Economy, Domestic Economy

Excessive Regulations Inhibit Manufacturing, Investment

Excessive Regulations Inhibit Manufacturing, InvestmentExcessive Regulations Inhibit Manufacturing, Investment

Deputy Minister of Economic Affairs and Finance, Mohammad Khaza’ee, recently spoke of drafting a special plan aimed at deregulating investment and adding more transparency to the administrative procedures.

Cumbersome regulations have long been a perennial cause of concern for Iranian businesses who believe unnecessary rules hamper productivity and prevent foreign investors from considering an active engagement in Iran’s market.

It is also an element arguably responsible for Iran’s relatively low position in the global ranking of business environment. According to World Bank’s economy ranking for 189 countries based on their ease of doing business, Iran occupied the 130th position in 2014.

However, the latest efforts by the ministry of economic affairs and finance give the impression that Iran is determined to attract foreign investment and open up its economy by simplifying or removing unnecessary rules and regulations.

Khaza’ee said: “Iran is eying external financial resources in the form of foreign loans and finances as well as investments to finance its development projects, in an attempt to reduce its reliance on unsteady oil revenues.”

But what are the excessive regulations in Iran and how do they affect businesses and foreign investment? Persian-daily Forsat Emruz newspaper asked experts to comment on the issue.

 Bad Laws, Worse Implementation

Mohammad-Reza Mortazavi, secretary of House of Industry, Mine and Trade says Iranian manufacturers have to go through a “bureaucratic maze” to set up a manufacturing unit, a process that could “easily take as long as 6 months.”

Citing value-added tax (VAT), which has to be paid by the manufactures, as another example of an “unsound law”, he says: “It is not a common practice world over to collect value-added tax from the manufacturers, rather it is normally charged on the end consumer. In Iran, however, the government first collects VAT from the manufacturers and the manufacturers then again from the consumers. This means the manufacturers have to pay an extra 8% on raw materials before even producing and selling their final products in the market.”

The expert also referred to the challenges faced by small businesses in obtaining bank loans and the high interest rates of 27 percent as another barrier to starting business in Iran.

Mortazavi also pointed to the “lack of proper infrastructure in industrial towns,” and said: “This has pushed many manufacturers to set up their factories outside the industrial districts.”  

 No Incentive for Investment

The ‘Resistance Economy’ doctrine, envisioned by the Leader of Iran’s Islamic Revolution Ayatollah Seyyed Ali Khamenei clearly calls for increasing domestic production and attracting foreign investments to shield the economy against external economic shocks in the long term. But, the prevalence of so many rules and regulations could dissuade foreign investors from making investments in Iran.  

Now, the question is whether or not the government’s deregulatory attempts will be attractive enough for foreign investors.

Regulations that have driven up the cost of doing business are inhibiting economic activities and suppressing investments, which bodes ill for the economic growth moving forward. Damage caused by excessive regulations are many, with the issues discussed above only the tip of the iceberg. Hence, economists believe it is high time for the government policies to be aimed at making businesses and investments simpler in order to enable the economy to prosper and compete in the global market.  

Highlight: Iranian manufacturers have to go through a bureaucratic maze to set up a new manufacturing unit, a process that could easily take as long as 6 months