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Iran is the second largest economy in the Middle East and North Africa (MENA) region after Saudi Arabia, with an estimated Gross Domestic Product (GDP) in 2014 of US$406.3 billion. It also has the second largest population of the region after Egypt, with an estimated 78.5 million people in 2014. Iran’s economy is characterized by a large hydrocarbon sector, small scale agriculture and services sectors, and a noticeable state presence in manufacturing and financial services. Iran ranks second in the world in natural gas reserves and fourth in proven crude oil reserves. Economic activity and government revenues still depend to a large extent on oil revenues and therefore remain volatile.
Government of Iran’s Vision for the Future and Its Reform Agenda
Iranian authorities have adopted a comprehensive strategy encompassing market-based reforms as reflected in the government’s 20-year vision document and the recently issued sixth five-year development plan for the 2016-2021 period. The sixth five-year development plan remains ambitious, comprised of three pillars, namely, the development of a resistance economy, progress in science and technology, and the promotion of cultural excellence. On the economic front, the development plan envisages an annual economic growth rate of 8%% and considers the implementation of reforms of state-owned enterprises, the financial and banking sector, and the allocation and management of oil revenues among the main priorities of the government during the five-year period.
The Iranian state continues to play a key role in the economy with large public and quasi-public enterprises dominating to some extent the manufacturing and commercial sectors. The financial sector is also dominated by public banks. Moreover, the business environment remains restrictive with the country ranking 130 out of the 189 countries surveyed in the 2015 Doing Business. Within the MENA region, Algeria, Djibouti, Iraq, Libya, Syria, West Bank and Gaza are the only countries which fall behind Iran in this ranking.
The Iranian government has implemented a major reform of its subsidy program on key staples such as petroleum products, water, electricity and bread, which has resulted in a moderate improvement in the efficiency of expenditures and economic activities. The overall indirect subsidies, which were estimated to be equivalent to 27% of GDP in 2007/2008 (approximately US$ 77.2 billion), have been replaced by a direct cash transfer program to Iranian households. Domestic fuel prices have risen in parallel, thereby contributing toward reducing the deficit of the Targeted Subsidies Organization (TSO) which still remains substantial (estimated at 1.3% of GDP). A second phase of subsidy reform is being considered which would involve a more gradual fuel price adjustment than previously envisaged and the improvement in the targeting of the cash transfers to low-income households.
Recent Economic Developments
Following two years of recession, the Iranian economy recovered during the 2014 Iranian calendar year (i.e., March 2014-March 2015) as the new administration led by President Rouhani took office in July 2013 and a partial lifting of sanctions was enacted under the Joint Plan of Action (JPA). This sanctions relief included the partial removal of constraints on Iran’s oil exports, and the supply chain in key sectors of the economy—such as in the automobiles industry—and on international and domestic banks’ international transactions. The economy expanded by 3 % in 2014, on the heels of annual economic contractions of 6.6 % and 1.9 % in 2012 and 2013, respectively. As of August, 2015, the official and parallel market rates were trading at 29,797 Iranian rials per U.S. dollar and 33,400 Iranian rials per U.S. dollar, respectively, thereby representing a difference of about 13%, down from roughly 190% in the second quarter of 2012 when sanctions were tightened. The inflation rate declined from a year-on-year peak of 45.1% in 2012 to 15.6% in June 2015 in line with the lifting of sanctions and the tightening of monetary policy by the Central Bank of Iran.
The unemployment rate has remained stubbornly high and rose slightly in 2014. The unemployment rate reached 11.4% in 2014, up from 10.4% in 2013. The unemployment rate was much more elevated among women (20.3% for women against 8.7% for men), among the population between the ages of 15 and 29 (17.9% for men and 39% for women in this age cohort) and in urban areas (11.7% in urban areas and 7.4% in rural areas). This weak labor market performance took place within a context of a subdued and declining labor force participation rate with only 37.2% of the country’s population being economically active in 2014, down from 37.6% in 2013 (62.9% for men and 11.8% for women). The incidence of underemployment has also become more prevalent, with an estimated 9.5% of workers being considered underemployed (10.3% for men and 4.8% for women). Underemployment is largely concentrated among the youth population.
Stimulating private sector growth and job creation is a mounting challenge for the new government considering the number of workers who should enter the labor market in the coming years, including women and youth. Weak labor market conditions are exacerbated by the large number of youth entering the labor market and low female labor force participation rate. This trend is expected to be maintained in line with the evolving socio-economic profile with the demographics of the country characterized by a disproportionately high youth population with over 60% of Iran’s population of 77 million individuals estimated to be under the age of 30 in 2013. The government estimates that 8.5 million jobs should be created in the following two years to reduce the unemployment rate to 7% by 2016. Tackling youth unemployment in particular is a pressing policy issue.
In 2005, poverty was 1.45% in Iran using a poverty line of US$1.25 per day (PPP). World Bank projections estimate that only 0.7% of the population (half a million people) lived under this poverty line in 2010, although a large proportion of people are living close to it. Indeed, raising the poverty line by US$0.5 (from US$2 to US$2.50 and from US$3 to US$3.50) could put 4%-6% of the population – over 4.5 million people - in poverty. This suggests that many individuals are vulnerable to changes in their personal disposable income and to the persistent rise in the cost of living.
On July 14, 2015, the P5+1 (i.e., China, France, Germany, Russia, United Kingdom and United States) and Iran agreed on the Joint Comprehensive Plan of Action (JCPOA), which limits Iran’s nuclear program while the international community enacts the lifting of sanctions on Iran. If the JCPOA is successfully implemented, it will result in the lifting of all US, EU and UN sanctions on Iran by March-June 2016. The implications for the Iranian economy and the welfare of its citizens are significant . On the domestic side, parliamentary elections in Iran and the formation of the new council that appoints the Supreme Leader are scheduled for February 2016.
The medium-term outlook is positive if the JCPOA is enacted and implemented and the government tackles much needed reforms to unleash growth and private-sector led job creation. Growth will decelerate from 3% in 2014 to 1.9% in 2015 (March 2015-March 2016) against the backdrop of low oil prices despite a projected increase in oil production by 200,000 barrels per day from 3.1 million barrels per day in 2014. If all sanctions are be lifted by the beginning of the 2016 Iranian calendar year (March-June 2016), real GDP should rise to 5.8 % and 6.7 % in 2016 and 2017, respectively, as oil production reaches 3.6 and 4.2 million barrels per day. Reforms to the business environment to promote competition, rationalize licensing and authorization requirements, reduce the imprint of State-Owned Enterprises in the economy, and improve the health of the financial and banking sector are needed to accelerate growth and private-sector led job creation.
Source: World Bank Updated: September 2015
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