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 2017 of US$439.5 billion. It also has the second largest population of the region after Egypt, with an estimated 80.6 million people in 2017. 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.
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which were estimated to be equivalent to 27 percent of GDP in 2007/2008 (approximately US$77.2 billion), have been replaced by a direct cash transfer program to Iranian households. The second phase of the subsidy reform plan began in Spring 2014 which involves a more gradual fuel price adjustment than previously envisaged and the greater targeting of cash transfers to low-income households. Around 3 million high income households have already been removed from the cash transfer recipient list. As a result, the expenditures of the Targeted Subsidies Organization (TSO) is estimated to have declined to 3.3 percent of GDP in 2017 from 4.2 percent in 2014.
Following a contraction of 1.6 percent in 2015, the Iranian economy bounced back sharply in 2016, growing at an annual rate of 12.5 percent. Preliminary data for the first half of 2017 (Apr-Sep 2017) indicate a year over year GDP growth of 4.5 percent at factor cost. Unlike the previous year, the non-oil sector was the main contributor to the overall growth during this period, accounting for 3.2 percentage points of expansion in the economy. The unemployment rate remains high, at 11.9 percent as of Oct-Dec 2017, while it represents a moderate improvement compared to the same period of the previous year (12.3 percent). This is concomitant with a pick up in the labor force participation rate, from 38.9 percent to 41 percent and is supported by a gradual improvement in the non-oil sector production. Male and female unemployment rates of 10.1 and 19.1 percent respectively, suggest continued large gender gaps in the labor market.
Poverty is estimated to have fallen from 13.1 percent to 8.1 percent between 2009 and 2013 (US$5.5 a day line in 2011 PPP). This was likely due to a universal cash transfer program in late 2010, which preceded the elimination of subsidies on energy and bread. The 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 of the bottom 40 percent of the population, even though overall consumption growth between 2009 and 2013 was negative. However, poverty increased in 2014, which may have been associated with a declining social assistance in real terms.
The fiscal deficit is estimated to have slightly widened to 2.4 percent in 2017 as government expenditures growth outpaces the increase in revenues. In the first nine months of 2017, tax revenues increased by only 4.4 percent while current expenditures increased by 16.8 and capital expenditures surged by 91 percent on the back of a considerably low base and two subsequent years of contraction.
The current account surplus is estimated to have slightly improved to 4.1 percent of GDP in 2017 (up from 3.9 percent in 2016) as oil prices increased while export volumes remain stable around 2.4 million barrels per day and production remains at the amount agreed under the OPEC production cut and 2011/12 daily production level.
Following the street protests in late December 2017/early January 2018, the exchange rate depreciated significantly and volatility increased, while the gap between the official and parallel market rates widened.
As of early March 2018, the rial depreciated 15 percent against the US dollar compared to early-December.
In the medium to long term, growth prospects will rely on the pace of Iran’s reintegration with the global economy in banking, trade and investment and the implementation of key structural reforms. The economy is expected to maintain a steady growth of slightly over 4 percent, increasingly based on non-oil sectors, and fueled by a recovery in consumption and investment demand and overtaking the contribution of net exports. In the medium term, inflationary pressures are likely to increase due to widening output gap and further currency depreciation, pushing CPI inflation into double-digit territory again.
Going forward, implementing the domestic reform agenda is likely to bring the highest growth dividend in the medium to long term. In a period of heightened uncertainty, this will involve tackling the structural reform agenda that will boost the non-oil sector growth, through creating a level-playing field for existing and new firms, strengthening the banking sector, improving the business environment and the efficiency of labor markets.
Last Updated: Apr 01, 2018