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Iran is responsible for approximately 10% of the
world's proven oil reserves and 15% of global gas reserves. Its
access to the Strait of Hormuz, furthermore, gives it large
geostrategic significance
The Trump administration pullback from the Joint
Comprehensive Plan of Action (JCPOA) and levying of new sanctions
that came into effect in mid-2018 severely affected the Iranian
economy. Real GDP growth rates were -2.13% in 2018 and -7.66% in
2019. CPI inflation went up to 21.1% in 2018 and 40.6% in
2019
The real value of Iranian exports went down from
US$93.5 billion in 2010 to 57.5 billion in 2019. The main exported
commodities in 2019 being crude oil (20.6%), plastics (8.6%),
mineral fuels (7.9%) and gas (6.4%). The main partners in exports
currently are: China (24.1%), Iraq (15.5%), UAE (13.0%) and Turkey
(10.5%). The exports of crude oil to China alone are responsible
for 11.3% of total Iranian exports
The real value of Iranian imports went down from
US$71.4 billion in 2010 to 41.0 billion in 2019. The main imported
commodities being motor vehicles, tractors and work trucks (6.5%),
rice (4.2%), special industrial machinery (3.4%) and pharmaceutical
goods & corn (each having a share of 3.3%). The main partners
in imports currently being China (27.3%), UAE (13.5%), India
(7.4%), Germany (6.7%) and Turkey (5.7%)
The current escalation of tensions with the US will
adversely affect the Iranian economy and its trade relations and
could destabilize the Middle East and global oil
markets
Background information on the Iranian
economy
Its central location in Western Asia, and its access to the
crucial Strait of Hormuz (responsible for approximately 20% of
global crude oil traffic and 40% of maritime traffic), gives it
large geostrategic significance. Iran itself is responsible for 10%
of the world's proven oil reserves and 15% of global gas
reserves.
Iran's economy is characterized by a large involvement of state
and a large public sector (approximately 60% of Iran's economy is
still centrally planned). The Iranian government directly owns and
operates hundreds of state-owned enterprises (SOEs) and indirectly
controls many companies affiliated with the country's security
forces. The economy is to a large extent inefficient partly due to
poor governance and low institutional quality and partly as a
result of trade sanctions imposed on Iran. Distortions - including
widespread corruption, price controls (especially on food and
energy sector, informal (black) market, widespread subsidies, an
inefficient banking system, burden the Iranian economy, undermining
the potential for private-sector-led growth. The private sector is
more present in small-scale workshops, farming, selected
manufacturing sectors, and services, in addition to medium-scale
construction, cement production, mining, and metalworking.
The economy is highly dependent on oil and gas exports which is
archetypical for the so-called resource curse affected states. This
makes the state of the economy highly dependent on the price of oil
and gas and the potential sanctions on exports of the products.
Most of the revenues of the state depend on the exports of the two
commodities (approximately 80% at the beginning of the 2010s).
Recent developments
The lifting of most nuclear-related sanctions under the Joint
Comprehensive Plan of Action (JCPOA) in January 2016 initiated
restitution of Iran's oil production and led to an increase in the
revenue of the state that drove rapid GDP growth, decrease in
unemployment rates and inflation rates.
Economic growth declined in 2017 as oil production plateaued. In
May 2017, the re-election of President Hasan Ruhani generated
widespread public expectations that the economic benefits of the
JCPOA would expand and reach all levels of society. Structural
reforms that strengthen the banking sector and improve Iran's
business climate to attract FDI and encourage the growth of the
private sector is necessary. It is worth stressing, that the
sanctions that are not related to Iran's nuclear program remain in
effect, and these—plus fears over the possible re-imposition of
nuclear-related sanctions—will continue to deter foreign
investors from engaging with Iran.
The pullback of the US form JCPOA created significant tensions.
The Trump administration levied new sanctions that came into effect
in mid-2018 and the Iranian economy has been severely affected.
Real GDP growth rates were -2.13% in 2018 and -7.66% in 2019. CPI
inflation went up to 21.1% in 2018 and 40.6% in 2019. The
unemployment rate in 2019 went up to 13.4%. The sanctions-stricken
Iranian economy is thus in stagflation. The economic distress led
the Iranian government to initiate several aggressive foreign
operations in order to boost internal morale and decrease internal
pressures on the government.
The tensions increased significantly in the summer of 2019 after
an American drone was shot down, the obduction of several tankers
in the Persian Gulf and the attacks on a Saudi Arabian oil refinery
linked to the Iranian regime. The recent escalation of tensions is
due to the killing by an American drone of Iran's top general,
Qasem Soleimani (key military and political figure) on 3 January
2020 in Baghdad. On 5 January 2020 Iran declared its complete pull
back from the nuclear deal as a first retaliation against the
attack and in the early hours of Wednesday 8 January 2020 Iran
fired rockets at two air bases in Iraq that house US troops. This
instability could easily spill over to the whole of the Middle East
destabilizing the region and increasing the likelihood of global
slowdown.
Trade and FDI relations
The real value of Iranian exports went down from US$93.5 billion
in 2010 to 57.5 billion in 2019. The main exported commodities
being crude oil (20.6%), plastics (8.6%), mineral fuels (7.9%) and
gas (6.4%). The main partners in exports currently being China
(24.1%), Iraq (15.5%), UAE (13.0%) and Turkey (10.5%). The exports
of crude oil to China alone are responsible for 11.3% of total
Iranian exports.
The real value of Iranian imports went down from US$71.4 billion
in 2010 to 41.0 billion in 2019. The main imported commodities
being motor vehicles, tractors and work trucks (6.5%), rice (4.2%),
special industrial machinery (3.4%) and pharmaceutical goods &
corn (each having a share of 3.3%). The main partners in imports
currently being China (27.3%), UAE (13.5%), India (7.4%), Germany
(6.7%) and Turkey (5.7%). The imports of motor vehicles form China
alone are responsible for 4.1% of total Iranian imports in 2019.
This is followed by imports of rice from India (3.7%), corn (2.2%)
and soybeans (1.5%) from Brazil and soybeans from the US (1%).
The sanctions have caused a reorientation of Iranian exports and
imports from the developed western economies towards developing or
transition states and in particular China, Russia, Brazil, and
other South American economies and Africa.
Iran has observer status at the World Trade Organization (WTO)
since 2005. It applied for membership in 1996. Its membership is to
a large extent blocked by the US.
Iran, is currently a small recipient of inward foreign direct
investment (FDI), attracting US$3.48 billion in 2018 with a total
inward stock of just US$ 57.0 billion. Due to sanctions, the
attractiveness to FDI is low.
Trade and GDP forecasts for 2020-21
IHS Markit predicts Iran's imports in real value to increase by
4.6% in 2020 and by 3.8% in 2021. We forecast a decrease in exports
real value by 7.5% in 2020 followed by an increase of 3.7% in 2021.
The real GDP of Iran is forecasted to shrink by 3.8% in 2020 and to
grow by 1.0% in 2021. The currently escalating crisis in relations
with the US and the resulting instability in the Middle East could,
however, adversely affect our forecasts. The internal and external
prospects for the Iranian economy are weak in the short to medium
term.
