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Economy of Iran

Economy Iran - Car manufacturing in Tehran, at the main plant of Iran Khodro Company (IKCO).
Car manufacturing in Tehran, at the main plant of Iran Khodro Company (IKCO), where brands like Roa, Peugeot, Samand are made / Photo HH

Contents

Gross domestic product
Industry
Agriculture and livestock
Foreign trade
Poverty
International market position
Infrastructure
Tourism
Banking
Energy

Introduction

Iran’s economy is marked by statist policies, inefficiencies, and reliance on oil and gas exports, but Iran also possesses significant agricultural, industrial, and service sectors. The Iranian government directly owns and operates hundreds of state-owned enterprises and indirectly controls many companies affiliated with the country’s security forces. Distortions – including corruption, price controls, subsidies, and a banking system holding billions of dollars of non-performing loans – weigh down the economy, undermining the potential for private-sector-led growth.

The lifting of most nuclear-related sanctions under the Joint Comprehensive Plan of Action (JCPOA) in January 2016 sparked a restoration of Iran’s oil production and revenue that drove rapid GDP growth, but economic growth declined in 2017 as oil production plateaued. The economy continues to suffer from low levels of investment and declines in productivity since before the JCPOA, and from high levels of unemployment, especially among women and college-educated Iranian youth.

Iran’s economy is characterized by the hydrocarbon sector, agriculture and services sectors, and a noticeable state presence in manufacturing and financial services. Iran ranks second in the world in natural gas reserves and fourth in proven crude oil reserves. Economic activity and government revenues still depend to a large extent on oil revenues and therefore remain volatile.

Iranian authorities have adopted a comprehensive strategy encompassing market-based reforms as reflected in the government’s 20-year vision document and the sixth five-year development plan for the 2016-2021 period. The sixth five-year development plan is comprised of three pillars, namely, the development of a resilient economy, progress in science and technology, and the promotion of cultural excellence. On the economic front, the development plan envisages an annual economic growth rate of 8 percent and reforms of state-owned enterprises, the financial and banking sector, and the allocation and management of oil revenues among the main priorities of the government during the five-year period.

Gross domestic product

Iran’s GDP growth in 2017/18 dropped to 3.8 percent as the effect of a large surge in oil revenues in the previous year dissipated, According to the World Bank, The overwhelming majority of growth came from the non-oil sectors out of which more than half can be attributed to services growing by 4.4 percent.

Oil, agriculture and services sectors are now back above the levels of activity they were prior to sanctions in 2012/13. But in the past two years, there has not been a strong bounce back in key sectors such as construction and trade, restaurant and hotel services following the stagnation in growth during the sanctions period and the overhang from the problems of the banking sector. The oil and gas sector witnessed a growth of 0.9 percent, limited by the OPEC+ quota for the agreed period.

Indicatorsmeasuring unit20162017Change ±
GDP (at constant 2010)Billion US$540.581560.88120.3
GDP growth (annual)%13.403.76-9.64
GDP per capita (constant 2010)US$6,733.96,910.6176.7
GDP (at current value)Billion US$385.874454.01368.139

Source: World Bank.

Industry

The value-added growth rates of the Iranian manufacturing and mining sectors were 6.9 per cent and 2.1 per cent respectively in 2016/2017 (an Iranian year runs across two years in the Gregorian calendar), according to the Ministry of Industry, Mine and Trade. The production index of large manufacturing institutions increased by 8.7 per cent in 2017. These institutions manufacture chemical products, main metals, automobiles, trailers and semi-trailers, and food products with a relative rate of 69.9 per cent for this kind of products. The production index of these institutions increased by 11.8 per cent, 1.3 per cent, 37.6 per cent and 8.5 per cent respectively.

The employment index in the manufacturing and mining sectors decreased by 2.2 per cent in 2017, whereas the wage index increased by 18.3 per cent. In 2016/2017, about 1.35 million light and heavy vehicles were manufactured and crude steel production increased by 13.5 per cent, while cement, aluminium and copper production fell by 4.1 per cent, 4.1 per cent and 1.5 per cent respectively, compared to 2015/2016.

The number of manufacturing permits issued in 2016/2017 was 15,417, compared to 14,896 in 2015/2016. Meanwhile, the number of operating permits issued for existing manufacturing and updated units was 5,207 in 2016/2017, compared to 4,833 permits in 2015/2016. These industrial facilities created about 85,000 new jobs, compared to 76,300 jobs created in 2015/2017.

Agriculture and livestock

Agriculture plays an important role in Iran’s economy, accounting for more than a quarter of the gross domestic product (GDP) and absorbing about 25 per cent of the workforce. However, the sector faces a number of challenges, such as an increasing population, destruction of natural resources, over-reliance on pesticides and chemicals, limited arable land, soil erosion and water pollution.

Low rainfall caused by climate change has exacerbated water scarcity in recent years. In 2017/2018, rainfall decreased by 25 per cent. This has contributed to the reported 35 per cent reduction in water entering Iranian dams, from 32 billion cubic metres of surface water in 2017 to 25 billion cubic metres in 2018. This significant reduction is threatening the agricultural sector, which consumes 92 per cent of the country’s renewable water resources, compared to 70 per cent in most other countries. A third of this water is used to grow wheat, of which Iran produces about 13.5 million tons a year, making it the largest crop in the country.

According to Central Bank reports, the total volume of agricultural production in 2016/2017 was about 104 million tons, the majority of which was agricultural products (wheat, barley, corn, cotton, sugarcane, etc.) amounting to 82.99 million tons, and horticultural products (citrus fruits, grapes, apples, pistachios etc.) amounting to 21.02 million tons, with a total growth rate for agricultural and horticultural products of 7.9 per cent compared to 2015/2016.

Livestock and fish products were estimated at 14.66 million tons in 2016/2017, of which livestock products (red meat, milk, poultry, eggs etc.) amounted to 13.57 million tons and fish products (fish and shrimp) amounted to 1.09 million tons, with a total growth rate for livestock and fish products of 4.3 per cent compared to 2015/2016.

Foreign trade

In 2016/2017, the  total value of Iranian exports increased by about 3.1 per cent compared to 2015/2016. China accounted for 21.4 per cent of Iran’s exports, followed by Iraq (16 per cent), the United Arab Emirates (14.5 per cent), Turkey, Afghanistan and India (8.8 per cent, 6.7 per cent and 5.9 per cent respectively).

In terms of the relative importance of Iran’s export structure, 81.7 per cent is industrial goods, including oil and gas products, 15 per cent agricultural goods and 3.3 per cent others.

In 2016/2017, imports increased by 5.2 per cent compared to the previous year, 61.9 per cent of which was raw materials and semi-finished products, 21 per cent capital goods and machinery, and 16.7 per cent consumer goods.

At the forefront of exporters to Iran in 2016/2017, China ranked first with 24.6 per cent, followed by the United Arab Emirates (14.7 per cent), South Korea, Turkey and Germany (7.9 per cent, 6.3 per cent and 5.8 per cent respectively).

Poverty

Iran entered an unstable period after 2009 and faced multiple shocks, including sanctions. Poverty also remained volatile during this period, although there is no fixed official poverty line in Iran. However, according to the international poverty line of $5.50 per person per day in upper-middle-income countries (2011 purchasing power parity), poverty in Iran between 2009 and 2013 decreased by 5 per cent to around 8 per cent before rising again to 11.6 per cent in 2016.

These figures hide the sharp urban/rural differences in poverty levels. Rural poverty rates in 2016 reached 27 per cent, compared to 6 per cent in urban areas, according to the World Bank. Tracking economic inequality using the Gini index, the index fell between 2009-2013 from 42 points to 37.4 points and then increased to 40 points in 2014.

Iran was unable to maintain positive growth in per capita spending for 40 per cent of the population between 2013-2016, despite positive economic growth in 2014 and 2016 in particular, as this segment of the population had a negative growth rate of 3.2 per cent during that period. The World Bank attributes this negative result to the erosion of the real value of global cash transfers distributed to compensate for the increasing energy prices after subsidy reforms. Cash transfers were useful in reducing poverty in 2009, but because of rising inflation, the real value of benefits diminished, which was the main factor behind the increase in poverty after 2013. This negative impact was stronger than the effects of poverty reduction resulting from the economy and labour market expansion.

IndicatorsNumber of Poor (thousand) 2016Rate (%) 2016
National Poverty LineN/AN/A
International Poverty Line 23567.3 in Iranian rial (2016) or US$1.90 (2011 PPP) per day per capita213.30.3
Lower Middle Income Class Poverty Line 39692.4 in Iranian rial (2016) or US$3.20 (2011 PPP) per day per capita2,040.32.5
Upper Middle Income Class Poverty Line 68221.3 in Iranian rial (2016) or US$5.50 (2011 PPP) per day per capita9,314.411.6

Indicators Poverty in 2016. Source: The World Bank.

International market position

Iran was ranked 69th out of the 137 countries covered by the Global Competitiveness Index 2017-2018, seven places higher than in 2016-2017. However, the macroeconomic environment has deteriorated significantly in the past year, despite its progress in most indicators, such as institutions (on which ranks 85th in the index), higher education and training (51st), infrastructure (57th), commodity market efficiency (100th), business environment development (97th) and innovation (66th). This deterioration reflects the general public mood, especially with regards to the instability in the exchange market. The government announced the unification of the official and parallel exchange rates in April 2018 but failed to achieve its goal of calming markets.

The parallel market price rose in anticipation of a continued reduction in the US dollar, after the United States pulled out of the 2015 nuclear deal in May 2018. By August 2018, the Iranian rial had lost 172 per cent of its value, as the exchange rate rose to more than 100,000 rials to the dollar. This contributed to the return of the calculated inflation rate to 24 per cent the same month, a rate not seen since 2013.

IndicatorRank (out of 138) 2016–2017Rank (out of 137) 2017–2018Change in rank ±
Institutions90855
Infrastructure59572
Macroeconomic environment7244-28
Health and primary education4950-1
Higher education and training60519
Goods market efficiency11110011
Labor market efficiency1341304
Financial market development1311283
Technological readiness97916
Market size19190
Business sophistication1099712
Innovation896623
Global Competitiveness Index76697

Iran’s rank on the Global Competitiveness Index. Source: Global Competitiveness Index 2016/2017 and 2017/2018.

Infrastructure

The country’s roads total about 178,151 kilometres (2007 estimate) and connect Tehran with all parts of the country and neighbouring countries. Iran’s railroads total 11,435 kilometres (2006 estimate), and the country has 316 airports (2009 estimate), including 54 major airports, of which eight international airports. Iran’s pipeline system carries natural gas, liquified petroleum gas, petroleum, and refined products. Iran’s main ports are on the Persian Gulf, at Asaluyeh, Bandar-Abbas, and Bandar-e Emam Khomeyni.

Tehran has had a metro system since 1999. Line 5, connecting Tehran to the suburb of Karaj, west of the city, was the first line to be completed. Line 1, running from north to south, and line 2 running from east to west, began operations in 2000. Lines 3 and 4 are still to be completed. On its website, the Tehran metro company features examples of a mix of traditional and modern art that can be found in the metro stations.

Click to enlarge ©Fanack

Tourism

The tourism industry was severely disrupted by the 1978-1979 Revolution and the Iraq-Iran War (1980-1988). The number of tourists fell from 695,500 in 1977 to 62,373 in 1982. The tourism industry began to revive slowly in the 1990s.

In 2004 Iran Cultural Heritage and Tourism Organization (ICHTO) officials admitted that ‘Iran’s share in the world tourism revenues is a meagre 0.0001 percent’. This was the result, in large measure, of the Revolution and the subsequent war with Iraq.

The Fourth Five-Year Economic Development Plan (March 2005-2010) called for the number of foreign tourists to increase to 2.5 million annually. In 2004 some 700,000 foreign tourists visited Iran, and revenues from tourism stood at USD 500 million. The industry faces serious limitations in infrastructure, communications, regulatory norms, personnel training, and visa requirements for foreign nationals, but, during the decade 2000-2010, there was a significant increase in domestic tourism.

Banking

Iran’s banking system was nationalized in 1979. Private banks were not authorized to reopen until the early 2000s. The Bank-e Markazi, the Central Bank of Iran, strictly monitors all state and private banks. In 2007 approximately 364 companies were listed on the Tehran Stock Exchange. While the trading of shares was limited between 1979 and 1986, activity has increased sharply since 2002. The tourism industry was disrupted by the 1978-1979 Revolution and the Iran-Iraq War (1980-1988) but began to revive in the 1990s.

Energy

For an in-depth overview of Iran’s energy sector, click on the button below.

Further Reading

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