1. Iran in the World Today
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) in 2015 of US$393.7 billion. It also has the second largest population of the region after Egypt, with an estimated 78.8 million people in 2015. 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.
2. Government of Iran’s Vision for the Future and Its Reform Agenda
Iranian authorities have adopted a comprehensive strategy encompassing market-based reforms as reflected in the government’s 20-year vision document and the recently issued sixth five-year development plan for the 2016-2021 period. The sixth five-year development plan remains ambitious, 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 considers the implementation of 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.
The Iranian state continues to play a key role in the economy with large public and quasi-public enterprises dominating to some extent the manufacturing and commercial sectors. The financial sector is also dominated by public banks. Moreover, the business environment remains restrictive with the country ranking 118 out of the 189 countries surveyed in the 2016 Doing Business.
The Iranian government has implemented a major reform of its subsidy program 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which were estimated to be equivalent to 27 percent of GDP in 2007/2008 (approximately US$77.2 billion), have been replaced by a direct cash transfer program to Iranian households. Domestic fuel prices have risen in parallel, thereby contributing toward reducing the deficit of the Targeted Subsidies Organization (TSO) (estimated at -0.3 percent of GDP in 2015). A second phase of subsidy reform is being considered which would involve a more gradual fuel price adjustment than previously envisaged and the greater targeting of cash transfers to low-income households.
3. Recent Economic Developments
Following the economic recovery experienced in 2014 , the Iranian economy is estimated to have advanced at an annual growth rate of only 0.5 percent during the 2015 Iranian calendar year (i.e., March 21, 2015-March 20, 2016). This performance came in spite of the signing of the Joint Comprehensive Plan of Action (JCPOA) in July 2015 and the significant economic prospects it offered. Inflationary pressures on the economy continued to abate under the less accommodative monetary policy stance, with the Consumer Price Index falling to 12.6 percent per annum in January 2016, from a peak of 45.1 percent in October 2012. Despite this positive development, the fiscal balance of the central government deteriorated due to low oil prices, from a deficit of 1.2 percent of GDP in 2014 to a deficit of 2.7 percent of GDP in 2015. Similarly, Iran’s current account surplus is estimated to have deteriorated from a surplus of 3.8 percent of GDP in 2014 to a surplus of 0.6 percent of GDP in 2015 due to the fall in oil exports.
Stimulating private sector growth and job creation is a continued focus for the government considering the number of workers who should enter the labor market in the coming years, including women and youth and the persistently high unemployment rate (11.7 percent). Tackling youth unemployment in particular is a pressing policy issue in line with the evolving demographic profile of the country, which is characterized by more than 60 percent of its population estimated to be under the age of 30 in 2013.
4. Poverty Conditions
Poverty is estimated to have fallen from 15 percent to 9 percent between 2009 and 2013, using a poverty line of US$5.5 per day (PPP), as Iran has no official poverty line. This was likely due to the implementation of a universal cash transfer program in late 2010, which preceded the elimination of subsidies on energy and bread. The cash transfer program appears to have more than compensated for the likely increase in energy expenditures of less-well-off households thus contributing to positive consumption growth for the bottom 40 percent of the population. However, the recession years took their toll, with overall consumption growth between 2009 and 2013 being negative.
5. Political Developments
The January 2016 lifting of the nuclear-related sanctions will provide a short-term boost to Iran’s economy. For the recovery to be sustained, longstanding structural reforms are needed. The February 2016 elections for Parliament and Assembly of Experts resulted in gains for moderates and reformers, providing an expected favorable climate for economic-reforms.
6. Economic Outlook
Due to the lifting of the sanctions and a more business-oriented environment, real GDP growth is projected to reach 4.2 percent and 4.6 percent in 2016 and 2017, respectively. On the production side, growth will be mainly driven by higher hydrocarbon production. On the expenditure side, consumption, investment and exports are expected to be the main drivers. Notwithstanding the narrowing of the output gap over the coming years, inflation is forecast to remain moderate, by Iran’s standard. The lifting of sanctions, and in particular the positive impact this will have on the banking system, will significantly reduce international transaction costs. Strong capital inflows, including FDI and the repatriation of part of the frozen assets, could put upward pressure on the Iranian rial which will help contain imported inflation. Fiscal policy, is projected to be slightly contractionary with the deficit projected to narrow to 1.8 and 1 percent in 2016 and 2017, respectively, mostly on account of improved oil revenues. Iran’s current account position is expected to turn into a surplus in 2017, also primarily driven by rising oil exports.
Last Updated: Apr 01, 2016