The Islamic Republic of Iran (IRI) is the second largest economy in the Middle East after Saudi Arabia. In 2016, the country’s GDP was $412,3 billion . GDP per capita is estimated at $5,900, which allows Iran to be included in the list of upper middle income countries.
The IRI economy is mixed and transitional one with a leading industrial sector dominated by state-owned enterprises. Country receives main profit from the export of raw materials. The profit from oil exports is 30-35% of the country’s fiscal budget.
The knowledge-based economy of the Islamic Republic of Iran is characterized by rich hydrocarbon reserves and minerals, but at the same time, high commodity dependence makes it vulnerable against external factors, such as volatility in world prices and geopolitical conjuncture.
The rate of economic growth. In a short period of time, Iranian President H.Rouhani took pragmatic measures to ensure macroeconomic stability. In 2016, the country’s GDP grew by 7,4%. The GDP of the oil sector grew by 61,3%. Other sectors of the economy showed growth of 0,9%. According to the estimates of the Ministry of Economy and Finance of IRI, GDP in 1396 Iranian year will grow by 6,2% .
On March 20, 2017, the implementation of the 6th National Development Plan of the Islamic Republic of Iran will begin, which projects annual economic growth of 8%. To reach this level of growth the inflow of foreign investments should be no less than 15,4% per year .
The IMF forecasts real GDP growth of 6,6% in 2016-2017 . However, in 2017-2018 GDP growth is expected to decline to 3,3%. At the same time, the IMF advises to reform the banking sector, support recapitalization of state-owned banks and take measures to strengthen their viability.
The World Bank (WB) forecasts GDP growth of the IRI by 4,6% in 2017-2018 . In addition, the WB outlined the following risks for the Iranian economy: 1) the export orientation of the economy, which is subject to fluctuations in world prices for energy products; 2) the results of the upcoming elections; 3) management of oil revenues, on which the investment climate depends; 4) the influence of the geopolitical conjuncture on trade channels.
Inflation. In February of this year the Central Bank of the Islamic Republic of Iran (CBI) announced that inflation fell to 8,7%. In rural areas inflation stood at 7,1% . As for January 19, 2017, favorable world food prices helped to reduce the Consumer Price Index (CPI) to 8,6% . According to the IMF forecasts, inflation will remain within the level of 9,5%. Due to the rise in liquidity volume, inflation is expected to temporary increase and reach 11,9% by the end of 2017-2018.
Labor market. Reforms in the labor market turned out to be ineffective. Although during 2015-2016 government created on average 0,7 million jobs per year , this was not enough for sustaining full employment of the population. In March 2016, unemployment reached 11% (3,5 million people) . According to the IMF, unemployment in the IRI is 12,5% and it will remain at this level in the next 5 years. Unemployment among youth is 30%, among women – 21% . The share of women in the total workforce is 17%. At the same time, 60% of unemployed women are considered to be “long-term unemployed” . Part-time unemployment also thrives in the IRI (9,5% of the population).
Oil and gas industry. Iran is the 2nd largest in the world in terms of reserves of natural gas and the 4th largest in terms of oil reserves. According to OPEC, the size of Iran’s proven oil reserves is estimated at 158,40 billion barrels  (this is about 10% of the world oil reserves).
In February 2017, another oil and gas field was discovered in Iran, which has 15 billion barrels of recoverable oil reserves and 37 trillion cubic meters of natural gas . In general, the proven reserves of natural gas of the IRI are 33500 billion  and Iran is second after Russian Federation. Perspective oil reserves of the Islamic Republic of Iran reach 175 billion barrels.
After lifting of the oil embargo, the top priority for Iran was rapid resumption of oil production and exports to the levels prior to sanctions and the restoration of ties with traditional customers.
Already in 2016, the IRI was able to increase its oil production to the levels of 2012. According to OPEC, on the basis of secondary sources, oil production in January 2017 was 3,775 million bpd . Iran plans to increase its oil production to 4 million bpd  by the end of March 2017, which will lead to a violation of the OPEC agreement and 11 non-OPEC countries to reduce oil production (under this agreement, Iran is committed to produce no more than 3,79 million bpd of crude oil). Currently IRI exports more than 50% of its crude oil, and in February 2017 the export of crude oil and gas condensate amounted to 2,2 million bpd .
All this makes Iran one of the most attractive countries in the Middle East for foreign investment in the oil and gas sector. Since January 2016, Iran has signed 36 memorandums of understanding with other countries, 25 of which are aimed at conducting research in the oil and gas sector. Iran also expects to conclude full-fledged contracts, investment values of which are estimated at $ 80-85 billion .
The IMF predicts positive growth dynamics for both production and export of crude oil. By 2021-2022 Iran will increase oil production to 5 million bpd, and rise oil exports up to 3 million bpd. According to the International Energy Agency, Iran will increase oil production by 0,5 million bpd, and will produce 4.15 million bpd by 2022 .
Automotive. The automotive industry provides for 10% of GDP. From March 20, 2016 to February 18, 2017 Iran produced 1224 million passenger cars, which is 31,9% higher than indicators of the previous year . Government plans to increase production capacity of cars to 1,35 million by March 20, 2017, and produce 3 million of cars annually by 2023.
The automobile industry of Iran is expecting an inflow of foreign investments worth of $ 3 billion. For example, the largest Iranian automaker, Iran Khodro, is launching a joint project with the French company Peugeot. Another French company – Citroen – intends to invest $ 160 million in a joint venture with the Iranian company Saipa. In addition, Iran Khodro concluded 5 agreements with Mercedes-Benz. Agreements on the creation of a joint venture have been signed between the Iranian auto parts manufacturer Crouse Company and the German automotive group Continental . “Volkswagen” is planning a joint project with the largest manufacturer of trailers in the Middle East “Mammut Group”. Belgium invests € 70 million in the production of automatic transmissions .
External trade. According to the Iranian Customs Service, in the first 11 months (March 20, 2016 – February 18, 2017), the volume of external non-oil trade amounted to $ 77 billion. The main trading partner of Iran is China. The volume of trade with China amounted to $ 16,6 billion, accounting for 20% of all Iranian trade volume. Trade with the UAE stood at $ 11,85 billion, and trade volume with South Korea and Turkey reached $ 5,96 billion and $ 5,33 billion, respectively.
The main importers of Iranian non-oil products were China ($ 9,37 billion), the United Arab Emirates ($ 5,71 billion), Turkey ($ 2,38 billion), South Korea ($ 3,27 billion) and Germany ($ 2,17 billion ). These countries accounted for 60% of Iran’s non-oil exports. The value of imports for the given period is $38,41 billion.
The main exporters of goods in Iran were China ($ 7,29 billion), the United Arab Emirates ($ 6,14 billion), Turkey ($ 2,95 billion), South Korea ($ 2,69 billion) and Iraq ($ 5,51 billion). These countries accounted for 64% of Iran’s total imports. During this period, the amount of exports was $ 38,49 billion.
Currently the volume of foreign trade with the EU looks modest, but it shows a dynamic growth rate. According to the latest data, the trade turnover between Iran and the EU grew by 78% and amounted to € 13,7 billion. Iran’s exports to the EU increased 4,5 times, showing an increase from € 1,23 billion to € 5,46 billion  .
The rapid growth of foreign trade is observed with France and Italy. According to the National Institute of Statistics of Italy, Iran’s exports to Italy grew by 95% and reached € 523 million . The volume of bilateral trade with France increased 3,5 times – from € 592 million to € 2,07 billion . These countries exported gas condensate, petrochemical products, nuts, leather goods, metal products, etc.
Despite a modest growth of 0,9% of the non-oil sector, Iran has reduced its dependence on oil exports. The economy of Iran is more diversified than in many oil-rich countries. Non-oil exports include industrial products, gas condensate, minerals, petrochemical products and agro-industrial complex. In the first 11 months of 1395 fiscal year in Iran (20 March 2016 – 19 February 2017), non-oil trade increased by 1,8% compared to the same period last year.
Conclusions. Analysis of the current socio-economic situation in the Islamic Republic of Iran allows us to draw a number of conclusions, generalizations and forecasts for the medium term.
Firstly, the social and economic situation in the Islamic Republic of Iran has noticeably improved. The government has stabilized the exchange rate of the national currency, fixed the inflation rate to single-digit number, and is implementing reforms aimed at reducing commodity export dependence. In the medium term, the population’s demand for goods and services will increase; in particular, the share of domestic products will be high in consumption.
Secondly, reforms in the labor market of the Islamic Republic of Iran have not yet led to the expected results, since foreign investments are ineffective in the IRI’s oil sector, which is more capital-intensive than labor-intensive.
Thirdly, the improvement of relations with the EU countries is on the economic agenda. IRI intends to become a reliable trading partner for the EU. In turn, the EU countries view Iran as a perspective partner.
In general, the prospects for the development of the Iranian economy can be estimated as favorable. By directing reforms at the most vulnerable sectors of the economy, Iran can strengthen its finances and become the strongest regional economic power.
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 Там же.
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