Nov 24, 2017

Facilitating foreign financing has been among the top items on Iranian President Hassan Rouhani’s agenda since the signing of the nuclear deal in 2015. Under the current circumstances, with domestic lenders grappling with a credit crunch, the best alternative appears to be embracing foreign capital to help boost economic output. In addition, the Islamic Republic’s Sixth Five-Year Development Plan (2017-2021) stipulates that 25% of funding should be provided through foreign investment, including foreign direct investment (FDI), contractual arrangements and financing.

In a 2015 study conducted on the requirements for 8% annual growth, it was concluded that achieving such a target would require $28-$50 billion of foreign capital per annum. This survey sought to determine the amount of investment required to realize the growth rate, excluding the amount of capital that could be accessed by the means of domestic savings in the banks. When the results of the study were announced, Masoud Nili, the special presidential aide for economic affairs, who apparently supervised the study, reiterated, "It should be noted that the figures mentioned in the report as foreign capital point to FDI. They do not include [foreign] financial investments or financing,” reported economic daily Donya-e-Eqtesad on Dec. 12, 2015. Regarding the findings of the study, Nili also remarked that the required capital would be subject to two conditions in the Iranian economy: First, the economy should have the underlying potential to attract foreign resources, and second, a robust, proactive private sector should be emerging.

Nonetheless, the climate for private sector engagement is still gloomy. In addition, among key features qualifying an entity to access foreign financing is the capability to cover part of the project cost by the loan seekers. In conventional finance, about 15% of the total purchase price needs to be initially paid by the beneficiaries. At present, full-fledged funding is not available for projects in Iran. It seems that should a loan applicant not have the financial capacity to grant his share of credit of the relevant project from the beginning, then, most probably, the applicant would not stand a chance to receive credit lines without state guarantee.

Next is the issue of different interest rates tied to credit facilities. The fact is that the overall cost of foreign credit lines is closely interwoven with the country's credit risk rating. The higher a country's credit risk grade is, the less the borrowing costs and vice versa. Of note, Iran’s country risk classification with the Organization for Economic Cooperation and Development (OECD), an intergovernmental economic organization with 35 member countries, experienced improvements and was promoted to the best historical record of grade 4 in 2001 after the 1979 Islamic Revolution. But the ranking steadily dropped to 7 under Mahmoud Ahmadinejad’s presidency (2005-2013). The OECD once again upgraded Iran’s credit rating to 6 in 2016-2017.

Mohammad Reza Jahan Biglari, a member of the Iran Chamber of Commerce, Industries, Mines & Agriculture (ICCIMA), in a round table discussion on Iranian state TV on Sept. 19 argued that in the finance contracts, interest rates range between 3-3.5%. But a large number of other extra costs such as 13-15% insurance expenditures are also added to the total charges. Biglari noted that the overall expenditure amounts to approximately 30-40%, making foreign funding for business unwise and noneconomic. Some economists and pundits believe that using financing would surge the country’s external foreign debt. They are of the opinion that the government is likely to default on these loans, which might lead to further economic and political problems for the country besides a further widening budget deficit in the years to come.