How Public Investment Could Help Strengthen Iran's Growth Potential: Issues and Options

Abstract

Public investment is key to growth in developing, oil-exporting countries, and oil revenue is an important source of finance for public investment. Looking at various approaches (gradual, aggressive, and conservative) to scaling up public investment in Iran under different oil price scenarios (baseline and adverse), this paper shows that because of absorptive capacity constraints and investment inefficiencies, the growth impact of an aggressive strategy is not significantly different from a conservative or a gradual design. Meanwhile, its costs, in terms of fiscal adjustment, are significantly higher, especially during periods when oil prices are low. Furthermore, an improvement in investment efficiency has a significant positive impact on growth outcomes and leads to higher private consumption and investment. Introducing an oil fund, on the other hand, can help contain the size of fiscal adjustments, although it results in a larger appreciation of real exchange rates and deterioration in the current account balance.