The decline in Iran’s GDP and per capita consumption during the 2010s should be chiefly blamed on the waning capital formation, Ali Cheshmi, an economist and university professor, said in an article for the Persian economic daily Donya-e-Eqtesad.
A translation of the text follows:
Production determines the level of societies’ welfare. Gross fixed capital formation, at fixed prices of fiscal 2011-12, declined to 2,610 trillion rials [about $9.5 billion at the current exchange rate] in the fiscal 2020-21 from 5,240 trillion rials [about $19 billion] in the fiscal 2011-12.
Capital formation in machinery and the construction sector decreased by 65% and 35%, respectively. These figures are enough to explain the slide in the current and future welfare of a society.
Undoubtedly, the main reason behind the decline in investment in Iran is poor governance and economic policymaking, which were manifested in multilateral problems such as sanctions and the separation of Iran from the global production chain. The following factors have also contributed to the decline in investment in Iran:
• Reduction of government investment following the decrease and misappropriation of capital budget.
• The country has not only failed to attract foreign capital, but also experienced a large outflow of capital.
• Uncertainties in the economy and severe instabilities have hurt private sector investment.
• The direct and indirect costs imposed on producers as a result of misguided policies, inflation and inefficient administrative system, which prevented the inflow of into the production sector.
The impact of delay in investment will be manifested in the years to come. The consequences of the problem that started in the 2000s affected the country in 2010s. For example, insufficient investment in infrastructures such as highways, airports, railroads, communications infrastructure and water, electricity and gas networks has disrupted other investments. If an investment is not made in time, the society will suffer huge losses in the following years.
Impact of Belated Investment
Had the Imam Khomeini International Airport been recognized globally 20 years ago, its proceeds would have now been invested elsewhere, increasing the wealth of the country. Or, if the automotive industry had achieved improvements in the 2000s, other related industries could have followed suit. The positive effects of implementing such projects on improving technology and human capital, and retaining the country’s specialists could have been significant.
Lack of investment will hurt Iran’s economy for years. While smaller and less powerful countries than Iran have been quick to invest in their infrastructures and industries, and entered the value chain of global production over the past decade.
But the Iranian government is still under the illusion of improving production through ways whose sources of capital are unknown. For example, the government has set the goal of achieving an 8% economic growth in 2022-23; it has envisioned that the industries sector will register an 12.5% and mining sector will post a 10.5% economic growth and 477,000 new jobs will be created to support this growth, but has failed to notice that in the first nine months of 2021-22, the total production growth of these two sectors was zero.
The non-inflationary growth roadmap set by President Ebrahim Raisi’s government says production will increase as the business environment improves. The point is that the improvement of business environment is a long-term variable; it will take several years for the administrative processes to change for the better and only then investors will agree to pour in money. This comes as the country is in need of investment now; a delay of several months can compound the economic situation.
Therefore, the government should seek to immediately lay the groundwork for attracting investment. Economic sectors should introduce all their major investment projects and determine their budgetary sources from the state budget, private sector investment or foreign investment.
This does not seem to be possible without the revival of the Joint Comprehensive Plan of Action and an improvement in international relations as well as local and foreign investors’ confidence.
