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Iran: Market Profile

Picture: Iran factsheet
Picture: Iran factsheet

1. Overview

The Iranian economy bounced back sharply in 2016 at an estimated 6.4 % growth. The latest data available for the first half of the Iranian calendar year 2016 (ending in March 2017), suggests that the Iranian economy grew at an accelerated pace of 9.2% (year-on-year) in the second quarter. In the medium to long term, growth prospects will rely on the pace of Iran’s reintegration with the global economy in banking, trade and investment and the implementation of key structural reforms. The economy is expected to maintain a steady growth of slightly over 4%, increasingly based on non-oil sectors, and fuelled by a recovery in consumption and investment demand, overtaking the contribution of net exports.

Sources: World Bank, BMI Research

2. Major Economic/Political Events and Upcoming Elections

July 2015
After years of negotiations, world powers reached a deal with Iran on limiting Iranian nuclear activity in return for lifting of international economic sanctions.

January 2016
International economic sanctions were lifted after the UN nuclear watchdog, the IAEA, confirmed that Tehran had complied with its promises to scale back its nuclear activities.

December 2016
The US Senate approved a ten-year extension of the Iran Sanctions Act, which penalised American companies for doing business with Tehran.

May 2017
Hassan Rouhani won re-election as president.

May 2018
President Trump announced the US withdrawal from the 2015 international deal on Iran's nuclear programme.

Source: BBC country profile – Timeline

3. Major Economic Indicators

Graph: Iran real GDP and inflation
Graph: Iran real GDP and inflation
Graph: Iran GDP by sector (2016)
Graph: Iran GDP by sector (2016)
Graph: Iran unemployment rate
Graph: Iran unemployment rate
Graph: Iran current account balance
Graph: Iran current account balance

e = estimate, f = forecast
Sources: IMF, World Bank

4. External Trade

4.1 Merchandise Trade

Graph: Iran merchandise trade
Graph: Iran merchandise trade
Graph: Iran major export commodities (2016)
Graph: Iran major export commodities (2016)
Graph: Iran major export markets (2016)
Graph: Iran major export markets (2016)
Graph: Iran major import commodities (2016)
Graph: Iran major import commodities (2016)
Graph: Iran major import markets (2016)
Graph: Iran major import markets (2016)

Sources: WTO, Trade Map, BMI Research

4.2 Trade in Services

Graph: Iran trade in services
Graph: Iran trade in services

Source: WTO

5. Trade Policies

  • International trade in Iran has been shaped by the sanctions regime from which the country began to emerge from in January 2016. The imposition of sanctions, led by the EU and the US, severely depressed trade volumes for Iran's key commodity export, oil, and prevented investment in the hydrocarbons industry, hindering economic growth. Sanctions have also halted the use of dollars for international trade, and driven the focus of trade flows towards Asian countries. These dynamics are beginning to change as the majority of sanctions on the country have been lifted as of January 2016, but investors, banks and insurers remain cautious of dealing with the Iranian market, particularly as US primary sanctions are still in place, hindering the expansion of trade flows with Western states.

  • Trade volumes in Iran are dominated by high-value hydrocarbons exports, which are the main drivers of economic growth and the major sources of government income. Import demand in Iran is also largely driven by the oil and gas sector, which is reflected in Iran's largest import segment in 2016, machinery and complex manufactured products, accounting for 39.5% of total product imports. Iran's vast natural resource wealth, nonetheless, suggests that potential trade volumes could be far higher than the current level.

  • International sanctions have presented the most major barriers to trade growth in Iran. Although Iran has been under sanctions of varying severity imposed by the US since the Islamic Revolution in 1979, these were significantly widened and joined in on by the EU and the UN in 2011 as a response to the country's continuing nuclear programme. Sanctions have had a severe and widespread impact on Iran's economy, specifically targeting the development of nuclear facilities and the procurement of arms, while also including a ban on the involvement of Western companies in the oil and gas industry, the prohibition of oil exports to Western states, and the exclusion of the banking sector from the international finance industry. Even though most sanctions were lifted in 2016, US primary sanctions continue to obstruct international trade by preventing the use of US dollars for transactions with Iran.

  • Trade flows are hindered by considerable average import tariff rates, standing at 15.2%, which is the highest figure regionally (out of 18 countries) and eighth highest globally. This is partly due to the fact that Iran has yet to become a full member of the WTO, as its membership has been held up US vetoes and slow progress on accession once its application was accepted in 2005. The Iranian government has traditionally applied high tariffs on imports to protect and encourage growth in domestic industries, but this significantly increases the costs of imported inputs for businesses and reduces Iran's competitiveness.

  • Trade bureaucracy and customs delays are a major hindrance to business activity in Iran. Convoluted procedures significantly increase the times and costs required for international trade, and particularly complicate the import process. The potential for rent-seeking behaviour within the customs procedure adds further difficulties to businesses.

  • Iran remains under US primary sanctions which prevent the use of dollar-denominated transactions for international trade. The inability to use US dollars for trade transactions significantly increases the difficulty of selling into and operating in the Iranian market, as payments have to be made in EUR or CNY instead.

Sources: WTO – Trade Policy Review, BMI Research

6. Trade Agreement

6.1 Trade Updates

US President Trump signed a Presidential Memorandum officially withdrawing the United States from the Joint Comprehensive Plan of Action (JCPOA), informally known as the Iran nuclear deal that was entered into in 2015 by Iran, the United States, China, France, Germany, Russia and the United Kingdom.

6.2 Multinational Trade Agreements

Active

  • Pakistan and Iran: Trade with Pakistan is not significant and the preferential trade agreement, therefore, offers few advantages for potential investors, but it, nonetheless, assists with facilitating regional trade flows.

  • Syria and Iran: Syria is not a viable trade partner while its civil conflict continues, and, therefore, the FTA is unlikely to offer attractive trading opportunities for many years, even if the war ends.

  • Economic Cooperation Organization (ECO): The partial scope agreement came into force in February 1992. The list of signatories includes Iran, Pakistan and Turkey.

  • Global System of Trade Preferences among Developing Countries (GSTP): The partial scope agreement came into force in April 1989.

Under Negotiation

  • Gulf Cooperation Council (GCC): Iran is reliant on GCC states for imports, which flow through the UAE's better connected ports, and trade will pick up once sanctions are lifted. Iran is currently negotiating an FTA with the GCC.

  • Indonesia and Iran: Indonesia is a large economy which could provide a significant market for Iranian oil exports.

  • Turkey and Iran: Turkey is conveniently located next to Iran, a top-five trade partner for Iran for both exports and imports, and offers a huge market for Iranian hydrocarbons. A successful trade agreement between the two countries would, consequently, open up considerable opportunities for businesses to take advantage of.

Sources: WTO Regional Trade Agreements database, BMI Research

7. Investment Policy

7.1 Foreign Direct Investment

Graph: Iran FDI stock
Graph: Iran FDI stock
Graph: Iran FDI flow
Graph: Iran FDI flow

Source: UNCTAD

7.2 Foreign Direct Investment Policy

  1. Iran offers one of the most difficult markets in the world for foreign investors to navigate. To a large extent, this is due to the international sanctions placed on the country, which precluded investment by Western businesses in many sectors, including the valuable oil and gas industry, and continue to severely limit access to financing for firms based in Iran.

  2. That said, FDI inflows have continued during the sanctions regime, particularly from China, while South Korean and Indian firms have also been among the first to secure investment in infrastructure development following the lifting of sanctions.

  3. Sanctions primarily focused on Iran's economically vital oil and gas industry and its financial sector, specifically preventing Western companies from involvement in the financing of oil exploration, production and refining. Iran's banking industry was excluded from global financial markets through the banning of trade in precious metals from Europe and expelling Iranian banks from SWIFT. By targeting these sectors, in particular, the sanctions imposed a blanket ban on investment in Iran by Western firms. Though most sanctions have now been lifted, US primary sanctions remain in place, causing difficulties for businesses with US interests and preventing the use of US dollars for transactions.

  4. Ownership of natural resources is confined to the Iranian state. In the oil industry, private investment is restricted to buyback contracts (which allow private firms to provide the capital and expertise required for extraction), and require production sites to be returned to the ownership of the National Iranian Oil Company after the initial set-up.

  5. Foreign companies are required to strike joint-venture agreements with state -owned enterprises in order to invest in some industries.

  6. Foreign investment is currently coordinated under the Foreign Investment Promotion and Protection Act (FIPPA), which was introduced in 2002.

  7. Iran has revealed several measures designed to encourage investment. These include abolishing restrictions on the percentages of foreign shareholding within a company, a three-year residence licence for foreign investors, directors and experts, as well as tax incentives and reduced administrative obligations for foreign investors.

Sources: WTO – Trade Policy Review, The International Trade Administration (ITA), US Department of Commerce, BMI Research

7.3 Free Trade Zones and Investment Incentives

Free Trade Zone/Incentive ProgrammeMain Incentives Available
Free Trade Zones (FTZs) located at Kish, Qeshm, Chabahar, Aras, Anzali, Maku, Abadan– Visa-free entry for foreign nationals
– Freedom to repatriate profits and obtain foreign currency
– 100% foreign ownership permitted
– Profit tax exemption for 20 years
– Customs duties exemption on capital goods
– Fewer bureaucratic procedures

Sources: US Department of Commerce, BMI Research

8. Taxation – 2018

  • Value Added Tax: 9%
  • Corporate Income Tax: 25%

Source: PwC Taxes at a Glance 2017

8.1 Important Updates to Taxation Information

The government has introduced a simplified flat corporate income tax rate which is applicable to both resident and non-resident entities.

The personal income tax rate applied to non-resident individuals is much higher than for Iranian nationals, while the tax system also favours public sector workers.

8.2 Business Taxes

Type of TaxTax Rate and Base
Corporate Income Tax25% on profits
Social security contributions (all employers)23% on gross salaries
VAT/GST (standard)9% on sale of goods and services
Real Estate Transfer Tax; levied on the acquisition of real estate5% on land value

9. Foreign Worker Requirements

9.1 Localisation Requirements

The saturation of the Iranian labour market means that the employment of foreign nationals is not encouraged, and the percentage of foreign workers employed in a company may be capped at 20%. The process of employing expatriate staff is made slightly easier if investment is through the 2002 Foreign Investment Promotion and Protection Act (FIPPA), which allows work and residence permits to be granted for foreign investors, directors, experts and their immediate family members.

9.2 Foreign Worker Permits

Companies wishing to employ foreign workers in Iran for more skilled positions must apply for work permits and seek permission from the Department General for the Employment of Foreign Nationals. Employment permits will only be granted if certain stipulations are met, namely that there is a lack of expertise for the position among Iranian nationals, the foreign national is qualified for the position, and the expertise of the foreign national will be used to train Iranian workers who will subsequently replace the expatriate. Work permits are issued for a period of one year, and cost USD130 to be issued or renewed (a renewal also lasts for one year).

9.3 Visa/Travel Restrictions

Citizens of the US, the UK, Canada and some South Asian and Middle Eastern countries must obtain visas in advance, and independent travel may be limited. Israeli citizens cannot travel to Iran, and citizens of third world countries who have visited Israel may be refused entry to Iran.

9.4 Religious/Cultural Barriers

Restrictions on women when it comes to clothing and social activities can make life challenging for expatriates. Businesses will likely have to offer higher remuneration packages in order to entice skilled expatriates to work in Iran.

Sources: Government websites, BMI Research

10. Risks

10.1 Sovereign Credit Ratings


Rating (Outlook)Rating Date
Moody's
Not ratedNot rated
Standard & Poor'sNot ratedNot rated
Fitch RatingsNot ratedNot rated

Sources: Moody's, Standard & Poor's, Fitch Ratings

10.2 Competitiveness and Efficiency Indicators


World Ranking
201620172018
Ease of Doing Business Index
117/189120/190124/190
Ease of Paying Taxes Index
123/190100/190150/190
Logistics Performance Index
96/160N/AN/A
Corruption Perception Index
131/176130/180N/A
IMD World CompetitivenessN/AN/AN/A

Sources: World Bank, IMD, Transparency International

10.3 BMI Risk Indices


World ranking
201620172018
Economic Risk Index Rank123/202
Short-Term Economic Risk Score50.454.053.5
Long-Term Economic Risk Score42.547.547.6
Political Risk Index Rank139/202
Short-Term Political Risk Score62.560.860.8
Long-Term Political Risk Score56.354.054.0
Operational Risk Index Rank128/201
Operational Risk Score43.442.642.9

Source: BMI Research

10.4 BMI Risk Summary

ECONOMIC RISK

Iran's economy is likely to grow substantially over the next five years following the removal of sanctions. The effects of elevated inflation and sanctions on the economy were drastic in the years leading up to 2016, but have eased significantly since then. Nevertheless, persistent political tensions with the US and resultant uncertainty surrounding Iran's future ability to integrate into the global economy will keep growth levels far below potential for the foreseeable future.

OPERATIONAL RISK
The survival of the nuclear agreement reached in July 2015 is at risk from opposition by US President Donald Trump, and many barriers will continue to stand in the way of greater foreign direct investment. These include obstacles to trade, regulatory restrictions, onerous taxes, stringent labour laws, the potential for terrorist activity and widespread corruption.

Graph: Iran short term political risk index
Graph: Iran short term political risk index
Graph: Iran long term political risk index
Graph: Iran long term political risk index
Graph: Iran short term economic risk index
Graph: Iran short term economic risk index
Graph: Iran long term economic risk index
Graph: Iran long term economic risk index

100 = Lowest risk, 0 = Highest risk
Source: BMI Research Economic and Political Risk Indices

10.5 BMI Operational Risk Index


Operational RiskLabour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
Iran Score42.948.738.351.233.3
MENA Average47.449.348.148.443.9
MENA Position (out of 18)12812913
MENA Average47.449.348.148.443.9
MENA Position (out of 18)12812913
Global Average49.849.850.049.349.9
Global Position (out of 201)12811014089154

100 = Lowest risk, 0 = Highest risk
Source: BMI Operational Risk Index

Graph: Iran vs global and regional averages
Graph: Iran vs global and regional averages
Country
Operational Risk
Labour Market Risk
Trade and Investment Risk
Logistics Risk Crime and Secruity Risk
UAE73.867.879.672.575.1
Qatar66.363.963.167.870.5
Bahrain64.158.468.571.158.5
Oman63.251.059.866.475.4
Saudi Arabia61.863.061.863.259.2
Jordan58.054.959.159.758.3
Kuwait55.352.351.751.166.2
Morocco53.639.862.055.257.2
Tunisia47.142.352.446.946.7
Egypt45.846.046.453.537.4
Lebanon43.047.950.040.633.6
Iran42.948.738.351.233.3
Algeria39.944.031.739.844.2
West Bank And Gaza33.746.436.830.221.5
Libya28.344.426.029.313.5
Syria28.142.930.026.412.9
Iraq27.343.725.228.811.5
Yemen21.630.623.017.315.6
Regional Averages47.449.348.148.443.9
Emerging Markets Averages46.848.047.545.846.1
Global Markets Averages49.849.850.049.349.9

100 = Lowest risk, 0 = Highest risk
Source: BMI Research Operational Risk Index

11. Hong Kong Connection

11.1 Hong Kong’s Trade with Iran


2017
Growth rate (%)
Number of Iranian residents visiting Hong Kong3,253-0.4
Number of Iranians residing in Hong KongN/AN/A

Sources: Hong Kong Tourism Board, BMI Research


2017Growth rate (%)
Number of MENA residents visiting Hong Kong129,816-0.2
Number of MENA residents in Hong KongN/AN/A

Sources: Hong Kong Tourism Board, BMI Research

11.2 Commercial Presence in Hong Kong


2016
Growth rate (%)
Number of Iranian companies in Hong KongN/AN/A
- Regional headquarters
- Regional offices
- Local offices

11.3 Treaties and Agreements between Hong Kong and Iran

  • Investment Promotion and Protection Agreement (IPPA) under negotiation between Iran and Hong Kong
  • Agreement on Reciprocal Promotion and Protection of Investment between China and Iran (entered into force in July 2005)

Source: Hong Kong Department of Justice

11.4 Chamber of Commerce (or Related Organisations) in Hong Kong

Iranian Chamber of Commerce and Investment in Hong Kong & Macau
Address: Unit 1101, 11/F, Asia Trade Centre, 79 Lei Muk Road, Kwai Chung, New Territories, Hong Kong
Email: chamber@irancham.org.hk
Tel: (852) 2151 8681
Fax: (852) 2151 8682

Source: www.irancham.org.hk

Consulate General of the Islamic Republic of Iran in Hong Kong

Address: Unit 701, 7/F, Sun's Group Centre, 200 Gloucester Road, Causeway Bay, Hong Kong
Email: iranconsulate.hkg@mfa.gov.ir, irancc@iranconsulate.org.hk, info@iranconsulate.org.hk
Hours of Business: Monday to Friday 8:30 a.m. - 4:30 p.m.
Honorary Consul: Mehdi Fakheri
Tel: (852) 2845 8002, 2845 8005
Fax: (852) 2845 8003

Source: Visa on Demand

11.5 Visa Requirements for Hong Kong Residents

Hong Kong residents require a Visa for Iran, which remains valid until 90 days from the date of issuance and the maximum duration of stay is 30 days. The passport must be valid for at least 6 months.

Source: Visa on Demand

Content provided by Picture: Fitch Solutions – BMI Research
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