The Economy of Iran

By

Prathik Shetty

Iran is an Islamic republic on the Persian Gulf with historical sites dating to the Persian

Empire. Extensive marble ruins mark Persepolis, the empire’s capital founded by Darius I in

the 6th century B.C.

It is a founding member of the UN, ECO, NAM, OIC, and OPEC. Its political system is

based on the 1979 Constitution which combines elements of a parliamentary democracy with

a theocracy governed by Islamic jurists under the concept of a Supreme Leadership. A

multicultural country comprising numerous ethnic and linguistic groups, most inhabitants are

officially Shia, and Persian is the official language.

It is the second largest economy in the Middle East and North Africa (MENA) region after

Saudi Arabia, with an estimated Gross Domestic Product (GDP) in 2014 of US$406.3 billion.

It also has the second largest population of the region after Egypt, with an estimated 78.5

million people in 2014. Iran’s economy is characterized by a large hydrocarbon sector, small

scale 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.

Iran had one of the Middle East’s most advanced economies before the 1979 Islamic

revolution. Today, the economy is in shambles thanks to an agenda characterized by large

subsidies to favored sectors, a bloated public sector, and high inflation. Corruption is another

serious problem. Economic sanctions imposed by the U.S. and European Union in response

to Iran’s illicit nuclear weapons program have had devastating effects. Petroleum exports,

which provide about 85 percent of government revenues, declined drastically in 2011.

President Hassan Rowhani, elected in June 2013, had found it difficult to revive the economy

without the removal of Western sanctions by negotiating a deal to curb Iran’s nuclear

program. Things have now started looking better for the country post the lifting of the trade

ban by the United States of America and other associated nations.

The economy of Iran is a mixed and transition economy with a large public sector. About

60% of the economy is centrally planned. It is dominated by oil and gas production, although

over 40 industries are directly involved in the Tehran Stock Exchange. With 10% of the

world's proven oil reserves and 15% of its gas reserves, Iran is considered as an "energy

superpower".

It is the world's 18th largest by purchasing power parity (PPP) and twenty-nine by nominal

gross domestic product. The country is a member of Next Eleven because of its high

development potential. A unique feature of Iran's economy is the presence of large religious

foundations called Bonyad, whose combined budgets represent more than 30% of central

government spending.

Price controls and subsidies, particularly on food and energy, burden the economy.

Contraband, administrative controls, widespread corruption, and other restrictive factors

undermine private sector-led growth. The legislature in late 2009 passed the subsidy reform

plan. This is the most extensive economic reform since the government implemented gasoline

rationing in 2007.

Most of the country's exports are oil and gas, accounting for a majority of government

revenue in 2010. Oil export revenues enabled Iran to amass well over $100 billion in foreign

exchange reserves as of 2010.

Due to its relative isolation from global financial markets, Iran was initially able to avoid

recession in the aftermath of the 2008 global financial crisis. Yet, following increasingly

stringent sanctions imposed by the international community as a result of the country's

nuclear program, oil exports fell by half, allowing Iraqi oil exports to overtake Iran's for the

first time since the 1980s. In September 2012, the Iranian Rial fell to a record low of 23,900

to the US dollar.

Exports aided self-sufficiency and domestic investment, although double-digit unemployment

and inflation remain problematic. Iran's educated population, high human development,

constrained economy and insufficient foreign and domestic investment prompted an

increasing number of Iranians to seek overseas employment.

Population: 77.1 million

GDP (PPP): $945.5 billion –1.7% growth in 2013 5-year compound annual growth 1.0%

$12,264 per capita

Unemployment: 13.2%

Inflation (CPI): 35.2%

FDI Inflow: $3.0 billion

Public Debt: 10.6% of GDP

After the Iranian Revolution in 1979, the United States ended its economic and diplomatic

ties with Iran, banned Iranian oil imports and froze approximately $11 billion of its assets. In

1996, the U.S. Government passed the Iran and Libya Sanctions Act (ILSA) which prohibits

U.S. (and non-U.S.) companies from investing and trading with Iran in amounts of more than

$20 million annually. Since 2000, exceptions to this restriction have been made for items

including pharmaceuticals and medical equipment.

Iran's nuclear program has been the subject of contention with the West since 2006 over

suspicions of its intentions. The UN Security Council imposed sanctions against select

companies linked to the nuclear program, thus furthering the country's economic isolation.

Sanctions notably bar nuclear, missile and many military exports to Iran and target

investments in oil, gas and petrochemicals, exports of refined petroleum products, as well as

the Iranian Revolutionary Guard Corps, banks, insurance, financial transactions and shipping.

In 2012, the European Union tightened its own sanctions by joining the three decade-old US

oil embargo against Iran. In 2015, Iran and the world powers reached a deal on Iran's nuclear

program that will remove the main sanctions against Iran by early 2016.

Iran may be losing as much as $60 billion annually in energy investment. Sanctions are

making imports 24% more costly on average. In addition, the latest round of sanctions could

cost Iran annually $50 billion in lost oil revenues. Iran is increasingly using barter trade

because its access to the international dollar payment system has been denied.

The Gross Domestic Product (GDP) in Iran was worth 415.34 billion US dollars in 2014. The

GDP value of Iran represents 0.67% of the world economy. GDP in Iran averaged 148.91

USD Billion from 1965 until 2014, reaching an all-time high of 576.56 USD Billion in 2011

and a record low of 6.15 USD Billion in 1965. GDP in Iran is reported by the World Bank.

The biggest sector of Iran´s economy is services, which account for 51% of GDP. With

services the most important segments are: real estate and specialized and professional

services (14% of total GDP); trade restaurants and hotels (12%) and public services (10%).

Oil production constitutes 23% of the wealth. Manufacturing and mining contribute for 13%

of the output and agriculture for 10%. The last big component of the GDP is construction and

electricity, gas and water distribution, which account for 7% of total output.

Year

GDP,

current

prices

(billions

IRR)

Implied

PPP

conversion

rate

(USD/IRR)

GDP per

capita, PPP

(current

international

dollar)

Inflation index

(average CPI)

(2013/2014=100)

Current

account

balance

(billions

US dollars)

Population

(million

persons)

1980 6,622 40 4,267 0.5 -3.6 38

1985 16,556 53 6,469 0.9 -0.9 48

1990 35,315 101 6,410 2.5 -2.7 55

1995 185,928 399 7,265 9 3.4 64

2000 580,473 940 9,666 21 12.5 64

2005 1,831,739 2,025 13,036 40 15.4 69

2010 4,333,088 3,498 16,664 82 27.3 74

2015

(est.) 13,077,142 9,788 16,918 253 6.9 79

Throughout the 1960s and 1970s, Iran had a favourable trade balance, but substantial imports

of services resulted in an annual deficit on current accounts. By 1974, with a net trade surplus

of $17,718 million and a current accounts surplus of $10,893 million, Iran was one of the

world's major exporters of capital. The current accounts balance remained in surplus annually

until the massive economic and civic turbulence caused by the revolution of 1979 and the

long, devastating war with Iraq (1980–88). By the time the war had ended, Iran's position as a

net foreign creditor was badly eroded due to a substantial drop in the world price for oil and a

sharp increase in dependence on imports—largely machinery and basic commodities to

rebuild infrastructure. By 1993, Iran owed foreign creditors nearly $30 billion. In following

years, the government, still plagued by lessening oil revenues and a quota of production

imposed on it by OPEC, was forced to reschedule the debt—with payments coming due in

1996, when foreign debt went down to approximately $22 billion. Foreign debt stood at

approximately $8.2 billion in 2002.

The International Monetary Fund (IMF) reports that in 2000 Iran had exports of goods

totalling $28.4 billion and imports totalling $15.2 billion. The services credit totalled $1.4

billion and debit $2.3 billion. The following table summarizes Iran's balance of payments as

reported by the IMF for 2000 in millions of US dollars.

The last Interim Assistance Strategy which covered the period 2002-2003 was extended

through 2005 by the World Bank. No new World Bank loans to Iran have been approved

since 2005 and all projects have closed. The International Finance Corporation (IFC) has no

program in Iran at present. Multilateral Investment Guarantee Agency (MIGA) issued two

guarantees in 2005 and no guarantees have been provided since then.

The distribution gives the percentage contribution of agriculture, industry, and services to

total GDP, and will total 100% of GDP if the data is complete. Agriculture includes farming,

fishing, and forestry. Industry includes mining, manufacturing, energy production, and

construction. Services cover government activities, communications, transportation, finance,

and all other private economic activities that do not produce material goods.

The service sector accounts for the majority of the GDP of Iran with more than half the

amount contributed by this sector. It is followed by oil exports and consequently followed by

agriculture and the manufacturing sector.

The inflation rate in Iran was recorded at 10.80% in October of 2015. Inflation Rate in Iran

averaged 14.09% from 1957 until 2015, reaching an all-time high of 59.02% in May of 1995

and a record low of -3.27% in April of 1958. Inflation Rate in Iran is reported by the Central

Bank of Iran. In Iran, the most important categories in the consumer price index are Housing,

water, electricity, gas and other fuels (29% of total weight) and Food and beverages (28.5%

of total weight). Others include: Transport (11.97%); Furnishings, household equipment and

routine household maintenance (6%); Clothing and footwear (6%) and Health (5.5%). The

smallest groups are Recreation and culture; Education; Restaurants and hotels;

Communication; Tobacco at and Miscellaneous services and goods.

For the year 2015,

Iran Prices Last Previous Highest Lowest

Inflation Rate 10.80 11.17 59.02 -3.27

Consumer Price Index CPI 228.70 227.00 228.70 2.30

Producer Prices 216.00 216.00 216.10 56.27

Food Inflation 6.40 7.10 57.90 4.20

Iran’s Human Development Index (HDI) value for 2014 is 0.766— which puts the country

in the high human development category—positioning it at 69 out of 188 countries and

territories. Between 1990 and 2014, Iran’s HDI value increased from 0.567 to 0.766, an

increase of 35.0 percent or an average annual increase of about 1.26 percent. The rank is

shared with Costa Rica.

Between 1980 and 2014, Iran’s life expectancy at birth increased by 21.3 years, mean years

of schooling increased by 5.9 years and expected years of schooling increased by 5.9 years.

Iran’s GNI per capita increased by about 52.9% between 1980 and 2014.

Iran’s 2014 HDI of 0.766 is above the average of 0.744 for countries in the high human

development group and above the average of 0.607 for countries in South Asia. From South

Asia, countries which are close to Iran in 2014 HDI rank and to some extent in population are

Bangladesh and Pakistan, which have HDIs, ranked 142 and 147 respectively.

The Gender Development Index (GDI) measures gender inequalities in achievement in

three basic dimensions of human development: health (measured by female and male life

expectancy at birth), education (measured by female and male expected years of schooling

for children and mean years for adults aged 25 years and older); and command over

economic resources (measured by female and male estimated GNI per capita). The GDI is

calculated for 161 countries. The 2014 female HDI value for Iran (Islamic Republic of) is

0.689 in contrast with 0.804 for males, resulting in a GDI value of 0.858. In comparison, GDI

values for Bangladesh and Pakistan are 0.917 and 0.726 respectively.

The Gender Inequality Index (GII) reflects gender-based inequalities in three dimensions –

reproductive health, empowerment and economic activity. The GII can be interpreted as the

loss in human development due to inequality between female and male achievements in the

three GII dimensions. Iran has a GII value of 0.515, ranking it 114 out of 155 countries in the

2014 index. In Iran, 3.1 percent of parliamentary seats are held by women, and 62.2 percent

of adult women have reached at least a secondary level of education compared to 67.6

percent of their male counterparts. For every 100,000 live births, 23 women die from

pregnancy related causes; and the adolescent birth rate is 31.6 births per 1,000 women of ages

15-19. Female participation in the labour market is 16.6 percent compared to 73.6 for men.

Multidimensional Poverty Index (MPI) identifies multiple deprivations in the same

households in education, health and living standards. Due to a lack of relevant data, the MPI

has not been calculated for this country.

According its estimates, in 2011, access to an improved source of water supply was 98% in

urban areas where more than two thirds of Iranians live. It was 90% in rural areas (87% house

connections). Access to sewerage in urban areas was estimated at 19% in the late 1990s.

Access to improved sanitation was estimated at close to 100%.

Iran is a presumed source, transit, and destination country for men, women, and children

subjected to sex trafficking and forced labour. Iranian and Afghan boys and girls are forced

into prostitution domestically; Iranian women are subjected to sex trafficking in Iran,

Pakistan, the Persian Gulf, and Europe. Iran does not comply with the minimum standards for

the elimination of trafficking, and is not making significant efforts to do so; the government

does not share information on its anti-trafficking efforts, making it difficult to assess the

country's human trafficking problem or the government's attempts to curb it.

Despite substantial interdiction efforts and considerable control measures along the border

with Afghanistan, Iran remains one of the primary transhipment routes for Southwest Asian

heroin to Europe; suffers one of the highest opiate addiction rates in the world, and has an

increasing problem with synthetic drugs; lacks anti-money laundering laws; has reached out

to neighbouring countries to share counter-drug intelligence.

UNDP’s 2012-2016 country programme was prepared in close consultation with the

Government of the Islamic Republic of Iran, drawing from the Fifth National Development

Plan, the agreed outcome areas of the United Nations Development Assistance Framework

(UNDAF) 2012-2016, and key priorities of the UNDP Strategic plan. The country

programme is organized around four main issue-areas: poverty reduction, environmentally

sustainable management, health in terms of support to Global Fund grant implementation and

natural disaster management. The cross-cutting issues of south-south cooperation and sharing

of knowledge and expertise through science and technology transfer are included across all

programme components. As a middle income country, Iran is well placed to play a leading

role in exchanging knowledge and technical expertise through South-South cooperation, both

in the region and globally. UNDP will continue to support Iran in these endeavours, drawing

on its vast global knowledge network and established best practices.

The Indian state that corresponds to the economy of Iran would be Jammu and Kashmir. Even

though the HDI of J&K is 0.644 as compared to 0.766 of Iran, but on a comparative scale, both can be

ranked well above the respective average.

Both J&K (0.29) and Iran (0.34) have similar Gini coefficients close to 0.3 which is well below

average. Both regions have a fair literacy rate of about 65%.

Both regions are major exporters of commodities; Iran being a major oil exporter and J&K being

major exporter of minerals and spices.

There is constant unrest in both the regions due to heavy political tension.

Trade restrictions are prevalent in both the regions which are constantly hampering growth in both

these regions.

Both the regions were erstwhile famous tourist destinations, but tourism has taken a hit due to the

political unrest prevalent in these regions.

The formation of new government and the upliftment of trade sanctions and better policies have

ushered in a new era of growth and cooperation in these regions.

IGIDR Publication: INDIA DEVELOPMENT REPORT 2012–13

UNDP Iran Country Programme 2012-2016

http://www.worldbank.org/en/country/iran/

http://www.heritage.org/index/country/iran#

https://en.wikipedia.org/wiki/Economy_of_Iran

https://en.wikipedia.org/wiki/Water_supply_and_sanitation_in_Iran

http://www.tradingeconomics.com/iran/

http://www.theodora.com/wfbcurrent/iran/iran_issues.html

http://www.nationsencyclopedia.com/Asia-and-Oceania/Iran-BALANCE-OF-

PAYMENTS.html

https://en.wikipedia.org/wiki/Economic_history_of_Iran