Economic Analysis
Iran, Islamic Republic of

Iran, Islamic Republic of

Population 79.4 million
GDP per capita 4907 US$
E
Country risk assessment
C
Business Climate
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Synthesis

major macro economic indicators

   2014 2015 2016(f) 2017(f)
GDP growth (%) 4.3 0.4 4.5 4.0
Inflation (yearly average) (%) 15.6 12.0 8.9 8.2
Budget balance (% GDP) -1.2 -2.9 -2.5 -1.5
Current account balance (% GDP) 3.8 0.4 -0.8 0
Public debt (% GDP) 15.6 17.1 17.5 17.7

 

(e) Estimate (f) Forecast

STRENGTHS

  • Large reserves of gas and oil (respectively second and fourth in world)
  • Very low level of external debt
  • Strategic location in the sub-region. 

WEAKNESSES

  • High inflation
  • Social tensions
  • Unhelpful business climate

Risk assessment

Growth accelerates with lifting of sanctions

Activity in Iran increased rapidly in 2016. The lifting of sanctions in January prompted an upturn in oil and gas exports, which returned to pre-sanctions levels. The increase in oil and gas production also helped to offset the fall in oil and gas prices. The improvement in the economic situation was also due to increased activity of non-oil and gas sectors, such as agriculture, the automobile industry, retail and transports which benefited from the removal of sanctions. The positif effects of sanction removal should continue into 2017, further supported by the gradual upturn in foreign trade and the return of foreign capital. In addition, the oil and gas sector is likely to feel the benefits of the rise in oil and gas prices. Inflation will continue to slow under the impetus of falling basic product prices and lower import costs. The Central Bank rate of interest has remained essentially unchanged since the maximum rate for deposits was reduced from 20% to 18% in October 2015, which resulted in fairly restrictive policy rates.

 

Public account imbalance and a small current account surplus

The small imbalance in public finances continued in 2016. Budget revenues contracted further with the fall in oil and gas prices, although increased production helped to offset this fall. Transfers to the national development fund as well as the repayment of arrears by the Iranian State to European export-credit agencies were also burdens on the public finances in 2016. In 2017, the public deficit will only be partly eliminated. The recovery in the oil and gas market should help boost budget revenues. The vitality of economic activity should further increase oil and gas revenues. The government also wants to encourage an increase in the proportion of non-oil revenues in order to implement a non-inflationary policy and to increase public investment spending. Spending is not expected to fall very much in the pre-election period. The authorities should not change the subsidy system although a measure aimed at reducing the subsidies received by wealthier households is likely to be implemented in 2017. Government employee pensions and wages could also be increased. The public debt nevertheless remains very low although the latest IMF estimates suggest that this could be close to 40% of GDP once State arrears to the private sector are taken into account.

There was a small current account deficit in 2016 despite the rise in oil and gas exports (+70%). This will return to equilibrium in 2017 but will remain precarious. The surplus in the foreign trade balance will be eroded as imports increase. The capital balance could however feel the benefits of increased FDI in 2017.

 

A year of challenges

The election of Donald Trump as US President raises questions concerning the future of the 14 July 2015 agreement. He was, during his election campaign, staunchly opposed to any warming in the relations between the United States and Iran that could cast doubt on the involvement of the United States on the joint Action Plan and therefore impact the Iranian economy. Iran also faces a number of challenges on the domestic front. The presidential election that will take place in May 2017 should determine the political line to be adopted by the country both internally and internationally. The re-election of President Rouhani will lead to a greater integration on the international stage and indicate a continuation in the emerging openness initiated since 2015. The election of a more conservative candidate could result in these developments being called into question. Finally, the age of the Supreme Leader raises questions concerning the successor to the religious leader, whilst elements of the political class are feeling threatened by the process of greater openness. 

 

Last update : January 2017

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