Economy, Business And Markets

Incentivizing Foreign Investment

Analyst at Securities & Exchange Organization
Incentivizing  Foreign Investment
Incentivizing  Foreign Investment

While a lot of attention after and even before Iran clinched a nuclear deal with the P5+1 group , namely France, China, Russia, the US and the UK and Germany, in Vienna on July 14 has been on attracting foreign investments to Iran’s flourishing markets, many challenges remain to be resolved before investments start pouring in.

Over the past years, many domestic industrial sectors have been hit hard by shortage of liquidity and high inflation. It would be months, if not years, before these sectors could get back on track and be able to attract foreign investors. Iran’s equity market experienced a downbeat performance in the days following the nuclear deal to emphasize that the nuclear deal is, as some say, a matter of trifling importance for the domestic economy.

Although Iran is listed by the International Monetary Fund among the world’s top 30 economies in terms of nominal gross domestic product ($404 billion in 2014),  it ranked 62nd in the World Economic Forum’s 2011 analysis of the global competitiveness of 142 countries. Opening up the capital markets to foreign investors would boost liquidity, provide unparalleled investing opportunities, help better allocate resources and reduce systematic risks.

 Concerns over Transparency, Banking Restrictions  

Lack of transparent rules and regulations is one of the biggest impediments facing foreigners willing to invest in Iran’s capital market.

Isolation from the international banking system and the difficulty of foreigners opening bank accounts in Iran is another major challenge for foreign investors.

Shortage of liquidity has created a high level of risk for investment in certain industries. Iranian companies generally lack clear financial statements prepared in English as well as globally accepted accounting policies.

Economic instability, lack of transparent fiscal and monetary policies and absence of financial entities such as rating agencies leave investors with no suitable instrument to hedge the existing risks arising from fluctuations in currency and stock values.

In recent years, Iran passed several laws to promote and protect foreign investment. The biggest problem with these laws is their focus on encouraging rather than protecting investment.

While the Foreign Investment Law was ratified by the Iranian Parliament nearly five years ago, the law never actually went into effect due to lack of basic infrastructure and standards, fluctuating exchange rate, high inflation and banking sanctions that led to only few foreign investments being absorbed in Iran’s equity markets.

Controlling macroeconomic fluctuations, adopting a unified exchange rate (as against the current two-tiered exchange rate system), employing a taxation policy to encourage foreign investors, simplifying money transaction procedure and  improving the quality of services provided by financial entities are among measures required to remove investment barriers.

In addition, releasing the companies’ financial reports in English in accordance with global standards, forcing the companies to pay dividends in specified periods, resolving the issues in offering share rights and linking the Central Securities Depository of Iran to foreign counterparts could make Iran’s capital market more attractive for foreign investors.