Iran’s economy is characterized by its hydrocarbon, agricultural, and service sectors, as well as a noticeable state presence in the manufacturing and financial services. Iran ranks second in the world for natural gas reserves and fourth for proven crude oil reserves. While relatively diversified for an oil exporting country, economic activity and government revenues still rely on oil revenues and have, therefore, been volatile.
The Iranian authorities have adopted a comprehensive strategy of market-based reforms for their 20-year economic vision and five-year development plan for 2016/17 to 2021/22. The plan comprises three pillars: the development of a resilient economy, progress in science and technology, and the promotion of cultural excellence. Among its priorities are the reform of state-owned enterprises and the financial and banking sectors, and the allocation and management of oil revenues. The plan envisions annual economic growth of 8%.
Iran’s economy is slowly emerging from a decade-long stagnation, bogged down by two rounds of economic sanctions, marked oil price cyclicality, and the COVID-19 pandemic. Real GDP in 2020/21 was almost at the same level as 2010/11, and real GDP per capita in 2020/21 fell to its 2004/05 level. In 9M-21/22, recovery in the oil and service sectors (11.7% and 6.5% growth, respectively)—following the return of global and domestic activity after the worst of the pandemic—led to 5% year-on-year growth. However, the agriculture sector contracted by 2.1%, due both to drought and to energy blackouts.
On the demand side, an expansion in consumption drove GDP growth, as activity returned closer to pre-pandemic levels. The growth of imports outweighed the pick-up in exports, and investment declined. The country’s overall economic rebound has yet to be reflected in the labor market, however, as the recovery was largely driven by the oil sector, and the growth of employment in services and industries could not compensate for job losses in the agriculture sector. Only a third of the pandemic period jobs losses have so far been recovered.
Iran’s government faced challenges in financing a growing fiscal deficit, due to a shortfall in oil revenues and higher expenditures in 2021/22. In line with exports, oil revenues grew rapidly in H1-21/22 from a record low base, though, proceeds from oil only met 14% of an ambitious budget target for the year and accounted for 12% of government revenues. However, tax revenues grew by 60%, partly reflecting higher inflation, and expenditures also grew by 58%. This brought the budget deficit to 6.8% of GDP in H1-21/22. This gap was mainly financed through bond issuance (82%), as the government could not realize its planned sale of public assets. Inflation continued an upward trend, driven by inflationary expectations, currency depreciation, and monetary expansion.
While social protection measures partly mitigated pressure on household welfare, inadequate targeting of benefits and a lack of linking of their value to inflation, has reduced their impact over time. Furthermore, climate change challenges in Iran have hurt growth, especially in labor-intensive agriculture and industry sectors, following record high temperatures and low rainfall. These factors constrain the pace of recovery and the dynamism of the outlook for the economy.
Average GDP growth is projected to remain modest in the medium-term. The economy remains constrained by the continued impact of the pandemic, through weaker domestic and global demand. Trade, especially oil exports, remains restricted by continuing sanctions. Inflation is forecast to ease, relative to 2021/22, but remain high, at over 30% annually, as fiscal and exchange rate pressures persist. Sustained inflation will continue to put pressure on the livelihoods of poor and vulnerable households, already severely hit by the crisis caused by the pandemic.
Higher projected oil prices in 2022–24, and growth in oil export volumes (given the tighter global oil market) are forecast to curb fiscal pressures. However, high expenditure growth, due to increasing wage bill and pension spending, are projected to keep the fiscal balance in deficit.
Iran’s economic outlook is subject to significant upside and downside risks associated with oil market dynamics, geopolitical tensions, the pandemic, and climate change. On the upside, further increase in oil prices, following heightened global tensions, can directly boost fiscal revenues, and indirectly lead to a faster growth in oil export volumes. Downside risks relate to the resurgence of new COVID-19 variants, worsening impacts of climate change, and heightened geopolitical tensions, including the war in Ukraine’s impact on global food prices and the effect this has on Iran’s food imports.
Last Updated: Apr 27, 2022