Iran is the second largest economy in the Middle East and North Africa in terms of GDP - US$400 billion in 2011 (after Saudi Arabia) and in terms of population - 78 million people (after Egypt). It is characterized by a large hydrocarbon sector, small scale private agriculture and services, and a noticeable state presence in manufacturing and finance. In 2007 the service sector (including Government) contributed 56% to GDP, followed by the hydrocarbon sector with 25 %, and agriculture with 10%. Iran ranks second in the world in natural gas reserves and third in oil reserves. It is the second largest OPEC oil producer; output averaged about 4 million barrels per day in recent years. Iran's chief source of foreign exchange comes from oil and gas. Thus, aggregate GDP and Government revenues are intrinsically volatile, fluctuating with international prices of these commodities. Despite the Oil Stabilization Fund and the newly established development fund in 2011/12, macroeconomic policies so far have typically not counteracted these boom and bust cycles in economic performance which increase the uncertainty faced by the private sector, impeding investment and job creation.
Iran's economy is transforming towards a market-based economy. However, the Iranian state still plays a key role in the economy, owning large public and quasi-public enterprises which partly dominate the manufacturing and commercial sectors. Over 60 percent of the manufacturing sector’s output has been produced by state-owned enterprises. The Government envisioned a large privatization program in its 2010-15 five-year plan aiming to privatize some 20% of state-owned firms (SOEs) each year. However, assets of SOEs appear to have been often bought by the Iranian Revolutionary Guards Corps or other semi-governmental enterprises. The financial sector is also dominated by public banks. Moreover, Iran’s 2012 Doing Business ranking is in the bottom tiers of the MENA region ranking 144th overall. Only Algeria, Iraq, and Djibouti rank lower among MENA countries. However, the authorities have adopted a comprehensive strategy as reflected in their 20-year Vision document and the 5th Five-Year Development Plan to ensure the implementation of market-based reforms.
Economic growth increased by 3.5 percent in 2009/10 while prudent macroeconomic policies reduced inflation to about 10 percent and ensured a fiscal surplus. The initial impact of the removal of the substantial energy and food subsidies in December 2010 did not suppress Iran’s economic performance despite stricter economic sanctions. Nevertheless, growth is projected to decline to 2 percent in 2011 and to decrease further thereafter, and inflation is expected to increase to around 20 percent in 2011 and 2012 due to the impact of the substantial increase in energy prices. The authority to release inflation statistics has been transferred from the Central Bank to a new agency, the Supreme Council of Statistics, which weakens the credibility of official inflation statistics. The medium term outlook for economic growth is lower due to tougher sanctions and overall declining oil production. Exports of crude oil are expected to decline due to embargoes by the EU and lower demand from China and India after recent payment difficulties due to the US sanctions on the Iranian central bank. Moreover, higher than expected inflation after subsidy removals are projected to depress private consumption. The industry is also likely to struggle to adjust to higher energy prices also due to the sluggish provision of Government assistance which had been earmarked for the sector.
The country’s social indicators are relatively high by regional standards. Most human development indicators have improved noticeably based on Government’s efforts to increase access to education and health. Virtually all children of the relevant age group were enrolled in primary schools in 2009 and enrollment in secondary schools increased from 66% in 1995 to 84% in 2009. As a result, youth literacy rates increased from 77% to 99% over the same period, rising significantly for girls. Consequently, Iran is well placed to achieve the MDG target with regard to eliminating gender disparities. Over the years, Iranian women have been playing an increasingly important role in the economy, though their market participation and employment rates remain limited. Iran’s health outcomes have also improved considerably over the past twenty years. The mortality rate for children under five steadily declined from 65 (per 1,000) in 1990 to 27 in 2009. Similarly, the maternal mortality ratio per 100,000 live births declined from 150 to 30 during the same period. Consequently, health indicators are usually above regional averages. This success is based on the effective delivery of primary health care which almost balanced health care outcomes in rural and urban areas. Iran’s new 5th five-year development plan from 2011 to 2015 continues to focus on social policies.
The Government has launched a major reform of its indirect subsidy system, which, if successful would markedly improve the efficiency of expenditures and economic activities. The overall subsidies were estimated to cost 27 percent of GDP in 2007/2008 (approximately US$77.2 billion). The Government has opted for a direct cash transfer program while substantially increasing the prices of petroleum products, water, electricity, bread and a number of other products. Preliminary estimates suggest that the Government’s comprehensive cash transfer program accompanying the ongoing subsidy reform has reduced extreme poverty and income inequality significantly. However, the Government assistance program to the industry, which was supposed to account for 30% of the savings from the subsidy removals, has been slow-moving partly because the cash transfers to consumers appear to have been more costly than planned. It was not until September 2011, that the Government started to fulfill its commitment to producers.
The recently imposed international sanctions between December 2011 and February 2012 have increased the cost of doing business, limited access to foreign direct investments and foreign technologies, and exacerbated international trade and financial transactions. The United Nations Security Council (UNSC) sanctions include a ban on financing and exports related to Iran’s nuclear and military programs. In January 2012, the US imposed new sanctions including a ban on any financial institution doing business with Iran’s central bank from conducting business in the US. In addition, the EU agreed to impose an embargo on imports of Iranian oil; no new contracts or delivery can be agreed starting July 1st.