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Iran offers foreigners a market
share
By Hooman Peimani
The
Iranian Foreign Investment Company (IFIC) has
established an investment fund in Bahrain to allow
foreign investment in the Tehran Stock Exchange (TSE).
This is a significant change in the Iranian government's
economic policy as for the first time it now authorizes
the entry of foreign investors into the Iranian
financial market. Being part of Iran's efforts to
liberalize its economy, the development has the
potential to attract a large share of Arab investment
that has left the United States since late 2001.
The Iranian news agency IRNA reported that the
value of the IFIC's portfolio in Bahrain is 50 million
euros (about US$58.7 million). Bank Saderat Iran (the
export bank of Iran) is acting as the custodian of the
fund. Being one of the main private sector players in
Iran's financial market prior to the Iranian revolution
of 1979, this is now a giant government-run bank with
many branches inside and outside Iran and with extensive
involvement in various economic transactions in Iran.
Cairo-based EFG-Hermes reportedly manages the fund,
while Norton Rose acts as its legal adviser.
The
IFIC is yet to elaborate on its short, medium and
long-term objectives. However, according to the Middle
East Economic Digest, it plans to attract private,
institutional and corporate investors in the Persian
Gulf, in addition to European institutional investors
who want to diversify their portfolios.
As
reported, the IFIC fund's main focus will be on large
companies listed with the TSE. These are mainly involved
in the construction, consumer, pharmaceutical and
petrochemical fields, which have all experienced
significant growth since 2000. This phenomenon has been
a result of Tehran's large investments over years, as
well as from investment from Iranians residing abroad.
The uncertainty about their investments, mainly in the
United States, and to a much lesser extent in Western
Europe, encouraged many to transfer their investments to
Iran in 2001 and 2002. In particular, that development
stimulated a boom in Iran's construction and also caused
a sharp increase in investments in the TSE in 2002.
Currently, more than 300 Iranian companies are
listed on the TSE. More than 800 additional firms have
reportedly applied to be listed and their applications
are pending. The TSE's market capitalization is about
$15.2 billion, but it will surely increase significantly
as other firms are listed.
The decision to allow
foreign involvement in the Iranian financial market
constitutes one of the components of Tehran's policy
aimed at the liberalization of the economy, which is
currently heavily dominated by the public sector as a
result of the intentional and unintentional policies
taken in the post-1979 era. In one way or another, these
policies have resulted in the weakening of the private
sector in favor of a mushrooming public sector.
The massive destruction of Iranian industries,
agriculture and infrastructure, estimated at about $1
trillion, forced the Iranian government to allow a
degree of economic liberalization following the end of
the Iran-Iraq War (1980-1988). Two factors justified
such a policy: a need for reconstruction of private and
public assets, and a necessity to appease the
dissatisfied population coming out of eight years of war
and economic austerity programs.
The opening of
the Iranian economy resulted in a short-lived economic
boom. It reflected in the rapid expansion of private
industries involved mainly in the production of consumer
goods and in construction. Yet this period also resulted
in the accumulation of debt for the first time,
estimated at about $30 billion in the early 1990s, as
lifting of import restrictions encouraged massive
imports. Added to a concern about the political
implications of rapid economic liberalization on the
Iranian regime's stability, fear of a skyrocketing debt
inclined the Iranian authorities to reimpose import
restrictions, while slowing down economic
liberalization.
However, the inability of the
state-dominated economy to meet the growing needs of
Iranian society in various areas, including employment,
technological advancement and investment, forced its
regime to opt for a more meaningful, but still short of
required, economic liberalization in the second half of
the 1990s. Apart from the privatization of many small
and medium-sized enterprises, the Iranian government has
tried to help expand the private sector through creating
incentives such as tax breaks and by removing many laws
and regulations that discourage private initiatives.
Tehran has speeded up this economic policy since
2000, as reflected in allowing private banking and in
the removal of multiple exchange rates, for example.
While aiming at the expansion of the indigenous private
sector as a necessity for addressing many economic
problems, such as low investments and the double-digit
unemployment rate, the Iranian government has also
sought to encourage foreign investment. Concerned about
a rapid expansion of the foreign economic presence with
a weakening effect on the country's independence, Tehran
has put limits on foreign involvement in its economy to
confine it mainly to energy-related projects through
buy-back arrangements. Yet there has been an apparent
attempt since January to encourage direct and indirect
foreign investment in Iran. An approved law on foreign
investment has removed many economic barriers to direct
investment by foreign investors. The mentioned decision
to allow foreign engagement in the TSE is aimed at
facilitating indirect foreign investment.
The
IFIC's establishment of an investment fund in Bahrain
reflects a major move for economic liberalization. If
this policy continues, Iran will be able to attract
large foreign investment, especially from the Persian
Gulf region, seemingly Tehran's main target. That region
houses a great number of Arab investors who have
transferred large parts of their investments from the
politically unpredictable and unsafe American market to
other countries since late 2001.
In particular,
the Saudis' share of such investments is estimated at
about $1 trillion. Given the friendly and growing
bilateral relations between Iran and the Arab Persian
Gulf states, especially Saudi Arabia, the Iranians have
a good chance of attracting large investment from the
Persian Gulf region if they continue their economic
liberalization, and also their friendly ties with their
southern neighbors.
Dr Hooman Peimani
works as an independent consultant with international
organizations in Geneva and does research in
international relations.
(Copyright 2003
Asia Times Online Co, Ltd. All rights reserved. Please
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