Last updated: February 2022
Iran lags most Middle Eastern countries on measures of growth, per capita incomes, business climate and creditworthiness. The economy is recovering from the COVID-19 pandemic but international sanctions remain a constraint on oil exports. Inflation remains high because of import restrictions and sharp currency depreciation in recent years.
The above chart is a cobweb diagram showing how a country measures up on four important dimensions of economic performance—per capita income, annual GDP growth, business climate rank and creditworthiness. Per capita income is in current US dollars. Annual GDP growth is the five-year average forecast between 2022 and 2026. Business climate is measured by the World Bank’s latest Ease of Doing Business ranking of 190 countries. Creditworthiness attempts to measure a country's ability to honour its external debt obligations and is measured by its OECD country credit risk rating. The chart shows not only how a country performs on the four dimensions, but how it measures up against other countries in the region.
The COVID-19 pandemic added to pressures on the Iranian economy already-struggling from the reimposition of US sanctions in 2018 and 2019. Despite an initial COVID-19 induced shock to GDP, recovery in external demand, limited COVID-19 lockdowns and rising oil prices led GDP to grow 3.4% in 2020-21. But declining oil revenues and the cost of COVID-19 mitigation measures has driven a sharp rise in government debt and constrained authorities’ scope to counter future shocks. Restricted access to foreign capital due to US sanctions has led to sharp exchange rate depreciation, in turn stoking inflation and weighing on households’ purchasing power.
The IMF expects growth of 2% per annum, on average, over the next five years. In the near term, the outlook hinges on the evolution of the COVID-19 pandemic and domestic vaccination rates, the pace of the global economic recovery and geopolitical developments. Limited fiscal space and high inflation will continue to pressure lower income households. Should US sanctions be lifted, favourable demographics and abundant energy resources (Iran has significant oil and gas reserves) offers Iran robust growth potential.
Iran gained upper-middle income status in 2019. Job losses through the COVID-19 pandemic and high inflation contributed to budget pressures on already-vulnerable households. Unemployment remains high and youth unemployment is a significant issue. Recovery in economic activity should lift incomes in coming years. But ongoing economic sanctions will remain a notable headwind to growth in employment, income and GDP.
Country risk in Iran is very high. The OECD country credit grade is 7. This is akin to a speculative grade sovereign rating, which indicates a high likelihood that Iran will be unable and/or unwilling to meet its external debt obligations. Long-standing US sanctions weigh heavily on oil receipts, a major source of foreign exchange.
The World Bank ranks Iran 128th out of 190 countries on its ease of doing business gauge. Iran performs in line with other Middle Eastern countries on measures such as trading across borders, enforcing contracts, getting credit, registering property and dealing with construction permits. But Iran lags in other areas, particularly protecting minority investors and starting a business.
Risk of expropriation in Iran is high. The Iranian revolution in 1979 and the incoming regime led to widespread expropriation of foreign owned assets and businesses. The weak economic climate and ailing government finances raises the risk of expropriation, if the government looks to potentially generate other sources of revenue.
Political risk in Iran is high, reflecting US sanctions, conflict with regional neighbours, high poverty rates and high inflation that all contribute to social tensions.
Furthermore, Iran’s scores on the World Bank’s governance indicators are very low. Most indicators are in the bottom quartile, and scores are particularly low for regulatory quality, political stability and absence of violence and voice and accountability. Constraints in government administration, inefficiencies and a burdensome regulatory environment are significant challenges to governance.
Iran was Australia’s 84th largest trading partner in 2020. Total goods and services trade amounted to $214 million in 2020. International sanctions on Iran and the COVID-19 pandemic have weighed heavily on Australia’s bilateral trade and investment relationship with Iran.
Since 2016 Australia has eased some of the trade and financial sanctions on Iran pursuant to the United Nations security council. But there are still some sanctions in place and the Australian government encourages Australian businesses to conduct enhanced due diligence when dealing with Iran and seek legal advice on implications of US sanctions on Iran.
Goods trade with Iran is small. Merchandise exports comprised mostly pharmaceutical products, and medical instruments in 2020. Goods imports are largely made up of fruits and nuts, floor covering, and lime, cement and construction materials.
Services trade is larger than goods trade. The COVID-19 pandemic and associated international travel restrictions have hurt services trade over the past couple of years. Services exports to Iran consist mostly of education and tourism. The ongoing pandemic points to another year of uncertainty for services exports in 2022.
Bilateral investment with Iran remains negligible. International sanctions remain a significant constraint on doing business. If sanctions are lifted, Iran’s vast oil and gas fields could present opportunities for Australian mining firms and food and agriculture has the potential to be an area of collaboration between the two markets.
Department of Foreign Affairs and Trade
Austrade
