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Economy and Trade

Iran, a theocratic Islamic republic with strained relations with the West, is a major producer of oil and gas, and has had one of the Middle East’s best-performing economies. A founding member of the Organization of the Petroleum Exporting Countries (OPEC), it has the world’s third largest proven reserves of crude oil and the second largest proven reserves of natural gas. Oil accounts for 80% of foreign exchange receipts, while oil and gas contribute 70% of government revenue. Iran also produces textiles, construction materials, metals, armaments, and agricultural produce. The state controls most economic activity, and spends about half of its budget on subsidizing basics, including fuel, electricity, bread, and rice. Bordered by Iraq to the west and Afghanistan and Pakistan to the east, Iran is subject to UN, EU, and US sanctions as a result of its nuclear ambitions and as an alleged sponsor of terrorism. Its main trading partners are China, Japan, Germany, Italy, South Korea, and the United Arab Emirates.

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Economic Policy over 12 Months

Ultra-conservative President Mahmoud Ahmadinejad, elected in 2005 on a populist platform, has vowed to transform Iran into a regional economic powerhouse. With oil output limited by OPEC quotas, Iran has been striving to increase gas production, especially in the South Pars field in the Persian Gulf. In the longer term, Iran also plans to increase oil-refining capacity from 1.5 million barrels per day (bpd) in 2008 to 3 million bpd by 2012.

Critics accuse Ahmadinejad of squandering the windfall oil revenues that Iran received when crude prices soared in the first half of 2008, leaving the country vulnerable now that it faces possible additional UN sanctions over its nuclear program. In June 2010, the UN passed a fourth set of sanctions (the first was implemented in December 2006) against Iran as a result of its failure to suspend its nuclear enrichment program. The international community believes that Iran is trying to produce a nuclear weapon, while Tehran insists that its program is purely for peaceful purposes. The new sanctions target a further 40 companies and organizations.

Furthermore, the European Union and the United States have announced additional measures. In August, EU ambassadors agreed to a new package of sanctions, which includes a ban on investing or selling equipment to Iran’s energy industries, as well as restrictions on export-credit guarantees and insurance. Earlier, on July 1, President Barack Obama signed legislation that punishes foreign suppliers of Iran’s gasoline and blocks access to the American financial system for banks that do business with the country.

In August, the government reacted to the increasing pain of economic sanctions, with Supreme Leader Ayatollah Ali Khamenei urging greater efficiency and motivation, and Iran’s vice-president threatening to stop doing business in dollars and euros.

In July, the government said that it would cut subsidies for fuel and basic consumer goods in the second half of the new Iranian year, which started on March 21. The plan, which involves phasing out subsidies over five years, may reflect the growing economic pressure on Iran resulting from the sanctions. Subsidies have been a tenet of the Islamic establishment since it took power in 1979.

The budget for the fiscal year beginning March 21, 2010, forecasts revenues of US$59.6 billion, which will result in a US$6 billion deficit. It includes plans to phase out costly subsidies on food and energy, which the government has said would add 15 percentage points to its average inflation forecast of 10% in 2010/11.

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Economic Performance over 12 Months

President Ahmadinejad has repeatedly lashed out at the West for the current financial crisis—a tactic that analysts say is intended to deflect criticism from his mismanagement of Iran’s economy. However, his rhetoric has landed him in trouble domestically, as critics have accused him of spending too much time castigating the West and not enough time fixing domestic problems.

Iran is the world’s fifth largest crude oil exporter, but while oil prices have surged, Iran’s economy has slowed as a result of the global economic downturn, its political isolation, and sanctions over its nuclear energy program. It is likely to have grown by just 0.5% in the year ending March 2010.

Sanctions have undermined Iran’s economy. Imported commodities and technology are estimated to cost 10–20% more than they should as a result. US sanctions, first imposed after the 1980 hostage-taking in Tehran, prohibit most business with Iran. They also make it hard for non-US oil and gas companies investing in Iran to win US business.

Real GDP growth averaged an estimated 5.6% per year during 2005/06 to 2008/09, according to an IMF report published in March 2010. High oil prices supported this relatively robust rate of growth. Gross official reserves reached US$80.5 billion (about 12 months of imports) by the end of September 2009, reflecting the strong oil revenues. However, a sharp drop in oil prices in the first half of 2009, as well as rising inflation, prompted the authorities to rein in monetary and fiscal policy. Consequently, the IMF believes that real GDP growth fell to between 2% and 2.5% in 2008/09, from almost 7% in 2007/08. Domestic activity and demand growth also slowed significantly, due to the global economic slowdown and lower credit growth.

The tight fiscal and monetary policy curbed inflationary pressures, with consumer price index (CPI) inflation falling from almost 30% in October 2008 to 9.1% in July 2010. Iranian economists blame President Ahmadinejad for stoking inflation with his expansionary policies during his first four-year term. They accuse Ahmadinejad, who was re-elected in June 2009, of directly fueling price rises by plowing huge amounts of cash into the economy for local infrastructure projects and by offering low-interest loans.

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Support for Inward Investment and Imports

Any business considering commercial dealings with Iran must make itself acquainted with any relevant sanctions, such as those imposed by the United Nations, the European Union, or the United States. The Iranian government’s Organization for Investment, Economic, and Technical Assistance for Iran (OIETAI) offers advice on tax and other fiscal incentives. Information about Iran’s 17 Special Economic Zones and Free Zones can be obtained through the Secretariat of the High Council of Iran Free Trade-Industrial Zones.

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Tax Exemptions

Fiscal incentives for investing in Iran include reduced income tax rates—from 65% down to a flat, fixed 25% rate. (See the Ministry of Economic Affairs and Finance website.)

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Statistics

GDP growth: 0.5% (private economists’ estimates, March 2010)

GDP per capita: US$12,900 (2009 est.)

CPI: 16.8% (2009 est.)

Key interest rate: n/a

Exchange rate versus US dollar: IR9,900 (2009)*

Unemployment: 12.5% (official, 2008 est.)

FDI: US$7.854 billion (December 31, 2009 est.)

Current account deficit/surplus: US$2.249 billion (2009 est.)

Population: 67,037,517 (July 2010 est.)

* Iranian rial

Source: CIA World Factbook except where stated

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Further reading on Iran

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