The End of Sanctions Marks a New Beginning for Iran

Euromonitor International’s Iran Economy, Finance and Trade Country Briefing focuses on one of the Middle East’s largest and most promising economies. The intensification of the international sanctions over Iran in 2012 and the fall in oil prices since mid-2014 took a toll on the Iranian economy. However, short-term relief from sanctions and rise in private consumption provided some support for the economy in 2015. The country largely benefits from its abundant hydrocarbon reserves, rising household consumption and well-educated, tech-savvy populace. The removal of international sanctions in January 2016 is projected to boost trade and investment in the economy. However, low productivity, high state intervention and accumulation of bad loans are key challenges for the economy.

Swot Analysis: Iran. Strengths: In 2015, Iran was the third largest economy in the Middle East and Africa in US$ terms. The rEmoval of international sanctions has brightened Iran's growth prospects. Weaknesses: Heavy reliance on oil exports leaves the country highly vulnerable to a fall in oil prices. Accumulation of bad loans, high inflation and low productivity levels are also major problems facing the Iranian economy. Opportunities: The country's automotive market has great potential as a regional export hub. Iran will benefit from improved trade relations and new trade agreements. Threats: The return of Iranian oil to global oil markets will further lower the oil price, which will negatively impact government revenues. US sanctions over Iran's human rights policies and links to terrorism restrict American investors.

Iran will benefit from an increase in investment, exports and lower costs of financial transactions:

  • Iran has experienced double-digit inflation and in 2013 it reached the highest level since 1995, owing to the intensification of economic sanctions. During this time, the country had limited access to foreign exchange assets, which resulted in increased costs of trade and financial transactions. The removal of sanctions, coupled with gradual fiscal consolidation and prudent monetary policy, is expected to bring down inflation to single digits in 2016;
  • Iran’s car making industry is very large and has great potential as a regional export hub, owing to the availability of abundant raw materials such as zinc, copper, natural gas and crude oil. Numerous major car manufacturers are attempting to enter or re-enter Iran’s automotive market. After the sanctions were lifted in January 2016, PSA Peugeot Citroen was the first company to acquire a license from the government to invest in the country’s largest car manufacturer, Iran Khodro Co. (IKCO). However, aged technology will be a major drag on the automotive industry in Iran;
  • Prior to the intensification of the sanctions over Iran’s nuclear program, the European Union (EU) was one of Iran’s major trading partners, but Iran’s trade relations with the bloc deteriorated. Between 2010 and 2015, Iran’s total goods exports to the EU declined by 93.0% and total goods imports from the EU declined by 72.8%, in US$ terms. However, over the coming years, the Iran-EU partnership could be resumed;
  • Furthermore, Iran is expected to benefit from various new trade agreements with France, India, Australia, South Africa and Pakistan. On April 2016, South Africa and Iran signed eight agreements on various areas, including trade, under which they have agreed to boost non-oil trade. In March 2016, Iran, India and Afghanistan signed a three-party deal to turn Iran’s port of Chabahar into a transportation hub;
  • The intensification of international economic sanctions in 2012 coupled with the plunge in oil prices since mid-2014 and weakness in tax revenue has deteriorated Iran’s public finances. However, with the removal of sanctions, oil exports will increase and access to foreign assets will be restored. This should help ease government finances.

Effective government reforms are needed for sustained, long term growth

The removal of international sanctions along with the government’s continued privatisation drive will open new investment and trade opportunities for Iran, in both its oil and non-oil sectors, such as infrastructure, automotive and transportation. Yet international investors are reluctant to invest in Iran because of its uncertain relations with the West and an unfriendly business environment. Hence, the lifting of the sanctions will not be enough to boost investment and economic activity in the long run. Major reforms are needed in order to improve Iran’s banking sector that has a build-up of bad loans and its unfriendly business environment that is plagued by corruption and red tape.