Iran is not a hydrocarbon economy. Even in their un-sanctioned state, hydrocarbons value-add rarely rose above 20% of GDP and for most of the time, hydrocarbons contributed around 15% of GDP – far lower than the 40-80% levels prevailing in the true hydrocarbon economies of Saudi Arabia, Qatar, Kuwait and Venezuela.
In its current sanctioned state hydrocarbons account for less than 10% of Iran’s GDP. To put this in perspective, 12% of the UK’s economy are generated by tourism, but no one would describe the UK as a tourist-dependent economy, reads an article published by bne IntelliNews, a Berlin-based business media company focusing on emerging markets. Parts of the article follow:
Not a Small Economy
Another erroneous assumption is that Iran has a small economy. Its exact value is hard to pin down, since wild exchange rate swings drive it up and down in dollar terms, and those terms are confused by a large difference between official and black market exchange rates, but its dollar value today sits at somewhere around $450 billion per year.
That makes it larger than Denmark, Israel, Egypt and Belgium, about the same size as Argentina, and about half as large as Turkey and Saudi Arabia.
Iran has the potential to be a significant economic and geopolitical actor both regionally and globally, hovering on the edge of the G20.
The next myth to bust is the idea that Iran’s economy struggles to grow. Here too, it is difficult to get a clear picture, because GDP growth took a large leap in 2016 after sanctions were lifted, then turned negative after US ex-president, Donald Trump, unilaterally abrogated JCPOA and reimposed sanctions in May 2018, but World Bank data suggest that growth returned in 2020 despite US sanctions and the impact of coronavirus to 1.7%. That may not look like a spectacular growth rate, but it compares well with the negative GDP growth experienced by developed economies even now, a year and a half after the arrival of Covid-19.
Capital Expenditure Is Strong
One source of Iran’s above-peer performance is not hard to find: gross fixed capital formation (the sum total of investment in capital goods in an economy – broadly national capex) was above 30% as recently as 10 years ago, and in spite of the pandemic is still well above 20%.
Ten years ago, US GFCF was 18%, and while it has recovered, it is still lower than Iran’s, as is GFCF in the EU, Saudi Arabia and Israel. GFCF is the most significant driver of GDP growth after population changes and urbanization, and Iran’s GFCF has been largely unscathed by either sanctions or Covid.
A key support for GFCF is the national savings rate – the percentage of GDP saved in one way or another. Iran’s GNS rate is around 38% (source: CIA). Compare that with the EU (22%), the UK (13%) and the US (18%). In GNS terms, Iran is a peer of China (44%), Singapore (43%), Switzerland (35%) and South Korea (35%).
Once the COVID-19 effect passes, Iran’s non-oil GDP should start growing again at a trend rate of 3-4% – a rate that most of the EU states would sell their grannies for.
Given its perception as a profligate theocracy, surely Iranian government net debt must be very large? Not when we look at the data. In 2017, the CIA reported government debt as 37% of GDP, one of the world’s lowest levels, and a level far lower than Western debt levels of 100-200% of GDP (240% for Japan).
