Economy, Business And Markets

Foreign Investment and Future Growth

Foreign Investment and Future GrowthForeign Investment and Future Growth

Iran is facing exceptional circumstances. A bold restructuring of its economy which, if done right, could help Iran stage a historic turnaround and grow rapidly.

Masoud Nili, the president’s top economic advisor, believes this is a necessity not an option.

Why? Well, because Iran is approaching an employment crisis, if it’s not already in one. Nearly half of Iranians are between the ages of 15 and 34, and most are unemployed.

According to Nili, 8.5 million reached working age—about 950,000 per year—during the past 10 years. Of those, over 6.5 million are jobless.

Going forward, the Iranian economy must create 655,000 jobs each year just to keep unemployment at its current level. However, if unemployment is to fall below 10%, Iran needs one million jobs each year.

Eighty-three thousand jobs each month in a $400 billion economy! The United States with its $17 trillion economy added on average 221,000 jobs each month in 2015, in the best year for US job growth since 1999.

However, the jobs target may not be as farfetched as it would seem. During the second term of former president Mohammad Khatami from 2000 to 2004, Iran had its best growth run since the victory of the 1979 Islamic Revolution.

During the period, gross domestic product grew 5.8% per year on average. The economy added 700,000 jobs each year during the period.

Putting feasibility aside, Iran needs to change how it interacts with the global economy, because it needs heavy foreign investment to grow. With the government’s oil revenues dropping 81% in the past four years and the likelihood of oil staying lower for longer, there are no windfall petrodollars in store.

In the past, Iran’s interaction with the world revolved around exporting mostly crude oil and then importing goods with the receipts.

“This is wrong,” says Nili.

Like other countries, Iran should shift toward attracting foreign investment.

Security, educated workforce, abundant oil, gas and mineral reserves and tourist attractions are Iran’s competitive advantages in its bid to attract investors.

But just how much money does the government think Iran needs? It needs $28 to $54 billion annually, given the government’s 6% GDP growth target. “To get there, foreign investment has to grow 13.8% to 18.9% each year,” said Nili. Iran’s current record is 10%.

How much of this is feasible? Well, Nili says Turkey, a country of similar size but without Iran’s vast natural resources attracted $12 billion last year. Saudi Arabia, got $10 billion.

Even Iran’s smaller neighbor, Azerbaijan, with a population of 9 million has attracted $5 to $9 billion each year, according to Nili.

So the government is probably going to undershoot its target, but that does not cover the fact that Iran has a lot of potential for getting investments.

There are, however, three concerns about the route Iran is taking. Opening Iran’s doors may open the way for foreign influence in Iran’s economic and political arenas.

Also, manufacturers who thrived due to sanctions will fade after competition increases.

Thirdly, Iran may borrow too heavily from foreign companies, leading it to a sovereign debt crisis.

Those concerns are largely unfounded, says Nili, but caution must be maintained to avoid turning an opportunity into a liability.