iran draft country partnership strategy 2015-2016 of iran.pdfpage 3 of 23 iran, country partnership...

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Iran, Country Partnership Strategy – 2015-16

IRAN

Draft Country Partnership Strategy

2015-2016

http://www.etdb.org/default.asp

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TABLE OF CONTENTS

Page #

I. Basic Economic Indicators 3

II. Economic Overview and Outlook 4

Real Sector 4

External Sector 4

Fiscal Outlook 4

Monetary Policy and Inflation 5

Labour Market 5

Future outlook 6

III. Review of the Bank’s Operations 6

Micro-Small and Medium Sized Enterprises (SMEs) Development Facility 6

Short Term Trade Finance (STTF) Program 7

Corporate and Project Finance 8

IV. Review of Key Sectors & Investment Opportunities 9

Energy 10

Financial Sector 12

Agriculture 13

Manufacturing 15

Mining 16

Municipal Infrastructure 17

Transportation 18

Tourism 19

Infrastructure/Construction 20

Telecom and ICT 20

Retail 22

V. Conclusion 22

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I. Basic Macroeconomic Indicators

Table 1: Basic Macro-economic Indicators

Key Indicators: Iran 2010-2015 2010-11 2011-12 2012-13 2013-14 2014-15

Population (mid-year; mln) 74.7 75.1 76.0 76.9 77.8

Average exchange rate (nat.cur / USD) 10,339 10,964 12,260 21,253 26,509

Inflation rate (CPI av.; %) 12.4 21.5 30.5 34.7 15.6

GDP at current prices (nat cur. tr) 4,304 6,245 7,091 9,343 10,807

GDP at current prices (USD bln) 416 570 578 440 408

GDP / capita (in crt. prices; USD) 5,568 7,589 7,605 5,721 5,244

Real GDP growth (%) 5.8 4.3 -6.8 -1.9 3.0

Unemployment rate (ILO definition; eop; %) 13.5 12.3 12.2 10.4 10.6

General Gov. Budget balance /GDP (%) -1.8 -1.4 -2.0 -2.2 -2.5

Gross government debt / GDP (%) 13.4 9.2 11.7 10.6 11.0

Direct foreign investment (USD bln) 3.7 4.3 4.1 4.4 2.1

Export (fob, USD bln) 109 145 98 93 86

Import (fob, USD bln) 74 78 67 60 65

Trade balance (exp. fob. - imp.fob.; USD bln) 35 67 31 33 21

Current account balance (USD bln) 25.3 59.4 26.3 27.9 15.8

Current account / GDP (%) 6.1 10.4 4.5 6.3 3.9

Forex reserves (eop; USD bln) 79 92 104 107 110

Sources:

(1) Central Bank of Iran

(2) Statistical Center of Iran

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II. Economic Overview and Outlook

Real Sector The economy of Iran has experienced major fluctuations in the post-global economic crisis era. During the global crisis period of 2009, Iran’s economic growth maintained not to contract unlike many other EM economies as the economy was robust while its external position was strengthened on the back of rising international oil prices and pro-cyclical policies. The positive environment continued during the 2010-11 and 2011-12 years when the economy boomed and realized a performance at par with its long-run average.

This promising trend took a hit when the economy contracted two years in a row for the first time since 1994 while the impact of the contraction matched the crisis years of 1987-88. Iran economy has entered in a severe depression from the beginning of 2012 which has lasted till the end of 2013. Economic growth statistics during this period show that the level of overall economic activities has collapsed by 6.8% y/y and 1.9% y/y, respectively. The 37.4% y/y and 8.9% y/y contractions in 2012-13 and 2013-14 respectively in the oil sector which is the engine of the economy was a direct result of international sanctions.

The oil sector crisis has led to a severe reduction in investments which in turn caused the manufacturing and services sectors to contract during this period as well with the exception of agriculture sector. After two years of instability and reduction in the level of economic activities, Iran’s economy rebounded mildly and showed positive performance. In the 2014-15 fiscal year, the economy had achieved a 3.0% y/y growth with an oil sector growth of 4.8% y/y. It should be noted that the most recent economic recovery was broad-based with oil, industry, construction and financial and credit services sectors all making strong contributions in the improvement of overall economic performance of the country.

External Sector As a result of the adverse external environment which stifled the sale of the most important trade item of the country, the total oil and gas exports collapsed around 50% in 2012-15 period to an average USD 60 billion. But the non-oil exports remained strong during the corresponding period and partly compensated the loss in oil revenues with an average surge of 40% y/y. Historically, the overall exports had boomed at the average rate of 28% y/y each in 2010-11 and 2011-12 to reach USD 109 billion and USD 145 billion respectively supported by the surge in oil exports to slightly above USD 100 billion two years in a row for the first time in country’s history.

Imports were relatively much stable in the six years since the 2009 global economic crisis with an annual average level of USD 70 billion a year mostly in the form of agriculture, machinery, and iron/steel. But the imports took a 14% dive in 2013-14 from that average due to lagged effects of the lower oil prices which depressed oil revenues and caused an import and expenditure cut.

Even though the country is continuing to produce a sizeable trade surplus, its ratio to GDP is gradually falling and is no longer at double digits while external arrears emerged as international sanctions impaired access to foreign exchange. Given the complexity in improving on the non-oil export front, the country is looking toward restoring its lost status in oil markets. China accounts for about 40% of all Iranian oil exports since mid-2012. Given the constraints on exports, replacing weaker demand from China with exports to other destinations has become an important target for the country.

The current account position of Iran is following the footsteps of trade surplus as it fell markedly in the last years. Despite the sharp contraction in oil export receipts in recent years, the current account remained in surplus, albeit less than in previous years. Gross foreign exchange reserves stood at about USD 110 billion, equivalent to twenty months of imports on average in 2014. However, difficulties in accessing the international payment system and making payments in convertible currencies following the intensification of international sanctions in 2012 have affected the liquidity and currency composition of foreign assets.

Fiscal Outlook In line with the slowing economic activities and major loss of budget oil revenue, the fiscal position worsened. Considering the performance figures of revenues and expenses in 2013-14, the government

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operating budget deficit was up by 49.2% compared with the previous year. The government managed to stop the deterioration in 2014-15 as the deficit shrank 4.1% y/y. The government seeks to maintain a moderate fiscal deficit to continue to support the economy while taking steps to broaden the revenue base away from oil, prioritizing capital spending, and containing the growth of current spending. Total spending growth was significantly reduced in the new budgets the VAT rate was increased from 6 to 8 percent and the authorities intend to raise it further to 10 percent. The landmark subsidy reform which was launched in December 2010 created a major shift in a decades-old subsidy system that was very inefficient. The reform aimed at replacing subsidies with targeted cash transfers to households, and providing assistance to enterprises. The government’s goal is to eventually liberalize all energy prices and reduce energy consumption, which far surpasses the global average. After initial success in the first phase of the reform, Iran started the second phase of subsidy reform plan as of April 2014. Some 73 million Iranians have been registered to receive cash subsidy in the second phase of the subsidy reform plan. Compared to the first program, 2.4 million people have given up receiving subsidies. Under the new plan, petrol prices were hiked 75%, while electricity and domestic gas prices went up by 25%.

Monetary Policy and Inflation The economy over the last two years was under heavy inflationary pressure as annual CPI inflation rose from about 12% in late 2010 and peaked to around 45% in July 2013. On a broader perspective, the average annual inflation almost tripled in 2013-14 with 34.7% compared to 2010-11. The spike in prices was triggered by excessive depreciation of the Rial against the US dollar which was led by decrease in oil price along with decrease in oil export earnings.

Pressures in the foreign exchange market was so high that even after the %100 percent increase in the official exchange rate, the price gap had not disappeared between official and free markets. Thus, after functioning with a single exchange rate for one decade, CBI was forced to accept two-exchange rate system in 2012 until they eventually unified the official exchange rates again in June 2013. Since the Presidential election in mid-2013, there have been some major signs of stability. The exchange rate has appreciated markedly in the free market. The CBI also has kept a lid on base money growth thanks to tighter credit to the banking system and some fiscal consolidation. Government and CBI have introduced inflation control as their major monetary policy priority. CBI in its first action has implemented inflation setting policy; in this policy, central bank has declared target inflation rates for 2013 and 2014 as 35 and 25 percent, respectively. In practice and for validating given policies, CBI has stopped financing Mehr construction plan. In addition to improving conditions of inflationary expectations, policies of CBI have also reduced growth of liquidity. As a result of stabilization in exchange rate market and monetary discipline, the 12-month inflation has declined continuously to close to 15% in Iranian calendar year 1393 (March 2014-March 2015).

Labor Market Based on estimates by the Statistical Center of Iran, total population grew by 1.1% to 77.8 million persons in 2014-15. During the last three years, the country realized a population increase of 900,000 a year on average while the net increase in employment closely matched this with an average increase of 700,000. As a result, unemployment rate dropped by 1.6 percentage points compared to 2012-13 to reach 10.6% in FY 2014-15. Even though this is one of the lowest rates since 2008-09, it is worth mentioning that the majority of the jobs created were in sectors which have a low contribution to the growth of GDP. Unemployment rate was planned to be cut to 7% by the end of the 5th socio-economic development plan (March 2016) which requires an additional 5.5 million new jobs to be created. In order to achieve this middle-run target, the economy needs to perform above 6% which is a challenging target.

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The government aims to promote private sector activity and employment, including simplifying administrative procedures under the ‘Law for Continued Improvement of the Business Environment” and taking steps to improve the privatization process. The country needs to create more jobs which is possible by making the labor market more responsive to changing conditions in the economy, including improving labor skills and addressing other labor market rigidities.

Future Outlook Looking ahead, the near-term outlook is positive after the political negotiations carried out by the government with P5+1 ended positively. Iran’s rapprochement with West was continuing to progress in a positive direction before the nuclear deal. In October 2014, Iran had signed a memorandum of understanding with Portugal which was the first of its kind with a European Union country since 1979. Furthermore, Iran and Russia have agreed to use national currencies in bilateral trade and signed a massive USD 70 billion deal in projects. In this new political environment together with the end of constraints for oil revenues and international financial transactions, the economy is envisaged to pick up significantly in the upcoming period. The government is taking steps to make the regulatory framework for foreign investment in the oil sector more attractive since the economy will continue to rest on the developments of its hydrocarbon industry in the foreseeable future. To boost the domestic production, the administration announced an economic policy package on mid-2014 for the country to emerge from stagflation. On the macro level, the government aims to stabilize the economy through a set of monetary, financial, and foreign exchange policies. While on the micro level, overall improvement on ease of doing business has been identified to be a determining factor for the development of the economy. High priority will continue to be given to reducing inflation, unifying the exchange rates, completing the subsidy reform, improving fiscal management, strengthening the banking system, and embarking on critical structural reforms to invigorate growth and increase employment. Drop of oil prices to a six-year low to below USD 50 per barrel is risking budget revenues of the country if the situation persists in the upcoming years. Deepening structural reforms will be critical to promote higher sustainable growth and increase employment opportunities, and remains a key objective of the authorities’ medium-term strategy. Since the successful exchange rate unification in 2002, Iran has adopted a managed float exchange rate regime, eliminated most exchange rate restrictions for current transactions, and liberalized some capital movements. The government is committed to unifying the official and market exchange rates which is currently around 30%, despite the complexity of the task given external environment impediments.

III. Review of the Bank’s operations

The Bank’s operations in Iran are followed through SMEs development program and trade finance facility conducted in cooperation with financial intermediaries. In addition, the direct project and corporate finance loans are progressing towards available opportunities and development priorities of the country. Since the beginning of operations in 2008, the total disbursements of the Bank to various operations in Iran have reached to USD 196 million by the end of 2014. The Bank’s total outstanding portfolio in Iran stands at USD 32.6 million as of end-December 2014. In addition, disbursement of USD 35 million commitments to infrastructure projects is continuing according to their progress. In the forthcoming period, the Bank would also give due consideration to identification of bankable projects and increasing its operations in Iran. Broadly defined, operations would be further directed towards supporting the development of financial sector, SMEs, trade, corporates and development projects in manufacturing and infrastructure. The Bank will also continue to seek opportunities for co-operation with a variety of other lenders including multilateral development banks, bilateral financial

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institutions, export-credit agencies, official lenders or guarantors, commercial banks, and other financial intermediaries.

Micro-Small and Medium Sized Enterprises (SMEs) Development Facility

Under this facility the Bank provides loans to local partner banks and other financial institutions which subsequently on-lend to the Micro and SMEs. This facility is designed in a manner where the Bank’s risk is on the Financial Institutions and their expertise to on lend to M-SME sector of the country. M-SME facility plays a vital role in creating jobs and generating income for the low income group in the member countries. It also serves the ETDB mandate in an optimal manner.

The Bank is looking for co-funding from the participating financial institution in each on-lending, in order to strengthen the relationship between the intermediary and its clients, and to increase the intermediaries’ interest in the good performance of the credit line. The Bank has specific eligibility criteria which are defined to the selected Financial Institution in order to assure that funds are moving to the Bank’s target market. Funds will be allocated to M-SMEs according to following amounts and requirements.

Client Category

Micro

SME

Headcount

<50

51-250

Annual Turnover

<EUR 50,000.-

EUR 51,000-EUR 15,000,000

i. Only be applied to SMEs which are bankable, financially sound and will be able to use the funds

economically.

ii. Only be applied to finance of SMEs domiciled in the territory of the ETDB member states. iii. Only be used by SMEs which comply with ETDB’s rules on sector eligibility and restrictions.

In addition to above final beneficiaries of the SME Development Loan will be filtered according to the negative list of products and sectors and the environmental policy of the Bank.

Promoting the knowledge economy/skills and innovation capacity of vibrant SMEs in Iran remains a priority for the Bank. The focus of ETDB in segment has been the agriculture sector in order to support growth, export and employment potentials of the SMEs. The total disbursements of the ETDB under this facility amounted to USD 52 million by the end of December 2014. So far, the operations of the Bank supported the availability and lengthen the maturity of funding for SMEs, underpinning job creation and growth. However, for the time being, unfavorable international environment limit the financial institutions in Iran to benefit from this facility in an optimum manner. As soon as the obstacles are removed in the near future for Iranian banks, there will be a huge potentiality to utilize the SME limits for the Iranian FIs. In the coming years, through intermediated financing the Bank will continue to increase the availability of long term funding to SMEs and look for opportunities for further cooperating with banks which are active in SME financing.

Short Term Trade Finance (STTF) Program Trade finance is a distinct core business of the Bank. The program has been designed to strengthen the ability of local banks to provide trade financing to entrepreneurs throughout the country to expand their import and export financing operations. Within the STTF facility, the FIs participating in the program have been using these facilities which helped a number of businessmen in their trade transactions within and outside the ECO region. Each and every transaction is filtered according to the negative list of products and the environmental policy of the Bank.

The Bank has approved short term trade finance limits to banks which are active in trade finance in Iran, however, due to unfavorable international environment, the Iranian FIs are not utilizing these limits actively. Since 2008, the total disbursements of the ETDB under this facility amounted to USD 58 million by the end of December 2014. In the light of current progress on removal of respective limitations the Bank expects to cater opportunities to provide short and medium term trade financing to eligible partner

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banks for trade finance purpose and to the companies for trade transactions under its Trade Finance program.

Corporate and Project Finance

With a strategy to support economic development and social progress in the Islamic Republic of Iran, the Bank continues to provide medium to long term finance to development projects in key priority areas. The process of selecting projects is based on the assessment of additionality and development impact, with special emphasis on public welfare, sustained economic activity and improvement in quality of life. Contribution to national priorities and promoting complementarities among member states, in particular, tends to preclude a preferential factor in allocation of funds towards projects with the optimum risk/return ratio. The corporate loans are provided to firms and public sector entities in order to cover their needs such as acquisition of equipment, modernization of plant and structures, trade transactions and other related expenditures. Since 2008, the total disbursement including commitments under corporate and project finance operations have been intensified and amounted to USD 120.6 million as of December 2014. In the Islamic Republic of Iran, supply and protection of water resources are among the priority topics in the 5-year development plans. The legislative authorities added agendas regarding the improvement of development indicators of the water and wastewater industry through (implementation of) wastewater collection network and treatment plants and, upon ratification, the same has been communicated to the government for implementation. In line with Iran’s development plans, the Bank has participated in the following projects: In order to improve the performance of the irrigation systems and the relevant institutions to support agricultural producers in Iran, the Bank has committed a financing amounting to USD 22.2 million to the Siazakh irrigation project. It would provide for the agricultural water requirements of land use measuring an area of about 7,680 hectares. The loan agreement was signed in December 2010, having the tenure of 8 years including 3 years grace period. The Bank has been working in close cooperation with project management consultant, relevant authorities and the obligor to accelerate the implementation of the project, where the overall impact of the project would significantly improve the natural resource planning and affect the output of the irrigated area in terms of yield and unit cost.

Another infrastructure project in the portfolio of the Bank in Iran is the Shahriar Waste Water Management Project which was signed in September 2011. The development objective of this project is to improve the efficiency and effectiveness of water and wastewater network and infrastructure, reduce pollution discharges and improve water quality. An 8 year term (including 3 years grace period) loan amounting to USD 23.7 million was committed for the construction of a wastewater treatment plant besides the collection networks and the main transmission line for the benefit of more than 180,000 population in the Shahriar, a city located in south west of Tehran Province. In close cooperation with the Tehran Province Water and Wastewater Company, the Bank is focused to improve the implementation of this project of huge social and environmental impact.

Another project finance of Euro 16.9 million has been extended to Southern Khorasan Water & Wastewater Company for the development of Birjand Waste Water Treatment Plant for a tenor of 10 years, inclusive of 3.5 years of grace period. This project shall cater to the water treatment requirements of the city of Birjand in South Khorasan Province of Islamic Republic of Iran which has a population of more than 140,000 people.

The Bank has also been able to contribute positively to the requirements of major industrial conglomerates in Iran that are active in manufacturing sector and intend to expand their business to export markets. The trade finance facility amounting to USD 27.5 million has been provided to Iran Power Plant Projects Management Company (MAPNA) in September 2011 which enabled the company to increase its exports. On the other hand, the Bank has extended trade finance facility of USD 28.6 million in November 2011 to Esfahan Steel Company (ESCO) for import of raw material from ECO member countries. Both these facilities were successfully implemented and settled on respective due dates.

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The Bank has gained valuable experience from the initial projects which are still under implementation stage in Iran. With help of its past experience the Bank would improve its turn-around timings in subsequent projects. On the other hand, the Bank is putting efforts to identify and built up its project pipeline for further operations. In this respect, efforts are intensified to seize mid-size projects that contribute development of urban infrastructure, water management systems, power plants, energy efficiency, electric transmission lines and industrial manufacturing seeking to increase the coverage and effectiveness in terms of development of essential urban and industrial services and relevant sectors. The Bank would be also looking forward to work with medium size enterprises directly to increase their performances and access to finance.

IV. Review of Key Sectors and Investment Opportunities The efforts of the Bank sustained to identify business opportunities consistent with the development priorities of Iran envisioned particularly in the 2025 Vision document and the 5

th Development Plan (2011–

15). While noting the experiences and impediments faced during the implementation of previous development plans, Iran is now in process to plan and implement the 6

th Development Plan (2016-2021).

Following the monetary discipline, reduction of inflation, relative stability in foreign exchange market, and proper allocation of financial resources of the banks to production units, the economic growth rate reached to 3% in 2014-15 from its lowest level of -6.8 % and -1.9% in 2012-3 and 2013-4, respectively. The current positive development with regard to reinstating the favorable international environment is also expected to provide substantial support to the general policies of the said plan in realizing its target of 8 percent average economic growth rate during the five-year period. Within this framework, oil, petrochemical, mining, gas and related sectors would remain the main driving force of the economy and the government is planning to further develop its capacities in order to take maximum benefit from country’s rich natural resources. On the other hand, the country has been putting efforts to diversify the economy through developing non-oil sector and promoting a knowledge-based economy by pioneering in the fields of science and technology. The role of private sector in the manufacturing and commercial sectors has been improving and would be enhanced further. In certain areas, manufacturing sector has built a solid base but needs to improve its efficiencies as well as productivity and marketing practices to gain greater share of foreign markets. Agriculture sector has always been a priority with the objectives of sustaining food security and improving rural livelihoods. Iran is pursuing certain measures in supporting production, job creation, investment in energy-efficient technologies, development of small and medium-sized businesses, boosting businesses in border regions, rationalizing subsidy system, improving the role of private sector through divestment of state-owned enterprises (SOEs), strengthening the banking system, improving the business environment and foreign direct investment (FDI). In addition, the Government has set up comprehensive incentive programs to improve management, efficiency and energy-intensity at all production levels. The Bank will focus on providing support to the implementation of the Government program and priorities, while responding to the market demand. The Bank will consider undertaking activities and providing services as may advance its purpose, paying special attention to activities promoting export of goods and services and development of infrastructure projects. In addition, through selected intermediaries, the Bank would attempt to expand its financing programs in favor of SMEs. The Bank would also put efforts to directly cater to the financing needs of medium sized enterprises which would promote modernization of equipment and improvement of products and services. Particularly, providing support to the exporting companies would help to improve competitiveness and content of value added in exports. The Bank would provide support to projects that contribute to the capacity of the country to respond to the challenges of sustainable development. Therefore, the Bank seeks to assure that projects fit within a national development program and objectives which have multi-sector development perspective. Energy, agriculture, infrastructure, and manufacturing remain key priority sectors for the Bank’s engagement with Iran. It would also evaluate investment opportunities in telecom, mining, tourism, and retail sectors. Overall, the Bank with the available resources for Iran will continue to be primarily focused on delivering high quality projects and address funding constraints and sustainable development of financial sector.

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i) Energy The oil and gas industry has been the primary industry in Iran since the 1920s. The Ministry of Petroleum of the Islamic Republic of Iran is responsible for all kinds of oil and gas activities. The Ministry has got the four major specialized subsidiaries for oil, gas, refining & distribution and petrochemicals. The oil revenues accounted for over 65 percent of government revenues and comprise around 16 percent of the gross domestic product. Iran ranks fourth worldwide with 157 billion barrels of recoverable crude oil reserves (equivalent to 10% of the global oil reserves) and second with 34.2 trillion cubic meters of natural gas reserves (18% of the global natural gas reserves). Currently with production of about 3.5 million barrels per day (bpd), the country is the second largest OPEC oil producer. Iran has the capacity to produce 4.4 million bpd oil as well as the 800 million cubic meters of natural gas and 400 thousand barrels of natural-gas condensate. The crude oil production capacity planned to reach 5.7 million bpd and gas production capacity to 1.4 billion cubic meters per day and the natural-gas condensate production capacity to hit 1.2 million barrels a day by 2018. Removal of restrictions and implementation of current projects will lead to achieving these targets in the coming years. Presently, 62 onshore oil fields, 16 offshore oil fields, 20 onshore gas fields, and 2 offshore gas fields are in operation in the country. The country is putting efforts to support development of the industry through mobilizing domestic and international resources, indigenous production and manufacturing of relevant equipment, providing incentives for foreign investment and improving refinery, transport and storage facilities. The National Development Fund which accumulates about 37.5 percent of oil revenues also mandated to invest in the development of projects in the industry. Over USD 200 billion of investment envisaged for development of oil and gas upstream industries (exploration and extraction) and downstream (processing and the production of end products). By introducing a new Petroleum Contract Scheme, the country plans to enhance investments and further improve the production capacity in the sector. Iran's primary energy consumption amounted to 244 million tons oil equivalent in 2013-4, up by 2.1 percent compared with previous year. Oil and natural gas are the primary energies consumed largely by Iran, while other energies are consumed sparingly. Iran's existing oilfields have a natural decline rate estimated at 8-13% per year (300,000-500,000 b/d). With current recovery rates at just 24-27% (compared to a world average of 35%), the fields are in need of modernization to enhance oil recovery efforts (i.e., gas reinjection). The projects being carried forward across the country aim to enhance oil recovery rate by one percent over the fifth development plan. However, due to international restrictions, the oil production declined to 3.06 million barrels per day by the end of 2014-15. Likewise, crude oil exports including net exports of oil products decreased by 11.3 percent compared with the year before and reached 1.6 mb/d in 2013-14. The said figure further decreased to 1.4 mb/d in 2014-15. In 2013-14, Iran's natural gas consumption went up 1.4 percent and amounted to 154.1 billion cubic meters. The highest amount of consumption was related to residential, commercial, and industrial sectors by 88.1 billion cubic meters and the lowest to major industries by 29.7 billion cubic meters. About 87 percent of urban population and more than 30 percent of Iran's rural population uses natural gas. These figures are planned to be increased to 95 percent for urban and 40 percent for rural areas by the end of 2025. In this year, Iran's natural gas exports reached 9.3 billion cubic meters, indicating 0.3 percent decrease compared with last year. On the other hand, imports of natural gas increased by 15.2 percent to 5.4 billion cubic meters. Therefore, net exports of natural gas reached 3.9 billion cubic meters. Over 91 percent of natural gas was imported from Turkmenistan and more than 92 percent of natural gas was exported to Turkey. In order to meet the national demand and export gas to international markets, development of gas reserves is very important for Iran. Around 62 percent of Iranian natural gas reserves are located in non-associated fields, and have not been developed, indicating great potential for future gas development. Major natural gas fields include the South and North Pars gas fields, the Tabnak gas field, and the Kangan-Nar gas field. The production from South Pars gas field planned to be 800 million cubic meters per day in the coming years. Iran plans to raise gas exports to 230 million cubic meters per day by 2025, aiming to boost its share in global gas exports to 16 percent. Iran is also pursuing the project to export gas to Pakistan through Iran-Pakistan (IP) gas pipeline. The projected cost of the said pipeline is about USD 1.5 billion and would enable export of 21.5 million cubic meters of Iran’s natural gas to Pakistan on a daily basis. Iran has already built more than 900 kilometers of the pipeline on its territory. Building of 700-

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kilometer tranche of the gas pipeline on the Pakistani side is expected to be completed soon. Overall, largely influenced by global prices, the value of oil (including oil products, natural gas, natural gas condensate and liquids) exports amounting to USD 64.8 bln in 2013-14 decreased by 4.6 percent compared to previous year. It was further declined to USD 55.3 bln in 2014-15. On the other hand, import of gas & oil products (including oil products, natural gas, natural gas condensate and liquids) increased by 17.3 percent in 2013-14 compared to previous year and amounted to USD 3.1 bln. In 2014-15, import value of the subject items surged to USD 3.9 bln. The country’s power generation capacity stands currently at 73 giga-watts (GW). Iran has prepared a plan which would increase the capacity to 75 GW by the end of 2015-16 and efficiency of its power plants to 45 percent from the current 38 percent by 2025. These require investment in power-related projects such as gas power plants, combined cycle power plants, hydroelectric power plants, solar, biomass and wind power plants. In 2013-14, electricity generation grew by 4.3 percent to 258.7 billion kWh compared previous year. It further increased to 271.8 billion kWh by the end of 2014-15. Of total generated electricity, 85.8 percent was generated by power plants affiliated to the Ministry of Energy and 14.2 percent by other institutions. In 2014-15, the highest amount of electricity (170.8 billion kWh) was generated by gas and combined cycle power plants while hydroelectric, diesel and wind power plants accounted for the lowest amount of generation (14.4 billion kWh). The highest growth in generation of electricity belonged to gas and combined cycle power plants by 11.4 percent while the amount of electricity generated by steam power plants (86.6 billion kWh) declined by 4.5 percent in 2014-15. A total of 4.5 billion kWh of power was generated by the nuclear power plants in 2014-15. In 2013-14, consumption of electricity increased by 5.5 percent and reached 206 billion kWh. The highest growth of consumption belonged to residential sector by 7.1 percent. Furthermore, electricity consumption by industrial sector grew by 5.2 percent, agriculture sector 6.8 percent, and commercial sector 5.9 percent. The highest share in electricity consumption was related to the industrial sector by 34.3 percent, followed by the residential sector by 32.0 percent. In this year, Iran's electricity exports amounted to 11.4 billion kWh, up by 4.4 percent compared with the year before. Imports of electricity rose 12.5 percent to 2.5 billion kWh. Thus, net exports of electricity increased by 2.3 percent compared with the year before, and reached 8.9 billion kWh. In 2013-14, Iran imported electricity from Turkmenistan, and about 68 percent of Iran's electricity exports were related to Iraq. Iran plans to triple its annual electricity exports to 25 billion kWh by the next three years. Meanwhile, the country needs to make investment in improving capacity of existing power plants and reduce the total generation lost through investing in transmission network. Iran has some of the largest petrochemical complexes in the world. The country’s installed petrochemical production capacity is currently over 60 million tons per year. Owing to huge oil and gas resources, the strategy of the country is to enhance value-added products for export. To that effect, the country plans introducing new opportunities for investment, supplying feedstock to petrochemical plants, establishing petrochemical towns to serve the petrochemical value chain in a complementary fashion and preparing the necessary infrastructure for new petrochemical plants. The privatization move in the industry under the rules of Article 44 of the constitution had a great impact on production and efficiency. There are more than 60 petrochemical projects is under implementation that would double the production capacity once completed. Certainly, recent development on international relations will boost investments and accelerate completion of these projects. According to the National Petrochemical Company, in 2013-14, petrochemical products reached 40.6 million tons, indicating 1.2 percent decrease compared with 3.9 percent decline of the previous year. The petrochemical exports amounting to 12.8 million tons in 2013-14 fell by 18.6 percent compared to previous year, while the volume of domestic sales of petrochemical products increased by 9.4 percent. Methanol, polyethylene, butadiene, ethylene dichloride, and ethylene were the main export-bound petrochemical products. Furthermore, total value of petrochemical exports decreased by 18.2 percent to USD 12 bln compared with 2012-13. Considering the high decrease in the weight and value of petrochemical exports, share of petrochemical exports in total industrial exports decreased from 48.0 percent in 2012-13 to 39.5 percent in 2013-14, in terms of value. The country needs to further focus on energy intensity measures as well. Accordingly, the Bank shall focus on small-medium sized projects aimed at increasing production capacity, rehabilitation and

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development of transportation and distribution networks, and enhancing exports of value-added petrochemical products. The Bank shall also support projects for improving energy efficiency. Iran also has a vast potential in renewable energy sources including solar, wind, geothermal, which is not being properly harnessed. The Bank shall also look into opportunities to support Iran to utilize the potential of

these sources.

ii) Financial Sector

Iran's financial system is mainly dominated by Banks which account the largest Islamic financial system in the world. Although banking remains the backbone of the financial system, more recently, Iran’s capital markets (Tehran Stock Exchange-TSE, OTC market, commodities exchange) have also gained importance in the government’s strategy of promoting a more market-oriented economy and mobilizing private capital for the financing of the economy. With 314 listed companies and market capitalization amounting to IRR 2,813 trillion (USD 86 bln) by the end of 2014-15, the TSE aims to grow in the coming years. Iran's banking system has been far from competition in international banking industry due to international restrictions. The banking sector is comprised of 29 institutions grouped in four segments: (i) three public commercial banks; (ii) five public specialized banks (agriculture, housing, export, mining, and industry), (iii) nineteen private banks and (iv) two specialized Islamic banks (Gharzolhasaneh banks). A significant deepening of bank intermediation occurred in the past decade and private banks have been allowed in the system since 2000, with six licenses being granted initially, and more since then. Private bank assets have become the largest in the system following the privatization of large public commercial banks such as Bank Sedarat, Bank Mellat, Tejarat Bank and Refah Kargaran Bank during 2008-9. On the other hand, there are also several credit unions and microfinance institutions which are going through an intense phase of restructuring, licensing and supervision. Apart from other roles and responsibility, the Central Bank of Iran (CBI) is mandated for supervision of banks and credit institutions. In line with the development of banks’ electronic payment and application services, the CBI paved the way for introduction and implementation of different systems. For instance, interbank transactions, accounting for a great number of electronic transactions including ATM, POS and other card-based transactions processed through the banking system, are settled via the Interbank Information Transfer Network (SHETAB). The number of cards (mostly debit and prepaid or gift cards) issued in the banking system grew by 22.7 percent to 277 million in 2013-14. In the same period, the number of ATMs went up by 11.9 percent to 33,773 and the number of POSs grew by 15.6 percent to 3.1 million. In addition, a total of 1,544 million transactions, valued at IRR 526 trillion (USD 16 bln) were processed through cell phones, landlines, kiosks, and internet. These trends reveal an upsurge in the use of new electronic instruments and reductions in cash payments in daily transactions by the public. Within the framework of Monetary and Credit Policy, the Money and Credit Council (MCC) sets a series of rates/limits for banks and non-bank financial institutions such as provisional remuneration of term deposits, provisional profit rate of participation papers, sukuk, maximum lending rate on loans and facilities and reserve requirement ratio and commissions, etc. with a view to ensuring reasonable functioning of the system. According to the approval of the MCC in June 2014, the new rate for one-year term deposits set at a maximum level of 22 percent. The real interest rates remain in positive territory considering the successful measure taken to curb average inflation to 15.6 percent in 2014-15. The MCC permits banks to borrow abroad for the financing of private sector and municipalities. Such borrowing has no sovereign guarantee. The MCC sets for each bank a ceiling on the ratio of its foreign liabilities and commitments to total assets. The total assets of the banking system were up 48.7 percent y/y to hit IRR 17,344 trillion (USD 581 bln) by the end of 2013-14. However, revaluation of banks’ foreign assets, rise in the exchange rate and change in classification of calculations in 2013 had effect on this trend. Total deposits amounted to IRR 6,687 trillion (USD 224 bln) with the banking system as end of 2013-14 (20 March 2014) and further increased to IRR 8,242 (USD 243 bln) trillion by the end of 2014-15. Share of private banks and non-bank financial institutions out of total deposits of non-public sector was 69.1 percent as end of 2013-14. The average duration of banks' deposit liabilities continued its downward trend and reached 24.2 months in 2013-14, as against 28.1 months in the year before. Banking system claims on public and private sectors amounted to IRR 6,517 trillion (USD 218 bln) by the end of 2013-14.

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It amounted to IRR 7,775 trillion (USD 229 bln) by the end of 2014-15. Around 80% of total credits are on the non-public sector mainly in services, housing, industry and mining sectors. Improvement in profitability is also a concern for the banking industry. Currently, the reserve requirement ratio applied to both commercial banks and credit institutions (state-owned and private ones) is unified at 13.5 percent. Overall, Iranian banking sector is not going through its best years in history as the sector has suffered from a contracting economy, undercapitalization, pressure on profits and extreme non-performing loan ratios apart from the fact that they are being under pressure due to international banking restrictions over the past years. Although the ratio of non-current claims (overdue, non-performing, and doubtful) on public and non-public sectors to total facilities extended by banks and non-bank financial institutions declined from 14.1 percent in 2013-14 to 12.1 percent in 2014-15, remain to be a major concern. Of course, an important reason for the high level of bad debt is that it is not written off from the books of banks and credit institutions, as it is customary in the other countries. A large amount of compulsory facilities provided by state-owned banks at low interest rates to fund government initiated schemes and depreciation of the Rial have piled up bank balance sheets and elevated non-performing loans ratio. This has raised the systemic risks in the banking sector. However, the CBI and the other Iranian banks have already designed plans to converge on technical, humanitarian, organizational and management tools in global banking industry in order to restore financial discipline in the sector. Particularly, reforms are likely to target improvements in banking standards and basic measures including capital adequacy, asset quality, management, liquidity, earnings and systematic risks. Such plans are expected to be expedited to be implemented in the wake of restoring international interactions of the sector in the coming years. The country's economy is expected to flourish in coming years which will improve the backdrop for the banking sector as well. Moreover, the banking sector’s network and international transactions with the global financial system is expected to be strengthened. The sector players would also find better opportunities to raise capital in the international market and expand their presence abroad. Restoring international relations will also pave the way for presence of foreign investors including international banks in Iran. According to the assessments of the CBI, foreign investors may obtain licenses to establish new banks. Based on current banking regulations, foreign banks are also allowed to take a 40 percent stake in a local bank. However, the CBI is reviewing regulations to provide banks with easier terms in free trade zones. Obviously, the very presence of reputable global banks in Iran will result in improvement of banking standards.

In view of the challenges and prospects, ETDB would continue to strengthen its relation with the vibrant financial institution in Iran within the framework of its SMEs development program and short term trade finance facility. The focus of ETDB in segment has been the agriculture and manufacturing sectors in order to support provision of mid-term credits to boost the production, export and employment potentials of the SMEs. In the coming years, the Bank would also continue to look for opportunities for further cooperating with local financial intermediaries which are active in trade finance.

iii) Agriculture

Iran covers an area of 1,648,000 square kilometers. It has a population of around 78 million of which around 27 percent live in rural areas and is engaged in agriculture. Due to its diverse climate and fertile soil, Iran’s agriculture products are rated among the best in the world. The main strategy of Iran is to attain self-sufficiency in major crops. Iran has total of around 24 million hectares of agricultural land of which 18 million hectares is arable and around 52 percent of it is irrigated. Reviewing the developments of Iran's water resources indicates significant reduction in the level of groundwater reservoirs. This is attributable to reduced rainfall, relative to long-run trends, and the mismanagement as well as inefficient utilization of resources. According to the FAO, the annual economic losses due to salinization and land degradation have been estimated more than USD 1 billion. Hence, the country requires taking appropriate measures in sustainable water and land management matters for the resolution of these challenges. Agriculture accounts for almost 10 percent of Iran's GDP, 18 percent of non-oil exports, and 80 percent of domestically consumed foodstuffs. Main agriculture products are wheat, milk, fruits, nuts, potatoes,

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tomatoes, rice, barley and grapes. Production of crops accounts for about two-thirds of total farm income in Iran. Total farming, horticultural, livestock, and fishery products were approximately 96.7 million tons in 2013-14, indicating 4.3 percent growth compared with the previous year. In this year, farming and horticultural products grew by 3.9 and 4.0 percent, respectively. According to the preliminary data, the value-added of the agriculture sector rose 4.7 percent in 2013-14 and 3.8 percent in 2014-15, at constant prices. Total facilities extended by the banking sector to the agriculture sector increased by 25.7 percent to IRR 222.3 trillion in 2013-14. Therefore, the agriculture sector accounted for 9.4 percent of total facilities extended to economic sectors in this year. Most of the facilities extended o the agriculture sector was provided by Bank Keshavarzi Iran (Agriculture Bank). About 4.0 million tons of various agricultural goods, with the value of USD 5.1 billion, were exported in 2013-14, showing 9.6 and 15.4 percent reduction in terms of weight and value, respectively. Meanwhile, 18.4 million tons of various agricultural products, worth USD 13.5 billion, were imported; indicating 16.9 and 6.3 percent fall in terms of weight and value, respectively. Reviewing the production, imports, and exports of grains (wheat, rice, barley, and corn) indicates that the self-sufficiency coefficient of major grains was 61.0 percent, on average, during 2008-2014. Over this period, wheat and barley, with respectively 74.6 and 70.2 percent, on average, enjoyed the highest self-sufficiency coefficients while corn, with 30.2 percent, recorded the lowest self-sufficiency coefficient. Due to Iran's reliance on the imports of grains, over the mentioned period, a sum of USD 4.2 billion was spent on the imports of these commodities on an annual average basis. The self-sufficiency coefficients of red meat and poultry were respectively 86.0 and 99.1 percent, on average, during 2008-2014. This is indicative of favorable local supply conditions for these products. Over the longer term, focusing on investment in water and soil management, animal husbandry, research and development, agribusiness industry, packaging systems will yield results in terms of productivity and boost agricultural exports. Iran is the largest net-exporter of pistachios in the world with more than 60% of the world net-export. The total pistachio harvest amounted to 176,000 tons in 2013-14 and 65 percent of the said amount was exported. About 230,000 tons of pistachio is estimated to be harvested in 2014-15 and it is anticipated to be at the same level in 2015-16. Water shortages, traditional cultivation methods and poor marketing and packaging are key weaknesses of Iran in this sector. The income from pistachio exports currently stands at USD 1.5 billion annually. On the other hand, Iran accounts for around 90 percent of the world’s total saffron production. The country has developed a plan for raising the annual saffron output to 500 tons by 2021 from 100 tons in 2013-14 and boosting exports to over USD 1 billion through identifying new markets. In this regard, the country needs to further improve packing and marketing activities. Iran ranks among the major global performers with annual production of 26,000 tons of rose as well as in production of rosewater. Processed/value added food products market which still in its early stages shows considerable growth in recent years. A total of 12,198 entities are engaged in the Iranian food industry, or 12% of all entities in the industry sector. The sector also employs about 16.1% of the entire industry sector’s workforce with approximately 328,000 people, according to the Iranian Food Industry Organization. The main export items are confectionary, dairy products, tomato paste, fruit juice and concentrate, mineral water, and pasta. The beverages sector is growing quickly and players in the sector look to gain market share while improving supply and quality. The Iranian dairy sector is expanding as the investment in structural and infrastructure issues are being intensified. The country is also increasingly importing food technology, including processing and packaging equipment. The export of dairy products stood at USD 642 million in 2013-14 and is expected to increase in the coming year. With an annual harvest of about 20 million tons, Iran is also one of the major fruit producers in the world. Citrus fruits, apples, grapes, and peaches are the main fruits exported by Iran. The country is one of the largest producer and exporter of dates with an annual production of more than 1 million tons in more than 40 varieties. Fishing is of increasing importance in the country. Over 200,000 individuals are currently working in the fishery sector and output increased to 814,000 tons in 2013-14 which was 744,000 tons in the previous year. The fishery exports which stood at USD 25 million in 2012-13 increased by 113.2 percent to USD

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52 million by the end of 2013-14. Domestic production of meat (lamb, chicken, beef and goat) is estimated at over 2.6 million tons annually, which is almost sufficient to meet domestic demand. However some imports of various types of halal meat are allowed in order to maintain price stability. The need for more and better agricultural investment in Iran is becoming increasingly crucial in the light of the trends with witnessed over the past decades. In the meantime, issues such as resource constraints and environmental threats as well as adverse impacts of climate change need to be addressed. This increases the need for continued investment to improve infrastructure such as the improvement of irrigation systems, modernization of technology, including hardier grains variants, greater access to relevant inputs which will help the country in recovering farm profitability and production growth. Unequivocal investment support for the agri-food sectors would assist in managing the complex policy processes in these sectors. The Bank would support development of infrastructure projects particularly efficient use of water resources and establishment of modern irrigation systems to boost agriculture production. It would also invest in suitable projects to increase value addition in the sector so that export volumes are increased and competitiveness of Iranian products in international markets is enhanced.

iv) Manufacturing

Iran has a relatively sizeable industrial base, but large scale subsidies, insufficient investment and international restrictions have limited Iran’s ability to further develop its non-oil economy. Steel, weaving, food processing, car, electrical and electronics industries are among the key industries in the country. The country produces a wide range of manufactured commodities, such as telecommunications equipment, industrial machinery, paper, rubber products, steel, food products, wood and leather products, textiles, and pharmaceuticals. The share of manufacturing and mining sector in GDP was about 12.8 percent in 2014-15. Reviewing the indices of the manufacturing and mining sector in 2013-14 is indicative of relative recessionary conditions. However, the sector showed some strength in 2014-15 with 6.9 percent growth. Production index of large manufacturing establishments in 2014-15, on average, increased by 6.7 percent compared to previous year. Data on operation permits issued for new manufacturing units show that compared to the previous year, number of these permits increased by 16.7 percent in 2014-15 while the amount of investment increased by 11.2 percent. The industrial sector which encountered lower local demand and a decline in foreign sales due to transaction barriers and obstacles in access to feedstock and parts is likely to regain its potential for producing at their nominal capacity. Export of non-oil goods reaching to around USD 28.2 billion in 2013-14 decreased by 3.3 percent compared to previous year. This declined reversed in 2014-15 and non-oil exports increased by 10 percent to USD 31.1 bln. The pharmaceutical producers who play a major role in supplying medicines experienced significant challenges on importing finished products and pharmaceutical raw materials. If such challenges are removed, there will be huge partnership possibilities between local pharmaceutical manufacturers and their foreign counterparts. Focusing on the production of high-tech medicines that can be exported to emerging markets, pharmaceutical companies are working to meet domestic demand and maintain growth in a domestic market worth around USD 5 billion. A similar scenario is applicable to automotive and other industries as well. Automotive industry is the second largest sector in Iran, after the oil and gas sector. The industry accounts for 10% of Iran's GDP and 4% of its workforce. The industry has grown to be the largest in the Middle East with total vehicle output reaching to its record level of 1.6 million units in 2011-12 and making the country 13

th largest

worldwide. Iran Khodro and Saipa are among the major industrial units in terms of production and number of personnel. In the following two years, owing to rising production costs, international restrictions and withdrawal of many international companies from the sector due to several reasons, the production dramatically declined to 744 thousand units in 2013-4. The sector has been putting efforts to adopt new marketing and production strategies including production of new domestic designed vehicles and alternative fuel vehicles in order to sustain its competitiveness. Yet production increased by 46% to 1.1 million in 2014-15 compared to previous year. There are positive signals and huge potential for automakers in Iran to put the industry on a steady-state growth path in the coming years. Technology

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transfer is expected to become a central term of any new joint ventures to produce new and modern cars. The country plans to produce at least 3 million cars and export 1 million cars by 2025. Iran is one of the top ranking producers of cement in the world. The industry produced 69.4 million tons of cement during 2013-14, which was 0.9% lower than the previous year’s 70.1 million tons production. Cement is one of the key non-oil export commodities of the country and its main export markets are Iraq, Azerbaijan, Turkmenistan, Qatar and Saudi Arabia. With 77 active cement plants, the current cement production capacity stands at 82 million tons per year. It is planned to reach 110 million tons in 2016 by implementation of new projects. Despite challenges of the sector, positive developments is expected to come once the economy starts to improve and once government spending on infrastructure and construction projects picks up. Iran has also started to invest in production of domestically-made heavy diesel engine locomotives. In machinery and equipment manufacturing, the country plans to become self-sufficient in producing 19 essential pieces of oil industry equipment, such as onshore and offshore drilling rigs, pumps, turbines, and precision tools by 2015. Particularly, Iran is one of the six countries in the world that manufacture gas and steam powered turbines. The volume of Iran’s steel production reached 16.3 million tons in 2014, showing a 5.9 percent increase compared to previous year. Iran also ranked 14

th among major steel producing countries in the world.

According to Iranian Ministry of Industries, Mines and Trade, crude steel output is projected to increase to 18 million tons in 2015-16. The output is projected to reach 55 million tons by 2025 with an expected exports figure of 10-15 million tons. The weight of crude steel exports was 2.5 million tons in 2014-15. Iran is also one of the world’s ten largest producers of wide steel sheets and the exclusive producer of it in the Middle East. With their unique designs and high-quality, Iranian carpets occupy a special place in the extensive list of Iranian traditional manufacturing items. Iran exported hand woven carpets worth over USD 316 million during 2013-14. About 1.2 million weavers in Iran engage in the carpet making to cater to domestic and international markets. Around 80 percent of the five million square meters of carpets produced in the country each year are exported. The Bank would support manufacturing sector through lending operations as well as through its products that are extended in collaboration with financial intermediaries. These would support SMEs that are active in manufacturing sector and intend to expand their business to export markets. In addition, the Bank would put efforts to cooperate with industrial conglomerates to support their investment needs.

v) Mining Iran is a rich country in terms of minerals and natural resources. The sector has the potential to develop and increase its share in the economy. The country holds 68 types of minerals, including chrome, lead, magnesium, chromites, bauxite zinc, copper, coal, gold, tin and iron. Iran’s known iron ore reserves amount to 2.7 billion tons (0.8% of total global reserves) and copper ore reserves are estimated to stand at 2.6 billion tons which account of 4% of global reserves. Zinc reserves amount to approximately 11 million tons (4% of global reserves). In addition, with 300 tons of gold, Iran possesses approximately 1% of global gold reserves. The minerals reserves amounting to 58 billion tons estimated to be worth over USD 700 billion. However, boosting exploration activities can double this figure. The sector employs over 620 thousand people and has a considerable 28% share in non-oil export. This tremendous potential in the sector along with availability of low-cost energy, accessibility to international markets, skilled labor force, low costs of launching projects etc. needs to be unleashed through cooperation with investors by transferring modern technology, equipment and management skills to produce value-added minerals. Optimal exploitation of the mineral reserves together with other national advantages can serve as major drivers of growth. Annually Iran mines around 400 million tons of minerals from 6,000 mines that should be raise to 600 million tons. Currently Iran has USD 29 billion of mining investments attracting interest of companies. Iran Mines and Mineral Industrial Development and Renovation Organization (IMIDRO) is responsible to develop and support mine and mining industries

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projects and companies. In line with the objectives defined by the Government, the organization has the role to promote private sector and foreign investment to optimize the potentials in the sector.

The sector realized a growth of 9.8% in 2014-15. About 23.8 million tons of minerals were exported in 2014-15, down from the previous year by 25% in terms of volume and 23.8% in value. The decline in exports is believed to have been due to a sharp decline in global iron ore prices. Iron ore exploitation increased by more than 6 times during the past 10 years and reached to 51 million tons. Currently Iran operating 156 iron ore mines (5% of them with a reserve 86% of the country reserve controlled by IMIDRO). However, recent growth in iron ore pellets import (7-8 million tons a year) to meet the annual demand of 29 million tons shows necessity of expediting exploration and downstream projects underway. Iran produced about 350 thousand tons of aluminum in 2013-14 showing an increase of 4.2% compared to previous year. The country plans to raise aluminum output to 1.5 million tons by 2025 with an investment of about USD 12 billion. In addition, the aim is to boost copper cathode output to 800 thousand tons by 2015 means almost fourfold increases on what the country produces at the moment respectively.

A total of 822 mining sector discovery certificates, with a projected reserve of 1,991 million tons of mining products, were issued in 2013-14. This indicated 4.6 and 34.8 percent increase, respectively. The amount of facilities extended by banks and non-bank financial institutions to the manufacturing and mining sector reached IRR 706.0 trillion in 2013-14, showing 14.0 percent increase compared with the year before. Overall, the scale of the investment needed is vast. Apart from investment requirements, development of relevant infrastructure, transportation, international payments systems, global mineral products prices, restrictions in exports and tax arrangements are other challenges for the sector. The industry enjoys many advantages including the abundant metal and non-metal resources. Optimal and timely use of mineral reserves will support Iran’s economic and industrial development. The Bank shall provide support for projects that lead to transfer of technology and introduction of modern machinery and equipment in the mining sector.

vi) Municipal Infrastructure

Public transport, municipal water supply and solid waste management are important issues concerning municipal management in Iran. About 73% of the population in Iran resides in urban areas. Due to migration and traffic congestion in the major cities there is a pressing need to develop subway and mass transport systems. Iran also places special emphasis on the development of rural regions. The objectives are to extend provision of potable water, electrification, roads, industrial complexes and sanitation to rural areas. Iran aims to bolster the country’s poor wastewater network and infrastructure. In Iran, about 98 percent of people have access to potable water, a figure that is expected to reach 100 percent by 2025. But wastewater infrastructure in the country remains poor. Iranian authorities have planned investments in this sector, offering business opportunities to foreign investors. Currently, about 24 percent of Iranian cities have a wastewater network. The plan is to bring this figure up to 60 percent in 2025. For rural wastewater networks, the figure is expected to reach 30 percent by 2025. The Government has reportedly earmarked substantial projects for the water and wastewater sectors and exclusively facilitates the private sector's investment in national projects for expanding the relevant infrastructure. Accordingly an agreement was signed with the private sector in 2014, to invest about USD 310 million in seven water and wastewater management projects across the nation.

The Bank shall provide financial support for infrastructure projects particularly those relating to development of urban transportation and sewage system. Bank’s projects would aim to improve capacities of water and wastewater management authorities, on a regional level, particularly in wastewater supply systems. Although municipalities have encountered challenges to create stable revenues, the Bank aims to support municipalities and their utility companies for feasible and financially viable projects.

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vii) Transportation Ministry of Roads and Urban Development of the Islamic Republic of Iran is responsible for all kinds of transportation. Considering the key role of transportation in economic development of the country especially foreign trade and transit operation, general development policies in this sector focus on (i) development of multimodal transportation with particular attention to rail transportation network (ii) decrease in energy consumption (iii) decrease in environmental pollution (iv) increase of safety (v) balancing between infrastructures and fleet, navigation equipment and demand and (vi) increase in productivity at the highest level through promoting transport modes and management and human resources and information.

According to the 5th Development Plan, the Government allocated approximately USD 34 billion to the transportation sector in 2010 and various projects have been implemented. The amount of cargo and passengers traveling along the routes has increased significantly in the past decade, with airline companies seeing some of the largest growth. Rail and road networks are being focused on as the key for a streamlined transport corridor from east to west, and in 2013-14 there has been an increase in the number and quality of a variety of valuable connection routes both throughout the country and extending beyond its borders.

The outlook for the sector is positive, as a relaxation of international relations expected to be implemented in the coming years, thereby boosting demand for transport and logistics services. Continued investment and steady economic growth will see volumes across the country's freight transport modes continue to expand in the coming years. The potential investment in the transport sector is estimated to be about USD 80 billion worth of business including improving rail infrastructure, roads, motorways and renewal of the country's air fleet.

In transportation sector, the Government is planning to undertake several projects including highways, arterial and rural roads, railroads, ports, and airport facilities. The country is making significant investments in order to develop national road network as well as to improve connections to neighboring countries. Iran is also considering a land transport transit-oriented development plan for the east of the country with the aim of establishing a quick and affordable network between the north and south. The number of passengers carried by road reached 817 million persons in 2013-14, down by 6.6 percent compared with the year before. Moreover, 621 million tons of goods were carried and 11.6 million tons of goods were transited by road, indicating 1.6 and 7.9 percent increase, respectively, compared with the previous year. It is expected that over 12.3 million tons of goods be transited via the country during 2014-2015. Imam Khomeini Port and Bandar Abbas are the most active ports for transport of goods followed by Parviz Khan, Bashmaq, Bazargan, Lotfabad and Sarakhs border points. The Government’s proactive foreign policy, relatively improved passenger air fleet and improved economic prospects have led to increased clients of airlines. In 2013-14, the number of passengers departing and arriving at airports reached 42.4 million persons, indicating a 2.4 percent increase compared with 2012-13. However, the amount of cargo carried by air domestically decreased by 21.4 percent to 11.0 thousand tons. Moreover, the amount of cargo carried by air internationally amounted to 52.0 thousand tons, down by 21.2 percent. The air transport sector needs more investment and it also needs to replace inefficient aircraft. Airline mergers or liquidations will enable the sector to develop the air transport industry and thus improve quality. In addition, investments are envisaged for expansion of Tehran’s Imam Khomeini International Airport (IKIA) as well as the development of Mashhad and Shiraz airports. Iran’s special geopolitical location, which lies in the heart of the Silk Road and several transport corridors, plays a very effective role in developing regional trade and transit. The private sector plays an effective role in international transportation and with the support of private investors the country plans to make appropriate investment in order to benefit from the estimated capacity to transit 40 million tons of goods annually. In this respect, effective measures are being taken by the Government to improve the infrastructures of transportation and to facilitate exports and imports along with private sector cooperation. The country has equipped Persian Gulf and Caspian Sea ports to increase cargo handling capacity, built Atrak-Barekat Railway, extended Chabahar-Sarakhs railway network with the length of 1,500 km, equipped and developed Chabahar Port and approved a strategic plan on road safety for 2010-2019. In

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addition, Bazergan border is the most active land border and Iran's Ministry of Roads and Urban Development has plans to construct 255 km Tabriz-Bazargan (Border of Turkey) highway with an estimated cost of USD 1 billion. In order to promote bilateral trade, Iran and Azerbaijan have agreed to develop rail and road communications. Development of relevant infrastructure at the border and reducing tolls on transportation where annually over 85,000 trucks passes would have significant benefits in this direction. The Rasht-Astara railroad project will not only connect Azerbaijan to Bandar Abbas, but also pave the ground for transferring European goods to the Persian Gulf and Oman Sea. There is 195,000 km of rural roads in the country. Although about 90 percent of these roads have been asphalted but Iran plans to build more rural roads where about USD 1.6 billion are required to renovate and re-asphalt all rural roads to serve the nearly 1.5 million rural people that do not have access to suitable roads. In the rail transport sector, 122 kilometers of railroads were put under improvement program and 113 kilometers of railroads underwent renovation in 2013-14. By March 2014, the total length of track increased by 1.8 percent to 10,407 kilometers. In the sea transport sector, loading and unloading of oil products amounted to 44.0 million tons in 2013-14, showing 6.7 percent increase compared with the previous year. On the other hand, loading and unloading of non-oil goods fell 1.8 percent to 95.7 million tons. Total number of passengers embarking and disembarking at ports reached 15.6 million persons, indicating 35.1 percent increase compared with the year before. Improving the quality of the services offered at the container terminals and decreasing the unloading and loading time of the ships at Iranian ports are the key strands of the strategy to develop country’s logistic advantages. The Bank would like to engage in projects concerning the development of roads, railways and urban transport infrastructure, particularly those that aim to improve and expand the regional network. The Bank also aims to support development of logistics infrastructure, construction of terminals, goods and passengers mixed transportation towns and to develop dry ports by the cooperative and private sectors.

viii) Tourism Iran enjoys the highest capacities in cultural, historical, natural and pilgrimage tourism. The country has been taking significant measures to develop tourism industry as part of efforts to diversify economy and support job creation. According to Travel and Tourism Competitiveness 2015 report released by the World Economic Forum, Iran ranks 97

th in terms of Travel and Tourism Competitiveness among 141

countries. UNESCO has indicated 17 World Heritage Sites in Iran. The number of foreign tourists that visited Iran rose from 3.8 million in 2012-13 to 4.7 million in 2013-14 and contributed more than USD 6 billion to the economy. Moreover, over 5 million tourists visited Iran during 2014-15. The most visited cities in Iran inter alia include Tehran, Mashhad, Qom, Yazd, Isfahan, Shiraz, Tabriz and Kish Island. The vast majority of Iran’s visitors come for religious reasons, making pilgrimages to holy sites. The country is planning to increase the number of incoming tourists to 20 million and targets revenue of USD 30 billion by the end of its 2025 Vision plan. In order to achieve this objective investments should be attracted for development of tourism-characteristic infrastructure and services such as hotels, airlines, airports, marketing and promotion, travel agents and leisure and recreation services that deal directly with tourists. While there are more than 1,100 hotels in the country, only 130 of them rank four and five star hotels, and that during the next 10 years, 400 new hotels should be built for which the government plans to offer incentives for investors. With the goal of capitalizing on the already productive domestic market, Iran has identified 1,200 tourism special zone that investors can take advantage of it. The World Travel and Tourism Council (WTTC) 2015 report put the world ranking of Iran’s tourism industry (out of 184 countries) at the 41

st place in terms of size and at the 137

th place in terms of

contribution to GDP in 2014. The report also put the value of Iran’s investments in its tourism industry in 2014 at USD 2.8 billion, equal to around three percent of the total investment made in the country throughout the year. It is estimated to rise by 5.5% per annum over the next ten years. In this regard, the country has been implementing projects including construction of tourism complexes, hotels, indoors and out door amusement parks, shopping centers, and other recreational facilities. Iran is also making efforts to implement educational programs in the fields of hotel management and operating tours. The country plans to develop a wide array of tourism activities including sports, health, ecotourism and religious tourism. Particularly, there are huge potentials for investment in health infrastructures due to Iran’s capabilities in health tourism. Government’s priority and the available potential present opportunities for

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Bank to support viable projects, especially those relating to accommodation facilities like hotels, motels, and roadside service complexes, and recreational facilities as well as projects in sports and ecotourism.

ix) Infrastructure/Construction

Iran’s vital infrastructure projects after the oil industry make up the highest amount of construction projects in the country. Increase in population and development of the industry has also supported private-sector investment in construction, particularly in private residential accommodation for which demand (and prices) has boomed. The construction sector accounted for almost 9 percent of Iran's GDP in 2014-15. Not only has the country needed around 1.5 million new housing units per year but also the requirement of having earthquake resistant buildings. Construction sector and in particular housing construction in urban areas showed expansionary performance until 2011-12. According to the data released by the municipalities of urban areas, the number construction permits amounting to 117,278 showed decrease by 32.1 percent in 2014-15, compared with the year before. This number was 191,382 in 2011-12. On the other hand investment in the buildings of urban areas by private sector continued in 2014-15 and increased by 7.5 percent (at current prices) to reach IRR 811 trillion. The number of residential units constructed by the private sector in all urban areas came to 834 thousand in 2013-14, with a total floor space of 111.5 million square meters. This indicated a 10.6 and 13.3 percent increase in terms of the number and total floor space, respectively. As of the implementation of Mehr Housing Program until March 2014, a total of 2,041 thousand construction permits were issued. On this basis, 1,965 thousand residential units were at the foundation and subsequent phases of which, a total of 1,296 thousand units were at the finishing touches phase. Furthermore, as of the implementation of Mehr Housing Program until March 2014, a total of 4,025 thousand scheduled facilities worth IRR 505 trillion were extended by the state owned banks to the housing sector where 71.7 percent was extended in the form of land allocation on a 99-year lease. Total facilities extended by banks and non-bank financial institutions to the housing and construction sectors increased by 8.7 percent to IRR 287 trillion. The value of facilities extended by Bank Maskan to the construction and housing sector was about 40 percent of the total facilities. The country’s goal is to increase housing supply and create a balance between supply and demand in the housing market in order to control the trend of housing prices and provide housing to the vulnerable. Apart from this, there is need of expansion and modernization of industrial plants and production facilities. These are based on the premise that the country needs to invest resources in improving and expanding its domestic oil refinery industry. In the transport area, there are plans to build new roads, railroads and metro rail lines in the various cities and of establishing rail link with neighboring countries. Iran has a strong potential to emerge as a major player in construction materials sub-sector as it has one of the world´s largest natural stone reserves. Currently an amount of more than 10 million tons is being extracted annually from more than 500 quarries which are then processed in more than 3,330 stone-working plants. But most of these are low-tech enterprises which needs modern technology and business skills.

The Bank would like to partner with local and international financial institutions to finance key projects that would expand and modernize Iran’s economic infrastructure.

x) Telecom and ICT The Iranian ICT sector, a keystone of the country’s non-oil economic expansion, is set for exponential growth thanks to its unique combination of demographic and economic variables. The sector employs 150,000 people and accounts for 1.3% of GDP. Development of infrastructure, expansion of e-government services, increasing bandwidth, support to private enterprises, supporting native content and application development, hardware and software development, and issuance of major authorizations and job creation are defined as the most important medium-term program of Iran under the ICT sector. In this respect, around IRR 4 trillion state investments in ICT sector is planned for the 2015-16 period. While the sector enabled 30.000 new jobs in 2014-15, it is projected to contribute 100.000 new job opportunities in the next year. Accordingly, the current USD 6 billion market of ICT in Iran is expected to grow to USD 18 billion in the medium-term.

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A major engine of this growth is undoubtedly Iran’s population, which is large, young, and quick to pick up new technologies. Of Iran’s 78 million citizens, 70% are under 30 and over 80% are literate. Improving and expanding telecoms infrastructure has been the focus of investment in recent years, and the country is eager to take up next generation services. It is expected that attention will again turn towards this potentially lucrative market with the easing and betterment of international investment circumstances. Relatively high level of disposable income is creating a consumer class, while new players and technologies are helping to build sophistication and demand among them.

Although Iran’s mobile phone penetration is relatively high at 130% but there is further scope for growth. The number of smart phones on the market remains relatively low where about 40 million smartphones are in use. Mobile data services are also expected to grow at double digits over the next five years. The country has 3G mobile telecommunications technology services to 220 cities and 4G launched by MTN Irancell in November 2014 covers more than 70 cities.

Iran has by far the highest total number of internet users in the Middle East. Statistics concerning internet users show that Iran has about 46 million internet users in 2014-15. Internet penetration in Iran is 57.3% and ADSL technology is the mostly used method for connection. After ADSL, mobile internet services constitute the second mostly used technology to connect to the Web. And there are about 12 million people connecting to the internet through mobiles and the penetration of mobile internet is 14.7%. WiMAX technology in Iran has 2.7 million users and 6.1 million internet users access the web through fiber technology.

Iran is a progressive country in software and software development as well. Software exports stood at around USD 400 million in 2013-14. It was projected that the figure reach two percent of the country’s GDP by the end of the 5

th Development Plan. The government’s drive to implement serious supportive

measures towards the companies involved in the market has helped them to take effective steps in developing various local services and applications. Foreign investment in the sector is minimal, although some links are being developed with foreign software firms. Implications of intellectual property protection in Iran have also hindered the development of Iranian software companies because of lack of foreign direct investment in this sector. Overall, 17 percent of university students have majored in ICT related fields, which shows the potential of the country to further develop in communication and information technologies. About IRR 1.2 trillion will be offered by the Government to university students and graduates, and active private sector individuals, in form of low-interest loans during 2015-16.

E-Commerce and mobile commerce business has the potential to create a lot of jobs and businesses in Iran. The number of successful startups in this business provides the opportunity for the growth and development of internet entrepreneurship in Iran. Currently, online-sales estimated at around USD 300,000 per day with more than 20,000 active online stores. These figures are expected to increase exponentially once the new regulations are implemented and necessary facilities are employed.

Iran aims to increase local production of ICT equipment since the import of such goods have increased four-fold during the last decade and reached to USD 3 billion in 2013-2014. In order to support domestic production and research USD 273 million was allocated in form of controlled funds loan facilities to private sector in 2014-15. And in 2005-16, the Government allocated USD 364 million for helping this sector. In addition, design, manufacture and launch of a domestic communication satellite in cooperation with research centers, universities and private sector is considered as the most important plan of Iran.

As network quality and coverage improves, the Iranian consumer will develop a greater brand and product awareness, demanding greater mobile offerings and innovative service packages. Current penetration levels indicate room for continued revenue growth. Despite the relatively low penetration of fixed broadband there are moves underway to improve broadband access. According to the emerging needs the country makes investment on increasing the bandwidth nationally which currently stands at 2400 Mb/s. The Government is mandated to provide internet connection and e-services to regions of the country in the borders and the rural areas as well. In cooperation with the private sector, more than 8,000 villages in the country are now benefitting from these services and another 25,000 villages will join this service by the end of 2015-16. As a result the country was recently awarded the UNESCO special

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certificate for developing telecommunication services in rural areas. The Government is targeting to provide computers and internet to every school in the country. The country has been providing a substantial number of government and commercial services via the internet and to equip every school with computers and internet connections.

The Iranian telecommunications market has generated total service revenue of USD 9.9 billion in 2012 and it is estimated to grow at a rate of 6-7% per annum. The majority of this revenue would continue to come from the mobile sector. The Bank would seek to support development of technology parks and zones that could lead to further development of software and technology related businesses. It would also like to engage in projects that are aimed at increasing the coverage and access to the ICT services.

xi) Retail With a young, urbanized and educated population combined with the relatively high disposable income and positive international developments in the pipeline, Iran offers an attractive market for retail businesses. At present the Iranian retail industry is largely in the hands of independent retailers who operate through the bazaar networks that manage and control the distribution of the majority of consumer goods. This network includes key importers and wholesalers, which are still a necessity for the majority of manufacturers. The government-sponsored cooperatives are mainly active in traditional food markets. Although a growing number of mini-markets and supermarkets are emerging, but these are mostly one-off, independently owned operations. The most significant chains are the state-owned supermarkets, all of which are gearing up for expansion. Iran is an attractive prospect for a modern and experienced retail group who can muster experience of handling joint ventures and effectively managing the public sector regulatory and administrative procedures. A high inflation rate, poor GDP growth and unemployment hampered the growth of the retailing industry during the last two years. Although prices are relatively high but numerous well-known brands and goods are available in shopping centers. Imports still account for a considerable proportion of consumer goods consumption in Iran. Many foreign investors and groups have interest to enter the market. United Arab Emirates-based companies meet much of the demand; they re-export from Western and Asian countries, making Iran the UAE’s most important re-export market. Nevertheless, domestic output has risen strongly in recent years. The limiting factors in the growth of this sector could be the international relations and high land prices in Tehran which are making it difficult to have financial and commercial relations with Iranian entities. However, the domestic market potentials offers great opportunities for establishing joint ventures in retail business in Iran. The emergence of multinational retailers would further drive growth in this sector. Due to Government’s policies regarding foreign investment and privatization as well as development in international relations, the international financial system would have further incentives to penetrate the retailing market in Iran.

V. Conclusion

Despite economic depression during 2012-2013, from the beginning of 2014, improvement has occurred in the performance of economic activities in Iran. However, international restrictions and decrease in oil price had influence on government activities, especially in developmental expenditure. Nevertheless, the stability in the asset and foreign exchange markets, decline in inflation, financial discipline and government commitments to constrain expenditures within the boundaries of accessible resources, financial sector reforms along with deregulation of the economy created a better business environment for economic players in Iran. The economic growth rate reached to 3% in 2014-15 from its lowest level of previous two years. The average 12-month inflation dropped from its peak of 40.4% in October 2013 to 15.6% in July 2015. Overall, recent macroeconomic developments are indicating that the Iranian economy has moved away from the severe stagflation and it is expected that such positive developments on the basis of the well-defined policies will continue in the future. The efficacy of improvement in international relations in the coming years is expected to reflect positively to economic prosperity, job creation and exports expansion. The transfer of oil revenues and expected foreign assets channeled to

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the development of relevant infrastructure in the country would ensure the sustainable growth over the coming year.

While finalization of the 6th Development Plan (2016-2021) is under process, the general policies of the said plan targets realization of an average economic growth rate of 8 percent during the five-year period. The oil and gas sector would continue to be the main resources and assets of economic development while efforts for development of non-oil sector would continue to be on the development agenda. Iran has attracted about USD 2.1 billion foreign direct investment in 2014-15. But a remarkable increase is expected in the coming years, as the country realized about USD 3 billion foreign investment during the first quarter of 2015-16. On the other hand, new horizons would emerge on the economy as positive developments are expected to be materializing as a direct result of improvement in international relations. 2015-16 year's budget was formulated very realistically based on current trends in oil prices. The Government has been mapping out strategies to channel funds and accelerate development of key sectors including oil and gas, petrochemicals, mining, manufacturing, banking, tourism, and ICT. The government’s policy to bring down the inflation to single-digit rate and decreasing the unemployment rate will be strongly pursued. Evaluating the various investment opportunities is expected to put towards productive ends, driving economic growth and foreign investment. Meanwhile adoption of necessary measures in doing business would play a significant role in further increasing the foreign investment flows. By and large, it seems that the general performance of the Iranian economy in the coming years in accord with ideals and optimum targets expected to provide better results. The private sector is of sustainable importance for economic growth and that’s why the Bank would also continue to support steps for the enlargement of the private sector in Iran. A dynamic private sector needs to contribute creating jobs needed by the growing population. Through its privatization program and other incentives to the private sector the government is now affording greater space to this sector. The current country program document has been developed in alignment with the National Development Plan and Vision-2025. In the coming years, the cornerstone components of the country program would include: Energy. The productive capacity in the oil and gas sector would be enhanced and modernized. Focus on small-medium sized projects aimed at increasing production and efficiency in the energy sector. Development of transport and distribution networks (including emphasis on cross-country networks), and enhancing exports of value-added petrochemical products. Support realization of the untapped potential in renewable energy sources including solar, wind, geothermal. Infrastructure. The Bank will seek investment opportunities for well-designed water supply and wastewater treatment projects. Engage in development of trade related infrastructure projects (particularly enhancing regional connectivity) aimed to improve roads and railways networks and logistics. Manufacturing and Construction. Strategic focus will be on the enhancement of productivity, efficiency, capacity building, engineering, technological up-gradation and research activities of industrial conglomerates. Support industrial enterprises that are active in manufacturing and mining sector which intend to expand their business to export markets. Agriculture. Operations shall promote a sustainable, modern and diversified agricultural production. Construction, rehabilitation and modernization of irrigation and drainage systems for more efficient agricultural production and effective use of water resources. Development of agribusiness activities, packing and storage facilities would be encouraged. Trade. Promote export of goods and services. Support expansion & diversification of trade in terms of markets and products. Financial sector. Support development of financial services and products of local financial institutions in

SMEs finance and trade finance.

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