Iran Export-Led Growth Strategy Depends on Sanctions Relief
Author: Bijan Khajehpour Posted October 23, 2013
Iranians have traditionally been merchants and more active in importing goods and services than in developing export opportunities. Easy petrodollars used to pay for imports of all kinds, so there was little need to expand non-oil exports for the economy's sake. Over the past few years, however, as a logical response to external sanctions, Iranian traders have tried to develop export ideas to make their overall trade (especially imports) independent of the country’s banking system. This effort was further facilitated by the devaluations of the rial in 2011 and 2012 that made Iranian exports more competitive on regional and international markets.
The growth of non-oil exports and the concurrent decline in imports (as a result of sanctions) paved the way for the government to announce the goal of achieving “balanced non-oil trade” (a balance between imports and all exports with the exception of crude oil, gas condensates and natural gas). For example, in the first six months of the current Iranian fiscal year (which began on March 21), Iran imported $19.2 billion of goods and services while its non-oil exports amounted to $17.9 billion. Although the ultimate goal has not been achieved, it is valid to say that Iran has managed to grow its export potential, especially to regional markets, that is, the Iraqi, Central Asian, African and Asian markets. Based on the latest statistics from the Ministry of Industry, Mining and Trade, Iran’s industrial exports grew by an annual average of 6.7% during the period 2005 to 2012.
There are indications that the new government of President Hassan Rouhani sees export promotion as an instrument for growing the economy, creating needed jobs and helping reverse the economic decline of the past few years. Such measures as lifting export duties, removing the prerequisite of committing to repatriate hard currency revenues and implementing other export-promotion policies have been announced to incentivize traders and companies to engage in the export business. The government has also announced that it will create a High Council for Exports, a standard Iranian approach to addressing issues, and that it will revise the list of restrictions on export activity. Realizing the export potential of Iran will, however, require coordinated policies on a number of fronts, including the following:
- An easing of sanctions: The current restrictions on Iranian business, especially banking sanctions, have made life difficult for the country’s exporters. In many instances, even when a way is found to make bank transactions, companies in export destinations avoid working with Iranian exporters out of an exaggerated fear that they may be subject to sanctions by Western governments. Therefore, the realization of Iran’s export potential will depend on a de-escalation of the nuclear issue and the gradual lifting of sanctions.
- Improved business climate: Iran’s business climate remains a major challenge to companies and traders. According to the World Bank, Iran currently ranks 144th among 185 countries in regard to ease of doing business. Key obstacles remain legal ambiguities, instability in laws and regulations, corruption and bureaucratic hurdles.
- Banking facilities: Although Iran has a specialized bank for exporters, the Export Development Bank of Iran (EDBI), the institution does not have the financial means to support the country’s export potential. In fact, Mohsen Jalalpour, vice president of the Iran Chamber of Commerce, believes that the EDBI and the Export Promotion Fund need to increase their capital to respond to actual demand. General access to bank facilities is a shortcoming of the Iranian economy that needs to be rectified to improve the export outlook.
- Export guarantees: The largest export markets for Iran are untested markets, so exporters require export insurance coverage and other guarantees. Iran currently has export insurance schemes, but there is a serious need to revise these structures and to create more flexibility for potential exporters.
- Need to cluster companies: A large number of potential Iranian exporters are too small and inexperienced to enter regional and international markets. Iran will require a scheme by the government similar to one that South Korea followed to cluster companies and promote collaboration in export activity. A well-organized clustering campaign of Iranian companies would certainly unleash export opportunities, especially in the region.
- Expansion of export-related infrastructure: One of the main shortcomings identified by active exporters is the lack of appropriate infrastructure for storage, transportation and handling of export items. A weak and inefficient customs organization is an additional irritant in regard to industrial exports that require timely processing. In terms of availability of transport and logistics solutions for exporters, Iran ranks 112th among 155 countries.
- Membership in the World Trade Organization (WTO): A serious expansion of Iran’s export potential will depend on the government’s resolve to entertain membership in the WTO. The Mohammad Khatami government had appointed an Iranian team to negotiate with the WTO, but those efforts were not followed up by the Mahmoud Ahmadinejad government. Now that Mohammad Nahavandian, once head of Iran's WTO negotiating team, is a senior figure in the administration, Iran should again approach the WTO. The process of joining will be a long one, but engaging the organization will also compel Iran to undertake needed economic reforms.
Amid the government dealing with the above issues, Iranian exporters will continue to be hit by inflation and the negative impact of the coming phases of subsidy reforms. This means there will be a need for increased efficiency in order to weather the inflationary pressures that could make Iranian products less competitive on international markets. In fact, it is expected that the government will try to maintain the current free market rate of the rial (30,000 to the US dollar) over the next few years. Iranian exports will thus become less competitive taking into account a projected inflation of about 30% next year. The only way to compensate for the expected increase in costs is through increased efficiency or government grants to support successful exporters.
All in all, corporate Iran has the potential for much better export performance, but the government needs to do its part by paving the way for more Iranian exports to reach global markets. In the words of Nahavandian, also president of the Iran Chamber of Commerce, the main expectation from the government is sustainable laws and regulations. Companies also need to expand their capacities and increase efficiencies to be able to sustain their export business. A potential growth sector over the next few years will be the development of gas-based industries (cement, steel, aluminum, and so on), which will depend in part on sanctions relief and foreign investment activity. If everything falls into place, it would not be far-fetched for Iran to export much more non-oil products than oil and gas. Such an economy would be more sustainable, as it would be less vulnerable to oil price fluctuations.
Bijan Khajehpour is a managing partner at Atieh International, the Vienna-based international arm of the Atieh Group of Companies, a group of strategic consulting firms based in Tehran, Iran.
Read More: http://www.al-monitor.com/pulse/originals/2013/10/iran-growth-strategy-depends-sanctions-relief.html