Anatomy of the Iranian Economy

Executive Summary
Iran has a highly diverse and complex economic structure that has suffered as a result of postrevolutionary upheavals. The availability of a unique resource base, both natural and human, and its promising geo-strategic position have endowed Iran with massive potential that has been undermined by external sanctions as well as internal shortcomings linked to mismanagement, incompetence and corruption. Economic activity is relatively diverse. While the energy sector is the backbone of the economy, it is not the dominant contributor to gross domestic product (GDP). The service sector has dominated GDP alongside petroleum, industry, agriculture and construction. Despite the existence of a number of distortions, such as blanket subsidies, gradual reforms are injecting greater transparency into economic structures. Economic developments have been heavily dependent on political dynamics. Iran is unique in the sense that its state sector is much larger than its governmental sector. In essence, religious, revolutionary and military institutions belong to the state as a whole but are not controlled by the government. Instead they are controlled directly or indirectly by the Supreme Leader’s Office. Despite various attempts to modernize economic structures, Iran still lacks an economic doctrine. A strategy document entitled Vision 2025 represents attempts to provide such a strategy, but internal and external political events have made it redundant. Current policies are driven in reaction to US sanctions and revolve around the concept of a resilient economy. The objectives are to build domestic capacity, increase efficiency and promote exports. In parallel with the government’s efforts to promote domestic capacity building, young entrepreneurs are creating new domestic impetus through start-ups and knowledge-based solutions that will further magnify the medium-term potential of the economy. External sanctions are also reshaping many industries and leaving a footprint on government finances. In essence, the sanctions-related decline of the petroleum sector will have implications for the overall distribution of power, as semi-state players will be in a stronger position to undermine a government that is in a weaker financial position. Iran has an underutilized economy for political, cultural and external reasons. Short-termism caused by political, legal and operational uncertainties will continue to impede realization of its economic potential. At the same time, this crisis-ridden economy has demonstrated an ability to adapt to new realities fast, which could prove an advantage for the economic adjustments that will be needed following the current COVID-19 crisis. Iran’s officials describe the current situation as an “economic war”. Sanctions and other pressure tools are seen as “economic bombardment” that will continue as long as Iranian-US tensions remain high. It is obvious that the short-term economic impacts have been disastrous. Nonetheless, accompanied by appropriate policies, the Iranian economy has the potential to regain a new balance and to start growing again.