Iran Development Study

Iran is currently one of the most interesting and promising emerging markets in the world. The nuclear issue has long been dominating all aspects of political and economic life in Iran, and now that the nuclear-related international sanctions have been lifted, the Iranian economy reverberates with the effects thereof.

The Islamic Republic of Iran is the 17^th largest country in the world and the 2^nd largest country in the Middle East after Saudi Arabia. It is the most populous county in the region after Egypt, with a young, well-educated population of 82 million. Its population growth rate, however, has slowed significantly in the new millennium. The Iranian system of government is theocratic with a complicated political structure of elected and unelected institutions, in which the Supreme Leader is key. The regime faces an ongoing struggle for dominance between hardliners and moderates.

Gross Domestic Product (GDP) in Iran was worth 425.33 billion USD (current prices) in 2014 making it world’s 29th largest economy, but is expected to almost double until 2020. The Iranian economy recovered during 2014-2015, following two years of recession expanding in constant prices by 4.3%. Exports reached USD 100.4 billion in 2014 while imports stood at USD 81.9 billion in 2014, earning it a ranking of 41 and 46 respectively in a global comparison. The inflation rate declined from a year-on-year peak of 39.3% in 2012 to 17.2% in 2014, while the unemployment rate has remained stubbornly high and rose slightly in 2014, reaching 11.2%. Iran’s budget was still facing a small deficit during the past two years, constituting 0.9% and 1.1% deficit of the GDP in market prices for 2013-2014 and 2014 – 2015 respectively.

The business environment in Iran remains restrictive, with the World Bank ranking it 118 out of the 189 countries surveyed in its 2016 Doing Business. Iran has a diversified economy, including a significant manufacturing sector.

Having the second largest natural gas reserves in the world and the fourth-biggest oil reserves, Iran is an energy superpower, but it does not use its resources efficiently. The current electricity production is insufficient for the expected economic growth. Iranians have a high electricity consumption and energy demands grow at 6% per year, whereas capacity grows at only 2% per year. There is an ongoing restructuring and privatisation of the power sector to attract foreign investment and technology.

Most of Iran’s proven natural gas reserves are underdeveloped. The high rate in natural gas consumption means that the reserves are exploited primarily for domestic use. Iran is not a natural gas exporter of significance and trades only marginal amounts regionally. It lacks infrastructure for Liquefied Natural Gas, which is crucial for scaling up of production and exports.

Iran’s oil infrastructure is poor due to war, limited investment, sanction and natural decline in production. Oil exports make up 80% of Iran’s total export and up to 60% of government revenue. Exports experienced a sharp decline in 2012, when sanctions were tightened.

Iran is the world’s 24^th most water stressed country with inefficient supplies, currently facing a water crisis that stems from both physical, as well as economic water scarcity. Iran uses 70% of its total renewable freshwater, which is far above international recommendations. The government has recently pushed for better wastewater network and tariff increases to build awareness of water consumption, coupled with de-salination projects to supply drinking water in coastal areas.

There is a long, rich history of community-participation in Iran, with many Iranians supporting Community-based Organisations (CBOs) and Non-Governmental Organisations (NGOs). Social entrepreneurship occurred relatively late in Iran, but grow rapidly with a current estimated 50,000-70,000 active social entrepreneurs.

ICT is a prioritised strategic industrial sector in Iran, and in its ambitions to become a regional hub, the government has created several ICT parks and Incubators. Mobile telephony is the centrepiece of Iran’s ICT sector, showing an annual growth rate of 6%. The Iranian mobile telecoms market is the 4^th largest in the region. The country is also a regional leader in fixed broadband. Over half of the population are Internet users – higher than any other country in the Middle East – but Iranians face restricted internet access, through filtering and blocking of websites.

Public-Private Partnerships are not institutionalised in Iran, as the Constitution dictates most major economic activities fall under state monopoly. Current unattractive buy-back contracts that allow foreign investors to enter into exploration and development contracts with stringent conditions, are to be replaced by a new contract model, the Iranian Petroleum Contract (IPC) that covers production and extends contract duration, as well as including a risk-reward element linked to the complexity of the project. The IPC is yet to be released.

The removal of sanctions following the nuclear agreement is set to affect Iran’s macro-economy positively: it is expected to expand significantly in 2016 onwards due to increased oil production and exports, auto production and expansion of trade – World Bank estimates a GDP growth of 5.1% in 2016/2017.

Foreign Direct Investment declined in 2008 and came to a halt in 2012. In 2016/2017, World Bank estimates a FDI inflow of around USD 3 billion, mostly to the oil and energy sector.

As for bilateral trade, considerable changes are expected: in early 2000s, European countries were Iran’s major trading partners. Former hardliner president Ahmadinejad’s foreign policy of ‘looking to the East’ coupled with the tightening of sanctions in 2012 shifted direction of Iran’s trade towards Asia. With the rollback of sanctions, exports are likely to increase with Europe.

The car industry one of the largest industrial sectors in Iran (constituting 10% of GDP) and production is expected to reach pre-sanctions level (1.6 million) within 2 years.

Opportunities in the power industry in post-sanctions era include diversification of power generation capacities, an untapped potential for enhancing efficiency and energy saving, as well as Iran’s transformation into a regional energy hub.

With its enormous natural gas reserves, most of it underdeveloped and a large amount still untapped, Iran has huge potential to become a regional (short-term) and global (long-term) gas supplier. In terms of Iran’s oil exports, a gradual increase of oil exports is expected, with the likelihood that exports reach pre-2012 levels by the beginning of next decade.

In terms of entrepreneurship and ICT, sanctions relief coupled with growing expenditure on R&D, technology advancements and increasing IT spending will boost Iran’s IT services market over the next 5 years, benefiting Iran’s vibrant start-up sector.

The end of sanctions enables Iran to access billions of dollars of blocked assets, generating an almost certain major investment boost and a sharp rise of FDI, but whether this will translate into sustained economic growth and employment depends on the government’s ability to manage the economic windfall and addressing needed reforms.