DIMENSION SHIFT

Iran 2013 | ECONOMY | REVIEW: ECONOMY

As one of the main economies in the Middle East and North Africa, Iran is embarking on a program of subsidy reform and privatization that should see it return to high growth levels in the near future.


Iran's massive hydrocarbon sector, high-tech manufacturing, developed financial services, and small-scale private agriculture has pushed it into second place in GDP terms for the Middle East and North Africa (MENA) region. Growth came in at 5% over 2011, down from 7.3% in 2010. The slowdown in growth is mainly due to instability in the global demand for oil and shifting export routes away from the EU, which has been somewhat cushioned by the high price of oil per barrel over recent months. The economy is currently guided by the fifth Five-Year Development Plan (FYDP), a part of Iran's overall Vision 2025, which envisages subsidy reform and an overhaul of the banking, currency, taxation, and customs systems, as well as measures to improve goods and services distribution, social justice and productivity, public health care, and international relations.

In trade terms, the country was listed as the world's 23rd largest exporter in 2011 by the World Trade Organization (WTO). According to The Economist, exports, including crude oil, reached $131 billion in 2011. While the country is currently running a trade deficit, imports are expected to continue dropping in the coming years as the march of privatization continues and the country becomes more self sufficient, resulting in a surplus of $5 billion by the end of the upcoming Iranian year (1391, or Q12013). Currently, commodity exports are down as the government seeks to maintain the output of products such as steel to feed rising local demand. While the mining, metals, and petrochemicals sectors have, however, been seen as winners over the course of changing economic dynamics, the automotive manufacturing sector is still adjusting to the new conditions. Due to its reliance on certain imported parts, manufacturers have petitioned the government, which controls pricing, to allow an increase in rates of up to 20% while the domestic spare parts sector fills in the gaps.

Privatization is thus seen as a long-term solution to attaining self-sufficiency, in an economy that is currently 80% in the hands of the state, if the oil and gas industry is included. At present, the private sector is mainly involved in domestic and foreign trade, light industry, and mining. However, according to Mohammad Rahim Ahmadvand, Head of the Iranian Privatization Organization, the state has privatized up to 500 companies over the past six years.

The growth of inflation to over 20% in 2012 is also attributable to the removal of energy subsidies that are generally seen to be holding back long-term growth, as well as speculative activity on the Iranian rial, which the Central Bank of Iran (CBI) is reigning in by officiating all trades at a flat rate of IR12,260 to the US dollar. Short-term market restructuring does not seem to be deterring investors, however, with the country announcing that $1.28 billion in FDI was sourced in the first five months of the current Iranian year, beginning in March 2012.

TRADE

With exports reaching $131 billion in 2011, Iran is continuing on an upward curve that also saw the country's non-oil exports exceed total imports for the first time in August 2012. Falling imports, due to a drop in accessibility and rising commodity costs, will likely give the country a trade surplus of $5 billion come the end of the next Iranian year, ending in March 2013. If the trend continues, the surplus could reach over $19 billion by 2016.

Exports grew by 30% in 2011, and Iran's share of total global exports has also increased to 0.9% from 0.8% in 2010, according to the WTO. Non-oil trade volumes surpassed $47 billion in the six months from March 2012-September 2012, with $20.5 billion in exports and $16.5 billion in imports. Non-oil imports are also up by over 7% in terms of volume, but down 10% in value terms. The country's largest importers over the same period include the UAE and China, followed by Turkey, South Korea, and Switzerland. Non-oil exports also dropped 5.5% by volume and 4% by value. Iraq is the country's main export destination in these terms, followed by the UAE, China, Afghanistan, and India. Oil exports have been hit the hardest as the global economy realigns, falling from 2.2 million barrels per day (bbl/d) at the end of 2011 to 1 million bbl/d in September 2012. This is mostly attributable to falling demand for Iranian oil in Europe, which was buying only 800,000 bbl/d in July 2012, according to Turquoise Partners.

In that context, Iran is working to expand trade with countries of the Non-Aligned Movement (NAM), which has 120 members, including Egypt, Saudi Arabia, Syria, Colombia, and Cuba. Indeed, non-oil trade with NAM members reached $43 billion in the last Iranian year, which ended in March 2012, according to the Iranian Students News Agency (ISNA). This includes $19 billion in non-oil exports and $24 billion in imports. The largest importers of Iranian goods among NAM members include the UAE, India, Afghanistan, Indonesia, Pakistan, Azerbaijan, Syria, and the Philippines. The major export destinations are the UAE, India, Malaysia, Oman, Saudi Arabia, and Thailand.

China, which is currently an observer state in the NAM, also figures heavily on Iran's trade spectrum. Total trade between the two countries reached $40 billion by the end of 2011. It increased by 55% during the first four months of that year alone, totaling $13.3 billion. In 2010, China exported $11 billion worth of goods to Iran, while importing $18 billion. Crude oil is Iran's main export to China, with Iran the country's third largest supplier of the commodity—Iranian oil accounts for around 12% of China's total needs. Iran is now targeting higher trade levels with the Asian giant in order to offset declining demand elsewhere. Iranian First Vice-President Mohammad Reza Rahimi has been quoted as saying Iran is ready to boost the value of trade to $100 billion through raising interaction in the oil and gas sectors. On the other hand, China's main exports to Iran include machinery, textiles, and other consumer goods. Meanwhile, Chinese investment in Iran increased by almost 50% in the first four months of 2011, signaling closer cooperation between the two countries overall. The country's long-delayed accession to the WTO is still on the table, though Iran's parliament opposes quick membership until internal reform of the public-private ownership balance is complete.

FDI

Iran is also riding on the back of increasing global FDI rates, which rose 16% in 2011, the first time such a level has been seen since the onset of the global financial crisis. In the first five months from the beginning of the current Iranian year, starting in March 2012, Iran attracted $1.28 billion in FDI, according to Dr. Behrouz Alishiri, Iran's Vice-Minister of Economic Affairs and Finance. In the previous Iranian year, which ended in March 2012, the country attracted $4.37 billion in FDI, thanks partly to the Organization for Investment, Economic Aid and Technical Assistance of Iran (OIETAI), which has established investment service centers in 31 provinces across the country. Although FDI in the oil and gas sector is restricted, foreign firms are encouraged to strike up partnerships with Iranian firms if they wish to partake in the sector.

Major investors in Iran include Unilever and Danone, which are both present in Iran's growing FMCG segment. “We are very comfortable in Iran," said Unilever's Managing Director in the country, Ziya Domaniç, adding, “I am interested in investing more and increasing quality."

Iran is also stepping up its activities as a foreign investor itself. Over $6.5 billion in foreign investment has been approved for the current Iranian year, up 720% on the 2008-2009 period should each investment materialize. Continued privatization, subsidy reform, and strengthening trade ties with new partners in the NAM should reintroduce stability into Iran's economy and once again return the kind of growth figures the country has become accustomed to in recent years.