However, the recovery of greenfield investment in industry remains fragile, especially in developing countries, António Guterres secretary-general of the United Nations, wrote in the UNCTAD report’s preface.
This fragile growth of real productive investment is likely to persist in 2022. The fallout of the war in Ukraine with the triple food, fuel and finance crises, along with the ongoing Covid-19 pandemic and climate disruption, are adding stresses, particularly in developing countries.
Global growth estimates for the year are already down by a full percentage point. There is significant risk that the momentum for recovery in international investment will stall prematurely, hampering efforts to boost finance for sustainable development.
The coming years will see the implementation of fundamental reforms in international taxation. These reforms are expected to have major implications for investment policy, especially in countries that make use of fiscal incentives and special economic zones.
Ukraine War, Pandemic, Int’l Tax Reforms
The global environment for international investment changed dramatically with the onset of the war in Ukraine, which occurred while the world was still reeling from the impact of the pandemic.
The war is having effects well beyond its immediate vicinity, causing a cost-of-living crisis affecting billions of people around the world, with rising prices for energy and food reducing real incomes and aggravating debt stress.
Investor uncertainty and risk aversity could put significant downward pressure on global FDI this year, Rebeca Grynspan, secretary-general of UNCTAD, wrote in the report’s Foreward section.
The effects on investment flows to developing countries in 2022 and beyond are difficult to anticipate. Apart from direct effects on countries in Central Asia with close investment ties in the region, the impact on others will be mostly indirect and depend on the extent of their exposure to the triple crisis – in food, fuel and finance – caused by the conflict and their consequent economic and political instability – key determinants of international private investment.
If the past is an indication, the last time food prices were this high – during the 2007–08 food crisis – there were riots in more than 60 countries.
The outcome will be of enormous significance for development prospects. The need for investment in productive capacity for achieving the Sustainable Development Goals (SDGs) and assisting climate change mitigation and adaptation, is enormous. Current investment trends in these areas are not unanimously positive.
Although global FDI flows rebounded strongly in 2021, industrial investment remains weak and well below pre-pandemic levels, especially in the poorest countries; SDG investment – project finance in infrastructure, food security, water and sanitation, and health – is growing but not enough to reach the goals by 2030; and investment in climate change mitigation, especially renewables, is booming but most of it remains in developed countries and adaptation investment continues to lag behind.
Worryingly, some emerging indicators suggest that the war in Ukraine could cause a setback to the energy transition, with increased fossil fuel production in countries previously committed to reducing emissions. In the first quarter of 2022, most of the 5,000 largest multinational enterprises revised downward their earnings forecasts for 2022. Alarmingly, while extractive industries revised upwards their expected earnings, with oil and gas at +22% and coal at +32% of expected earnings, renewable energy companies released downward revisions of an average of -22% of expected earnings, lending credence to the intuition that current conditions risk reversing years of progress toward investing in sustainable energy. This is especially worrying as global CO2 emissions from energy combustion and industrial processes rebounded in 2021 to reach their highest ever annual level.
To achieve the SDGs, it is imperative that more funds are channeled to where they are most needed, on the ground, in developing countries. But an important effort will also have to come from domestic resource mobilization.
From that perspective, the ongoing international tax reforms led by G20 and the OECD are a major step forward. They aim to ensure that multinationals pay their fair share of taxes where they operate and they have the potential to give a significant boost to tax revenues in developing countries.
Resource Mobilization Worsens
The war in Ukraine has also complicated domestic resource mobilization in developing countries, already worsened by the Covid-19 pandemic and the increased frequency of natural disasters in the context of climate change.
In the midst of rising and unsustainable debt levels, without adequate multilateral mechanisms for restructuring, countries are being forced to reduce their fiscal space at a time when they should be increasing it.
The International Labor Organization suggests that the social protection financing gap stands at $1.2 trillion per year in developing countries, part of the $4.3 trillion we at UNCTAD estimate as the yearly gap in SDG financing. And even with food and energy import bills, and worsening costs of borrowing due to higher interest rates, developing countries’ primary fiscal balance has shrunk by $315 billion since the start of the war.
That is why international investment plays a critical complementary role to domestic public investment. And the new tax rules will affect how countries have traditionally promoted – and often competed – for international investment, through low tax rates, fiscal incentives and special economic zones.
The tax reforms are an opportunity for developing countries, not only from a revenue perspective, but also from an investment attraction perspective. Strategically, tax competition will decrease. Practically, the need to review the investment promotion toolkit is a chance to make costly incentives more sustainable.
There will be challenges. Developing countries face constraints in their responses to the reforms, because of a lack of technical capacity to deal with the complexity of the tax changes, and because of investment treaty commitments that could hinder effective fiscal policy action. The international community has the obligation to help. It can do so through technical assistance, by agreeing a solution to problems caused by international investment agreements, and by putting in place safeguards that protect the tax revenues of the poorest countries. These efforts should be part of a broader multilateral endeavor toward reining in illicit financial flows, especially in the developing world. This report points the way.
“It is important that we act now. Even though countries face very alarming immediate problems stemming from the cost-of-living crisis, it is important we are able to invest in the long term. Because the short term and long term start at the same time. And the time is now.”
Gov’t Eases Residency Rules for Foreign Investors
The government is looking to encourage foreign investment, as it recently eased conditions for investors applying for residence permits by reducing the volume of minimum investment.
“Foreign investors henceforth will be eligible for five-year residence permits if they invest €90,000. This is while in the past, foreigners needed to invest at least $250,000 to be able to get a residence permit,” Abolfazl Koudei, the head of the Foreign Investment Department at the Investment and Economic-Technical Assistance Organization of Iran, said recently.
"The proposal was put forward by the economy minister to help attract foreign investment. The rule also applies to executives and foreign technicians employed by overseas firms as well as their spouses and children," IBENA quoted the official as saying.
"Attracting investment mainly from neighboring countries is a key objective.”
Koudei said foreigners who have made long-term investments in the past can also benefit from the new rule, adding that investors can refer to the organization's website at Investiniran.ir to submit their application forms.
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