Iran 

 Iran 

 
EFIC Country profile - map of Iran

Iran has the world’s third largest proven oil reserves and is still the fifth largest oil producer despite years of underinvestment. It is also a relatively large economy – the world’s 18th largest in purchasing power parity terms. However, it is also an international pariah because of its nuclear power and uranium enrichment activities. Suspicions that these are driven by a desire to develop nuclear weapons, have prompted the US, EU and UN to impose economic and financial sanctions. As a result, some foreign investors have withdrawn from the country and foreign interest in the country’s oil sector has been severely curtailed.

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Contact: Benjamin Ford, Senior Economist EFIC
bford@efic.gov.au

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Overview

April 2012

Iran has the world’s third largest proven oil reserves and is still the fifth largest oil producer despite years of underinvestment. It is also a relatively large economy – the world’s 18th largest in purchasing power parity terms. However, it is also an international pariah because of its nuclear power and uranium enrichment activities. Suspicions that these are driven by a desire to develop nuclear weapons, have prompted the US, EU and UN to impose economic and financial sanctions. As a result, some foreign investors have withdrawn from the country and foreign interest in the country’s oil sector has been severely curtailed.

Iran chart 1: At a glance

Iran compares favourably with other Middle East and North Africa (MENA) countries on two key dimensions of economic performance – GDP growth and per capita income – but it is less creditworthy and has a less congenial business environment than the regional average.

Iran chart 2: Key risks for exporters and investors

Iran is a risky destination for exporters and investors, with most risks at the high or very high end of the scale.

Interpreting Chart 2

Business cycle risk. A volatile business cycle can be a special headache for exporters and investors, because it means that downturns will be steep – and corporate casualties will be high.

Currency risk. In today's world of widely floating exchange rates and sophisticated currency hedging techniques, some degree of currency volatility is quite acceptable, and presents little risk. But where a country has a weak balance of payments or is prone to wide swings in capital flows, it can suffer sudden and dramatic currency moves that can bankrupt large swathes of its corporate and banking sectors.

Currency inconvertibility risk. If the country suffers from a weak balance of payments, not only is it prone to steep currency depreciation, but there is a temptation for the government to impose exchange controls that prevent importers from converting local currency into foreign currency in order to make trade payments.

Systemic banking risk. Weak balance sheets and poor lending practices can sometimes trigger sector-wide banking crises.

Sovereign default risk. Fiscal mismanagement can put governments under financial strain to which they respond by running up arrears with, or defaulting on, overseas suppliers and creditors. With the sovereign cut off from credit, a sovereign default also increases the likelihood of sharp downswing in the economy, currency inconvertibility and a systemic banking crisis.

Difficulty/cost of enforcing contracts. If you get into a contractual dispute, will the country's legal and judicial system help or hinder you in pursuing a claim? Drawing upon World Bank data on the cost and time involved in enforcing contracts (at www.doingbusiness.org) we seek to measure the degree of help or hindrance.

The measure scale runs from negligible to extreme.

Economy

April 2012

The economy is heavily reliant on the oil sector, which accounts for 80% of exports and 65% of government revenues. This reliance has advantages and disadvantages. One advantage is that in periods of rising oil prices the central bank is able to boost foreign reserves; over 2002 08, for instance, reserves grew to US$70 billion. On the downside, it is hard to shield the economy from oil price cycles.

The country is no longer rated by any of three main agencies, but has an OECD Country Risk Classification rating of 7 (on a 0 to 7 scale, where 7 is the highest risk category). This OECD grade is an assessment of Iran’s country credit risk – the risk that a country in some systemic sense will be unable or unwilling to meet its external debt obligations.

Iran chart 3: Real GDP and inflation

A higher oil price has eased some of the economy’s financial and fiscal pressures, but the upside is being limited by tighter sanctions, which are restraining crude oil exports. The IMF expects growth will remain relatively subdued over the next few years - it foresees growth of just above 3% a year in 2012 and 2013.

Iran chart 4: External balance

The increase in the oil price has helped to improve the current surplus.

Politics

April 2012

The Iranian political system has democratic elements but is largely a theocratic state. The president and some legislative bodies are popularly elected but political power is dominated by conservative Islamic clerics and unelected bodies, such as the Council of Guardians.

Iran has been run by a conservative elite since 1979, but appeared to be entering another era of political and social transformation with the victory of reformist minded liberals in the 2000 parliamentary elections.

But the reformists struggled to gain much traction as powerful conservatives in the government and judiciary sought to frustrate their ability to make good on their promises.

Former President Mohammad Khatami’s support for greater social and political freedoms made him popular with the young, an important constituency because around half of the population is under 25.

However, Khatami’s liberal ideas brought him into conflict with the supreme leader, Ayatollah Khamenei, and religious hardliners reluctant to give ground on established Islamic traditions.

The elections of June 2005 were a big blow to the reformists. Mahmoud Ahmadinejad, Tehran's ultra conservative mayor and protégée of the Supreme Leader, became president. His election platform melded a populist conservative agenda with promises to deliver social justice, promote economic redistribution and pursue anti-corruption initiatives.

Despite the perception that he is the Supreme Leader’s ‘man’, Ahmadinejad has set about pursuing his own agenda and boosting his influence, particularly in foreign policy, which is traditionally the preserve of the Supreme Leader. This has weakened Ahmadinejad’s allegiance with the Supreme Leader and emboldened his conservative rivals to intensify their efforts to undermine the President’s authority.

Supporters of the Supreme Leader Ali Khamenei scored a major victory in the parliamentary elections held on 2 March – they won more that two-thirds of the 290 seats contested. However, it isn’t clear whether this will dent Ahmadinejad's power once the new parliament convenes in June – it appears that many of his supporters disguised their affiliation in the election in order to get through vetting procedures instigated by his political rivals.

Iran chart 5: Political indicators

According to the World Bank, Iran ranks in the bottom quartile of countries on two political indicators - political stability and voice and accountability.

Business

April 2012

While private business is allowed, there is little private sector activity outside small scale workshops, farming and the service industry. The oil sector is run by the state-owned National Iranian Oil Company (NIOC). In addition, Iran is subject to a multilayered range of economic and financial sanctions intended to stop it from pursuing its nuclear ambitions. The sanctions take many forms and include: outright bans on the import of Persian carpets to the US; the targeting of individual officials for human rights abuses; restrictions on foreign currency transfers; and US legislative provisions that discourage international shipping. The EU recently imposed restrictions on Iranian oil imports – from 1 July, The sanctions regime has added to the cost of doing business in Iran and deterred foreign investment inflows, particularly in the energy sector.

Iran chart 6: Business climate indicators

The World Bank ranks Iran in the bottom quartile of countries for regulatory quality, rule of law and control of corruption – below the regional and OECD average (right hand panel, Chart 6). On another World Bank gauge – ease of doing business, Iran ranks just inside the second bottom quartile. A key concern is investor protection.

Society

April 2012

Iran’s per capita income of US$6,300 gives it ‘upper middle income’ status and living standards on par with countries such as Serbia, Belarus and Namibia. However, despite this relatively high level of income, there are wide economic inequalities caused by high youth unemployment, rural underdevelopment, and frequent shortages of basic foodstuffs.

Iran chart 7: Per capita GDP

Security

April 2012

Iran is a strategically important country. The large size of its proven oil and gas reserves is one reason. But Iran also shares borders with several unstable countries and/or fragile regimes such as Iraq, Afghanistan and Pakistan. Iran seeks to have broader influence in the Gulf region and the Central Asian states to its north.

Iran’s nuclear ambitions are a particular concern for US policy makers, who have pursued a range of approaches to halt Iran’s progress towards nuclear weapons capability. The US has successfully leveraged an array of financial tools and international support to create a web of sanctions. These sanctions are designed to: limit Iran’s ability to procure technology useful for weapons development; and increase the pressure on Iran to change its policies by curtailing access to international financial and commercial networks.

Relations with Saudi Arabia have been strained since the 1979 Iranian revolution. The countries vie for influence in Iraq, Palestine, Lebanon and among Saudi Arabia’s Shia minority.

Relations with Israel are also tense. Iran does not recognise Israel and, according to the US State Department, has actively tried to undermine the Middle East process by providing arms to militant groups such as Hamas and Palestinian Islamic Jihad.

The potential for sporadic internal violence does exist, but dissent is kept under control by state security services and vigilante groups, which are reported to be tacitly sanctioned by the government. The state also controls the media and has created a central filtering facility to block access to unauthorised websites, identify internet users and keep a record of sites visited.

Iran - Selected indicators*

April 2012

People
Population 77
Official language Persian
UN Human Development Index** High

Economic***
GDP ($US bn) 475
GDP per capita ($US) 6260
Real GDP growth (15 year average, %) 4.8
Fiscal balance -1.0
Public debt -
Foreign direct investment -
Current account 3.0
External debt 5.9
Foreign reserves 22.0
S&P foreign currency debt rating -
OECD country risk rating 7

Governance
World Bank - Ease of doing business 144/183
Freedom House - Political rights and civil liberties Not free
Transparency International - Corruption Perception Index 120/183

*All 2011 figures unless specified

**The HDI is composite measure of human development: long & healthy life (life expectancy), education (literacy & education enrolment) and income (GDP per capita)

***Expressed as % of GDP unless specified

This report is published for general information and does not comprise advice or a recommendation of any kind. Readers should consider their own circumstances and rely on their own enquiries in relation to matters contained in this report. While EFIC endeavours to ensure it is accurate and current at the time of publication, EFIC makes no representation or warranty as to the reliability, accuracy or completeness of this report. To the maximum extent permitted by law, EFIC will not be liable to you or any other person for any direct or indirect loss or damage suffered or incurred by you or any other person arising from any act or failure to act on the basis of information and/or the opinions contained in this report.





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