Estudos Económicos
Iran, Islamic Republic of

Iran, Islamic Republic of

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

  2014  2015  2016  2017(f) 
Economic growth (%) 4.0 -1.6 6.5 3.3
Average inflation (%) 15.6 11.9 8.9 11.2
Public accounts / GDP (%) -1.2 -1.8 -2.8 0.7
Current account / GDP 3.8 2.4 5.2 4.8
Public debt (% of GDP) 12.0 42.4 35.0 29.2

(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

Weakening growth despite strong potential

After a strong growth in 2016 due to the lifting of sanctions with the nuclear deal in January, the Iranian economy is expected to grow moderately in 2017. The oil and gas sector is likely to feel the benefits of the rise in oil and gas prices, especially since Iran does not have to respect production quotas, unlike other OPEC countries. However, new investments will be needed in the oil and gas sectors to increase production. Foreign companies remain cautious about their presence in the country because of uncertainty over the US policy towards Iran, but also because of the juxtaposition of remaining sanctions (US sanctions against the ballistic missile program, European sanctions on Human rights violations with asset freezes and export bans). In addition, there are operational constraints related to the difficulties in access to financing, and corruption. Furthermore, growth in non-oil sectors (in particular construction and mining sectors) remains low, while it is needed to absorb new workers into the labour market and to reduce unemployment, which could rise to 12.5% in 2017.

The national banking system remains fragile, struggling to reconnect with the global financial system, and in need of improved governance and capital injections. The Central Bank policy remains restrictive, with its deposit rate at 18% and the benchmark interest at 15%. However, inflation is expected to increase, as it achieved its higher rate since August 2015 in April 2017 (12.6% YoY), driven by still-high prices in food and the rial depreciation.

 

Public and external accounts will remain under control

The budget balance is expected to be slightly positive in 2017 thanks to an increase in revenues from the oil sector, but will be weak, as government expenditures should increase, in particular in infrastructure. The government wants to lift non-oil revenues in order to have enough resources to eventually increase public investment spending without boosting money supply. 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. Nevertheless, pensions and government employee wages could be increased. Moreover, the public debt 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.

The current account remains in surplus, boosted by the lifting of sanctions. The increase in exports, particularly oil and gas, is expected to offset the increase of imports, which reveals improved consumption and investment. Nevertheless, the services deficit should increase (1.8% of GDP in 2017 versus 1.4% in 2016), the surplus of the income balance should tighten, and the FDI should not grow in spite of lift sanctions.

 

Re-election of Rohani: continuity and new challenges

Hassan Rohani was re-elected to the presidency with 57% of the votes at the May 19th, 2017 election, allowing him to continue his economic reforms to attract foreign capital. His second mandate would focus on measures in favour of the private sector undermined until 2016 by international sanctions, and a better fiscal and monetary environment. Nonetheless, H. Rohani will have to face powerful internal opposition (ultra-conservatives). The issue of the succession of the Supreme Leader of the Islamic Revolution, Ali Khamenei, should begin to arise and could lead to a change in the Iranian policy.

Iranian foreign policy will remain focused on strengthening diplomatic ties that have been renewed since 2016 with European countries, in a regional context (opposition with Saudi Arabia) and international difficult following the election of President Donald Trump.

Iranian foreign policy will remain focused on strengthening renewed diplomatic ties with the European countries since 2016, in a context of regional (opposition with Saudi Arabia) and international tensions, following the election of President Donald Trump. D. Trump has been very critical over the nuclear agreement, but new US sanctions would only be effective with the participation of Europe, China and Russia, which is very unlikely.

 

Last update : June 2017

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