The report submitted by the department of economics and statistics, Tata Services, on Iran indicates that though the country is under tremendous political pressure, its potential for growth, given its oil and mineral wealth, makes it an attractive investment destination

Iran has immense potential for growth and development. The country is rich in oil, natural gas and other mineral deposits. It has a sizeable middle class with a large demand for goods and services. India and Iran have good diplomatic relations, and Indian companies can reap benefits from investments in Iran.

Political outlook
The election of former Teheran mayor Mahmoud Ahmadinejad as president has enabled the conservatives to reassert their dominance over domestic political affairs.

The main risk to the country's economy stems from international concerns over Iran's nuclear ambitions. If Iran fails to allay suspicions that it is pursuing a nuclear weapons capability, the country may face UN sanctions and, possibly, military action by the US.

Economic outlook
The new president is yet to articulate detailed economic policies, but the broad thrust of his goals is to ensure more equitable economic opportunities and a fairer distribution of Iran's oil revenues. This would reflect in strong government spending, broadening of both the scope and scale of subsidies, steeper increases in public sector wages and higher support for conservative-leaning institutions.

The economy depends on oil and gas for 80 per cent of its export earnings. All large-scale industry is publicly owned and administered by the state. Large para-statal charitable foundations called bonyads, most with strong connections to the clerical regime, control as much as a third of the country's economy and exercise considerable influence. The government heavily subsidises basic foodstuffs and energy costs. Mismanagement and corruption negatively affect economic performance.

The official unemployment rate is approximately 16 per cent, though outside estimates are higher. Inflation is at 17 per cent, with economic growth estimated at 5.8 per cent in 2005. Because it has an oil-based economy (40 to 50 per cent of the budget and 10 to 20 per cent of GDP), the economy is hit hard when world oil prices plunge.

Budget deficits are a chronic problem, partly owing to large-scale state subsidies that total about $4.7 billion per year, including foodstuffs and gasoline. Higher oil export revenues over the past couple of years have helped ameliorate this situation, as Iran gains around $900 million in revenues for every $1 per barrel increase in the price of its oil.

Despite relatively high oil export revenues, Iran continues to face budgetary pressures owing partly to a rapidly growing young population, with limited job prospects and high levels of unemployment; heavy dependence on oil revenues; significant (but declining) external debt; high levels of poverty; expensive state subsidies on basic goods; a large, inefficient public sector and state monopolies; and international isolation and possible sanctions.

Iran is attempting to diversify by investing some of its oil revenues in other areas, including petrochemicals. It also hopes to attract billions of dollars worth of foreign investment by creating a more favourable investment climate (reduced restrictions and duties on imports, and creation of free-trade zones).

In May 2002, the country's Expediency Council approved the 'Law on the Attraction and Protection of Foreign Investment', which streamlines procedures, guarantees profit repatriation, etc. The law — the first foreign investment act passed by Iran's legislature since the 1978-79 revolution — was sent to the government for implementation in January 2003. It was delayed for several years owing to disagreements between reformers and conservatives.

Iran's foreign trade policies are greatly influenced by developments in international oil prices, and the amount of credit extended by its main suppliers.

Crude oil
Iran is OPEC's second largest oil producer and holds 10 per cent of the world's proven oil reserves. It also has the world's second largest natural gas reserves (after Russia). According to the Oil and Gas Journal (January 2004), Iran holds 125.8 billion barrels of proven oil reserves. In July 2004, Iran's oil minister reported that proven oil reserves had increased again, to 132 billion barrels, following new discoveries in the Kushk and Hosseineih fields in Khuzestan province. Though, some analysts believe that Iran's capacity is lower.

Its existing oilfields have a natural decline rate estimated at 200,000 to 250,000 barrels per day annually, and are in need of upgradation and modernisation. With sufficient investment, it is widely believed that Iran could increase its crude oil production capacity significantly.

Natural gas
Iran has an estimated 940 trillion cubic feet in proven natural gas (NG) reserves, surpassed only by those found in Russia.

Around 62 per cent of Iran's NG reserves are located in non-associated fields and have not been developed, meaning that Iran holds huge potential for gas development. Though domestic natural gas demand is growing rapidly, Iran has the potential to be a large NG exporter.

Power
As of 2003, Iran had an installed power generation capacity of about around 31 GW, over three-quarters of which is NG-fired. The remainder is either hydroelectric (7 per cent) or oil-fired.

Significant state investment has meant new power plants (mainly hydroelectric and combined cycle) have come online in recent years in Iran. Power demand is growing rapidly (7 to 8 per cent annually), and Iran is creating new capacity, both thermal and hydroelectric, to add 30 GW over the next 10 years. Iran estimates it may need 90 GW of power by 2020. The country has received offers for investment in the form of loans and build-operate-transfer (BOT) contracts, but progress has been slow. BOT contracts allow the investing company to build and operate the generating facility for a period of 15 to 20 years, after which time the plant is turned over to the energy ministry.

Auto industry
French automaker Peugeot says Iran has one car for every 21 inhabitants. That indicates a tremendous market growth potential and, in part, explains the substantial foreign car manufacturer interest in the Iranian market.

In July 2005, Iran resumed imports of foreign cars following a 10-year break. Import arrangements include a 130-per cent customs duty and a 10,000-car total to year-end.

Besides partnering foreign companies in Iran, the country is also exploring opportunities for partnerships in other developing countries. Indian car manufacturers are also in the mix.

Mining sector
Iran is among the 10 leading countries with the largest mineral deposits — 100 million tonnes of 60 different minerals. It has over 2,700 mines, 90 per cent of which are run by the private sector, only 5 per cent by the state, and the remaining by foundations and municipalities.

It is estimated that Iran has iron ore deposits of 4.7 billion tonnes, 2.6 billion tonnes of 0.8-per cent pure copper and 2 billion tonnes of coal stone. Other mining products include limestone, flourine, etc, which contribute to steel production.

One of the best incentives for foreign investors in Iran's steel industry is the low domestic prices of mineral products used in steel production; much lower than world standard price quotas.

Steel industry
Iran's steel output is around 8 million tonnes per year, 1.2 million tonnes of which are produced by the private sector. This is still well below annual consumption levels of 13 to 14 million tonnes. The industry has seen a surge in imports, over 3 million tonnes for the first six months of the current year, a 119-per cent increase over the same period last year. Many new projects and expansion initiatives are in place in order to fill the gap.

Uploaded on March 29, 2006