Analysis

A look at the state of Iran’s feeble economy

The Islamic Republic is a big player in regional geopolitics, but its economy is weak, its people in revolt and its enemies growing bolder. Simon Wilson reports.

How big is Iran’s economy?

In 2017, the last year for which it has published final figures, the World Bank put Iran’s GDP at $448bn, making its economy the second biggest in the Middle East and North Africa (after Saudi Arabia). It is also the second biggest country in the region in terms of population (after Egypt) with about 83 million people. Iran’s GDP is about the size of Thailand’s, Venezuela’s or Austria’s. But in terms of GDP per head (about $5,400) it’s less well off: Iran’s population is around ten million more than Thailand, 50 million more than Venezuela and ten times as many as Austria.

So it’s poor?

Iran has a well-educated population and it scores highly on many global development indicators. But compared with similar largeish countries in the wider region, Iran is notably poorer.

Turkey has about the same size population as Iran, but GDP per head is twice as big. Saudi Arabia’s population (about 33 million) is less than half the size of Iran’s, but its GDP per person is about four times as big. And although it currently dominates Iraq politically, Iran is only level-pegging with it in terms of GDP per person.

Broadly speaking, Iran is relatively rich (in terms of GDP per head) compared with Egypt and other North African countries, or compared with its eastern neighbours Pakistan and Afghanistan. But it is quite a bit poorer than Lebanon, much poorer than Saudi Arabia, and massively poorer than, say, the UAE or Israel.

How does it make its living?

Oil was first discovered in Persia in 1908, and since the 1950s Iran has emerged as a hydrocarbon superpower, with around 10% of the world’s proven oil reserves and 15% of gas reserves (according to US official estimates). Other sizeable sectors are agriculture and services, plus manufacturing and finance, with a high degree of state ownership and control (both direct and indirect via a web of religious foundations known as bonyads).

Oil and gas are not just vital to the economy, accounting for the vast bulk of exports, they also account for the overwhelming bulk of government income – a dependency that makes the country vulnerable. Iran’s economy picked up strongly following its 2015 nuclear accord with global powers. But since Donald Trump pulled the US out of the deal and reimposed sanctions in mid-2018, the economy has tanked.

What happened?

Sales of crude oil have fallen from 2.8 million barrels a day to less than 500,000, gutting the country’s foreign-exchange earnings and driving up prices of staple goods. Inflation has soared to around 50%. Food prices have doubled in the past two years.

The value of Iran’s currency, the rial, has plunged by around 60%. Since mid-2018 Iran’s central bank has stopped publishing macroeconomic data, but the IMF estimates that GDP shrank by 9% in 2019, following a contraction of almost 5% in 2018. People are leaving the cities in search of a cheaper life in smaller towns. And crime is soaring, fuelling popular anger and a sense of national crisis.

What is the government doing?

It is desperately trying to stabilise the economy and keep the government finances more or less afloat. President Rouhani has vowed that Iran can withstand the “great psychological, political and economic warfare” he believes is being waged on the Islamic republic by the US, and has announced a range of measures aimed at doing just that.

In essence, Tehran plans to muddle through by cutting its reliance on oil exports, increasing taxes, borrowing more money (selling Islamic bonds in the domestic market), selling off some state-run companies and slashing subsidies on fuel. At best, it’s a strategy that can only work for so long.

Any signs of progress?

Iran’s government says things began improving in the second half of 2019, and that the “storm” was passing. The rial has been back on an upward path, the Tehran stockmarket has been rising strongly, and there was a small increase in industrial production and agricultural output. Compared with the 2019 collapse in GDP, the IMF is forecasting zero growth in 2020, chiming with the government’s claim to have got through the worst of the crippling effect of sanctions.

However, the situation in Iran remains highly volatile. In November, the government’s move to slash fuel subsidies – in effect raising petrol prices by 50% overnight and drastically limiting the quantity available for purchase at subsidised rates – sparked the worst civil unrest since the 1979 revolution, and a ruthlessly brutal security crackdown in which hundreds were killed.

In the past, the theocratic Iranian state has proved resilient in the face of popular anger. This time, nothing is guaranteed, and much depends on how the geopolitics unfolds from here and how this affects the economy.

What could happen?

In terms of geopolitics, Iran is looking extremely vulnerable, despite its strong relationship with China, its biggest trade partner. Whether you believe the US was reckless and provocative – or just ruthlessly opportunistic – in eliminating the Iranian general Qasem Soleimani, what made President Trump’s action possible is a crucial new economic reality, argued Joseph Sullivan in Foreign Policy this week.

Four months ago, in September 2019, the US became a net exporter of oil for the first time since the 1940s. That’s a dramatic and defining moment for the Middle East and the Gulf. As of now, higher oil prices are a net positive for the US economy. That means Washington has been granted “armour that deflects what was once a favourite economic weapon in Tehran’s quiver of asymmetric arrows – oil price shocks”.

US energy self-sufficiency marks the start of new geopolitical era, and for Iran the killing of Soleimani could be merely its opening salvo.

Recommended

Why we will be reliant on fossil fuels for a long time to come
Energy

Why we will be reliant on fossil fuels for a long time to come

The energy crisis has shown us just how reliant we still are on fossil fuels. And we will continue to rely on them for a long time yet, says Merryn So…
27 Sep 2021
The Information Age is about to get interesting
Economy

The Information Age is about to get interesting

The IT revolution has been around for a while now, says Merryn Somerset Webb. But we're just getting to the good bit.
24 Sep 2021
I wish I knew what contagion was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what contagion was, but I’m too embarrassed to ask

Most of us probably know what “contagion” is in a biological sense. But it also crops up in financial markets. Here's what it means.
21 Sep 2021
The charts that matter: more pain for goldbugs
Economy

The charts that matter: more pain for goldbugs

Gold investors saw more disappointment this week as the yellow metal took a tumble. Here’s what’s happened to the charts that matter most to the globa…
18 Sep 2021

Most Popular

A nightmare 1970s scenario for investors is edging closer
Investment strategy

A nightmare 1970s scenario for investors is edging closer

Inflation need not be a worry unless it is driven by labour market shortages. Unfortunately, writes macroeconomist Philip Pilkington, that’s exactly w…
17 Sep 2021
What really causes inflation? Here’s what prices since 1970 tell us
Inflation

What really causes inflation? Here’s what prices since 1970 tell us

As UK inflation hits 3.2%, Dominic Frisby compares the cost of living 50 years ago with that of today, and explains how debt drives prices higher.
15 Sep 2021
The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021