Iran is the second largest economy in the Middle East and North Africa (MENA) region after Saudi Arabia, with an estimated Gross Domestic Product (GDP) of USD 366 billion in 2013-14. It also has the second largest population of the region after Egypt, with an estimated 77.3 million individuals in 2013. Its 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. Aggregate GDP and government revenues still depend to a large extent on oil revenues and are therefore intrinsically volatile.
Iranian authorities have adopted a comprehensive strategy encompassing market-based reforms as reflected in the government’s 20-year vision document and Iran’s fifth Five-Year Development Plan (FYDP, 2011–15). The Iranian state continues to play a key role in the economy, however, owning large public and quasi-public enterprises which partly dominate the manufacturing and commercial sectors. The financial sector is also dominated by public banks. Moreover, the business environment remains weak with the country ranking 152nd out of the 189 countries surveyed in the 2014 Doing Business Report. Only Algeria, Djibouti, the Syrian Arab Republic and Libya rank lower among MENA countries.
The government has implemented a major reform of its indirect subsidy system on key staples such as petroleum products, water, electricity and bread, which has resulted in a moderate improvement in the efficiency of expenditures and economic activities. The overall indirect subsidies, which were estimated to be equivalent to 27% of GDP in 2007/2008 (approximately USD 77.2 billion), have been replaced by a direct cash transfer program to Iranian households. The price of petroleum has risen in parallel, thereby contributing toward reducing the deficit of the Targeted Subsidies Organization (TSO) which still remains substantial (estimated at 1.3% of GDP). A second phase of subsidy reform is being considered which would improve the targeting of the cash transfers to low-income households.
The Iranian economy has continued to contract in 2013/14 (i.e., March 2013- March 2014), albeit at a slowing pace. The sanctions imposed on Iran’s oil exports, the supply chain in key sectors of the economy – such as in the automobiles industry – and transactions of international and domestic banks resulted in a real GDP contraction of 5.8% in 2012/13. For 2013/14, the economy is estimated to have contracted at an annual rate of 1.7%. Oil exports, which amounted to 2.2 million barrels per day (mbp), have been halved by US and EU sanctions initiated in mid-2012. The easing of sanctions under the Joint Plan of Action (JPA) between Iran and the P5+1 group has resulted in a gradual increase in oil exports led by an increase in exports to China, which rose from 250,000 barrels per day to 540,000 barrels per day between October to November 2013 and which have remained relatively unchanged since then. Iran’s oil exports were estimated at 1.21 million barrels per day (mbp) in June 2014. Furthermore, the depreciation of the real exchange rate has improved the competitiveness of the agriculture, manufacturing, and non-oil exports sectors, as well as of the hydrocarbons industry. Inflationary pressures on the economy have eased from a year-on-year peak of 45% in July 2013 to 15% in June-July 2014. This was facilitated by a number of factors including the appreciation of the Iranian Rial, the decline in global prices for key staples, and the easing of international sanctions.
Unemployment remains elevated and is expected to be a central challenge for the government. According to the Statistical Center of Iran, the unemployment rate was estimated at 10.4% during the calendar year ending on March 20, 2014. Unofficial sources, however, estimate the overall unemployment rate to be as high as 20%. The unemployment rate is particularly worrisome among the female (24%) and youth populations (20%). The incidence of underemployment has also become highly prevalent. The weakness seen in the labor market comes within a context in which only 36.7% of the population is economically active. Tight labor market conditions are exacerbated by the rise in the participation rate of women and the large number of youth entering the labor market. This trend is expected to be maintained in line with the evolving socio-economic profile of the country which is increasingly characterized by higher educational attainment for women-exceeding rates of their male counterparts, and a relatively low household formation rate. Similarly, the demographic profile of the country is characterized by a disproportionately high youth population (with over 60% of Iran’s population estimated to be under the age of 30). As a result, some 750,000 youth are estimated to enter the labor market every year, with a large portion becoming unemployed, abandoning their job search and joining the ranks of the economically inactive population. Not surprisingly, it is estimated that some 150,000 Iranians with tertiary education leave the country every year. The government estimates that the country must create some 8.5 million jobs over the next two years with stated of objective to reduce the unemployment rate to 7% by 2015.
World Bank data show that only 0.7% of the population (or half a million people) lived under the poverty line of US$1.25 a day (PPP) in 2010. A large proportion of people are, however, living close to this poverty line. Indeed, raising the poverty line by US$0.5 (from US$2 to US$2.50 and from US$3 to US$3.50) could put 4%-6% of the population – over 4.5 million people - in poverty. This suggests that many individuals are vulnerable to changes in their personal disposable income and to the persistent rise in the cost of living.
With a view to improving the prospects for the economy, the Iranian government has announced several measures including: raising the productive capacity of the non-oil segment of the economy, giving greater autonomy to the Central Bank, broadening the tax base, stabilizing and unifying the domestic currency in the market, reinstating the Management and Planning Organization which was in charge of drafting the government budget and the country’s five year development plans, and opening up the oil sector to foreign companies for investment and technical assistance. The economic outlook has improved since last year in line with the interim measures adopted by Iran and the P5+1 group (United States, United Kingdom, France, Russia, China and Germany) under the Joint Plan of Action. The government has expressed commitment to having sanctions on Iran eased and taming inflationary pressures on the economy. These initiatives would ultimately increase the country’s export potential, raise the purchasing power of consumers, and support consumption and business investment through improved consumer and business confidence. The most recent projections for 2014/15 suggest that the economy will expand by 1.5% and that the inflation rate will subside to 23%.
Last Updated: Sep 30, 2014
