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Iran Seeking to Boost Domestic Investment Ahead of US Sanctions

© AP Photo / Vahid SalemiA Ghadr-H missile, center, a solid-fuel surface-to-surface Sejjil missile and a portrait of the Supreme Leader Ayatollah Ali Khamenei are displayed at Baharestan Square in Tehran, Iran
A Ghadr-H missile, center, a solid-fuel surface-to-surface Sejjil missile and a portrait of the Supreme Leader Ayatollah Ali Khamenei are displayed at Baharestan Square in Tehran, Iran - Sputnik International
Iran is planning to re-open some governmental projects, offer investors tax breaks, and implement price controls to curb inflation, in an effort to alleviate concerns pertaining to the looming US sanctions.

Kristian Rouz — The Iranian government is weighing fiscal and monetary accommodation aimed at encouraging domestic investment, with a focus on private-sector spending. Such incentives, officials in Tehran believe, could help offset some of the crippling effects to Iran's financial system, employment, and economic activity, after the first package of US sanctions goes into effect on August 4.

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The stimulative measures under consideration include tax breaks for businesses, along with a mild form of price controls by the Iranian central bank. Iranian officials are facing the challenge of a rapid currency de-valuation amidst the exodus of foreign companies in light of the looming sanctions, which is adding upward pressure on consumer prices.

According to Iranian Vice President Eshaq Jahangiri, the government will offer tax breaks to investors who allocate their capital into one or several of the 76,000 governmental projects. These include infrastructure and energy objects, which are currently either unfinished or frozen due to a lack of financing.

"Over the past few months, the country's liquidity has gone into housing, foreign exchange and gold coins, raising prices and provoking public concerns," Jahangiri said.

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The vice president stressed the importance of domestic investment into the Iranian economy, urging an increased self-reliance and a pivot to the internal market amongst Iran's private-sector enterprises.

"A main issue in the meeting was to find solutions to push liquidity towards employment and activating manufacturing," Jahangiri said, referring to a recent cabinet meeting with President Hassan Rouhani, key members of parliament and top judiciary officials.

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The governmental plans to support the ailing Iranian economy come amidst several significant risks. Iran's annual GDP growth rate came in at 2.7 percent in 1Q18 which is way below its most recent peak of 16.8-percent annual growth in 4Q16.

Meanwhile, the last time Iran was under tough international sanctions, its economy was in a recession due to disinvestment and lack of oil revenues — and the renewed US sanctions might bring on another recession.

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But some experts say the main risk to the Iranian economy comes from structural inefficiency and the nation's excessive reliance on oil exports and revenues — whilst supply-side reform at home could help offset these issues.

"Rouhani's government has no real understanding of the extent of what's going to happen and what will happen with these sanctions," Saeed Laylaz, a former economic adviser to the Iranian government, said. "The strategy is firefighting. They're dealing with crises as they happen."

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And so far, the Iranian government's effort to support domestic investment has achieved limited results.

According to a report from the Ministry of Industries, Mining and Trade, coke and oil are still the most attractive investment destinations — with a total volume of investment in these sectors reaching $1.5 billion between March and May.

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Iranian energy is closely followed by the chemical industry, which attracted some $420 million in investment over the same period. Iranian private-sector investors have allocated some $2.38 billion in renewable energy over the past two years — but in the face of international sanctions, it is unclear, whether the pace of investment in this area could sustain its upbeat dynamics.

"The Energy Ministry changed its approach to renewables in 2016 largely due to financial constraints, and private investors came on the scene," Mohammad Sadeqzadeh, director of Iran's Renewable Energy and Energy Efficiency Organization (Satba), said.

Meanwhile, a separate report from the Financial Information Processing of Iran showed returns on investments (ROI) for the nation's 214 wealth funds averaged —0.08 percent between June 22 —July 22.

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But officials in Tehran say tax breaks could improve the average ROI, whilst also incentivizing the reallocation of investment capital into important development projects.

The proposed plans are also aimed at addressing economic concerns of Iranian citizens, who have recently expressed their dissatisfaction with the plunge of the national currency, as well as rising consumer prices and elevated unemployment.

The government hopes to create jobs and boost consumer confidence by resuming some of its projects, but uncertainty is rife over even the near-term economic prospects of the Islamic Republic. 

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