How Public Investment Could Help Strengthen Iran’s Growth Potential: Issues and Options
IMF Working Papers, June 8, 2018
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- Authors: Amir Sadeghi
- Published: June 8, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484345139.001
Summary — Key Findings
- Public investment is key to growth in developing oil-exporting countries and oil revenue is an important source of finance for public investment.
- Assessing the growth impact of public investment in Iran under various investment scaling-up (gradual, aggressive, and conservative) and oil price (baseline and adverse) scenarios shows:
- Because of absorptive capacity constraint and investment inefficiency the growth outcome of an aggressive investment scaling-up is not significantly different from a conservative or a gradual scenario.
- The costs of an aggressive scaling-up, in terms of fiscal adjustment, are significantly higher, especially during low oil price periods.
- An improvement in investment efficiency has a significant positive impact on growth outcome and leads to higher private consumption and investment.
- Using an oil fund can help contain the size of fiscal adjustments, although it would result in a larger appreciation of real exchange rate and deterioration in the current account balance.
Scenarios, Assumptions, and Comparative Outcomes
- Investment scaling-up scenarios considered: gradual, aggressive, and conservative.
- Oil price scenarios considered: baseline and adverse.
- Constraints emphasized:
- Absorptive capacity constraint limits growth gains from aggressive scaling-up.
- Investment inefficiency reduces the effectiveness of increased public investment.
- Comparative outcome summary:
- Aggressive scaling-up: not significantly better for growth than gradual or conservative when absorptive capacity and inefficiency are accounted for; entails substantially higher fiscal adjustment costs, notably under low oil price conditions.
- Improved investment efficiency: materially raises growth outcomes and private-sector demand (private consumption and investment).
- Oil fund usage: lowers required fiscal adjustments but has trade-offs — larger real exchange rate appreciation and worse current account balance.
Policy Implications and Options
- Prioritize measures that improve investment efficiency to amplify growth impact of public investment.
- Consider sequencing and sizing of investment scaling-up mindful of absorptive capacity constraints to avoid excessive fiscal adjustment costs.
- Weigh the trade-offs of establishing/using an oil fund:
- Benefit: helps contain size of fiscal adjustments.
- Cost: leads to larger real exchange rate appreciation and deterioration in the current account balance.
- Fiscal planning should explicitly account for oil price risk (baseline vs adverse scenarios) when designing public investment strategies.