Iran

Iran is the second largest economy in the Middle East and North Africa (MENA) region in terms of GDP - US$484 billion in 2012 (after Saudi Arabia) and in terms of population - 78 million people (after Egypt). It is characterized by a large hydrocarbon sector, small scale private agriculture and services, and a noticeable state presence in manufacturing and finance. In 2010, the service sector (including Government) contributed 55 percent to GDP, followed by manufacturing with 22 percent, agriculture with 14 percent, and oil and gas with 9 percent. Iran ranks second in the world in natural gas reserves and third in oil reserves. It is the second largest OPEC oil producer; output averaged about 4 million barrels per day in recent years. Revenues from oil and gas exports accounted for about 60 percent of government revenues in 2011/12 and are Iran's chief source of foreign exchange. Thus, aggregate GDP and Government revenues are intrinsically volatile, fluctuating with international prices of these commodities despite the Oil Stabilization Fund and the newly established national development fund (in 2011/12).

Iranian authorities have adopted a comprehensive strategy envisioning market-based reforms as reflected in the Government’s 20-year Vision document and Iran’s fifth Five-Year Development Plan (FYDP, 2011–15). However, the Iranian state still plays a key role in the economy, owning large public and quasi-public enterprises which partly dominate the manufacturing and commercial sectors. The Government envisioned a large privatization program in its 2010-15 five-year plan aiming to privatize some 20 percent of state-owned enterprises (SOEs) each year.  However, the Iranian Revolutionary Guards Corps and other semi-Governmental enterprises have reportedly purchased controlling shares in numerous SOEs that were offered to private investors in the stock market through the Government’s privatization program. The financial sector is also dominated by public banks. Moreover, Iran’s 2012 Doing Business ranking at 144 is in the bottom tiers of the MENA region. Only Algeria, Iraq, and Djibouti rank lower among MENA countries. However, the authorities have adopted a comprehensive strategy as reflected in their 20-year vision plan and the 5th Five-Year Development Plan to ensure the implementation of market-based reforms.

The Government has launched a major reform of its indirect subsidy system, which, if successful would markedly improve the efficiency of expenditures and economic activities. The overall subsidies were estimated to cost 27 percent of GDP in 2007/2008 (approximately US$77.2 billion). The Government has opted for a direct cash transfer program while substantially increasing the prices of petroleum products, water, electricity, bread and a number of other products. However, political wrangling between the current administration and the parliament as well as economic hardship due to sanctions has postponed the implementation of the second phase of the reform program.

Economic growth increased by 4 percent in 2009/10 while prudent macroeconomic policies reduced inflation to about 10 percent and ensured a fiscal surplus. The initial impact of the removal of the substantial energy and food subsidies in December 2010 did not suppress Iran’s economic performance in part also due to prudent initial macroeconomic policies and the Government’s substantial cash transfers program to households. However, stricter international economic sanctions, in particular the European Union’s embargo on Iranian crude oil since July, led to a sharp decline in oil exports. The impact of recent sanctions has pushed the economy to contract in 2012. The increase in prices for (imported) inputs due to higher energy prices and the sharp depreciation of the (black market) exchange rate for the Rial also started to suppress the performance of Iran’s non-hydrocarbon industrial sector. The currency has lost an estimated 80 percent in value against the US dollar between March 2012 and March 2013 and is likely to further depreciate. For instance, Iran’s sizeable pharmaceutical industry is reportedly struggling to import essential raw materials. Moreover, the number of bankruptcies appears to be on the rise while factories are reported to be working at only half their capacity.

The medium-term outlook for economic growth is negative due to the impact of stricter recent economic sanctions which are expected to reduce revenues from oil exports and to impede corporate restructurings. The speed of economic adjustment to higher energy prices after the subsidy reform will depend crucially on the corporate sector’s ability to offset increased input costs. In principle, the subsidy reform can lead to more labor-intensive economic growth, reducing unemployment in the long term. However, the stricter economic sanctions are expected to delay corporate restructurings as they reduce firms’ access to foreign markets, inputs, and more energy-efficient technologies. Moreover, the increase in inflation since 2011, in particular the recent increase in import inflation due to the devaluation of the Rial, started to offset the potential medium-term efficiency gains of the subsidy reform. Rampant inflation would result in rapid erosion of domestic energy prices, thereby eroding the benefits of reform. Controlling inflation requires tightly coordinated monetary and fiscal policies. While such policies had been prudent in recent years, the devaluation of Iran’s currency since the announcement of tighter international sanctions might trigger an upward adjustment of rapidly self-fulfilling inflation expectations. The official inflation rate is estimated at 28.7 percent in 2012. Official data, however, is widely thought to understate actual inflation.

The country’s social indicators are relatively high by regional standards. Most human development indicators have improved noticeably based on the Government’s efforts to increase access to education and health. Virtually all children of the relevant age group were enrolled in primary schools in 2009 and enrollment in secondary schools increased from 66 percent in 1995 to 84 percent in 2009. As a result, youth literacy rates increased from 77 percent to 99 percent over the same period, rising significantly for girls. Consequently, Iran is well placed to achieve the MDG target with regard to eliminating gender disparities. Over the years, Iranian women have been playing an increasingly important role in the economy, though their market participation and employment rates remain limited. Iran’s health outcomes have also improved considerably over the past twenty years. The mortality rate for children under five steadily declined from 65 (per 1,000) in 1990 to 27 in 2009. Similarly, the maternal mortality ratio per 100,000 live births declined from 150 to 30 during the same period. Consequently, health indicators are usually above regional averages. This success is based on the effective delivery of primary health care which almost balanced health care outcomes in rural and urban areas. Iran’s new 5th five-year development plan from 2011 to 2015 continues to focus on social policies.

Updated: April 2013

There is currently no Country Assistance Strategy for Iran.  The last Interim Assistance Strategy which covered the period 2002-2003 was extended through 2005.  No new World Bank loans to Iran have been approved since 2005, and with the last project closing in October 2012, there are no active projects in, nor disbursements to, Iran at this time.  

The International Finance Corporation (IFC) has no program in Iran at present.  Previous investments committed in 2004 and 2005 have recently closed, and IFC has no exposure to Iran.  The Multilateral Investment Guarantee Agency’s (MIGA) program in Iran supports Japanese and Thai investors in a single petrochemical project.  The guarantees for this project were signed in 2005 and no new guarantees have been provided since then.

Updated: April 2013