Economy

Iran's economy is a mixture of central planning, state ownership of oil and other large enterprises, village agriculture, and small-scale private trading and service ventures. Its economic infrastructure has been improving steadily over the past two decades but continues to be affected by inflation and unemployment.

In the early 21st century, the service sector contributed the largest percentage of the GDP, followed by industry (mining and manufacturing) and agriculture. About 45% of the government's budget came from oil and natural gas revenues, and 31% came from taxes and fees. Government spending contributed to an average annual inflation rate of 14% in the period 2000-2004. In 2006, the GDP was estimated at $193 billion ($599 billion at PPP), or $2,800 per capita ($8,700 at PPP). Because of these figures and the country's diversified but small industrial base, the United Nations classifies Iran's economy as semideveloped.

The services sector has seen the greatest long-term growth in terms of its share of GDP, but the sector remains volatile. State investment has boosted agriculture with the liberalization of production and the improvement of packaging and marketing helping to develop new export markets. Thanks to the construction of many dams throughout the country in recent years, large-scale irrigation schemes, and the wider production of export-based agricultural items like dates, flowers, and pistachios, produced the fastest economic growth of any sector in Iran over much of the 1990s. Although successive years of severe drought in 1998, 1999, 2000 and 2001 have held back output growth substantially, agriculture remains one of the largest employers, accounting for 22% of all jobs according to the 1991 census.

The current administration continues to follow the market reform plans of the previous one and indicated that it will diversify Iran's oil-reliant economy. It is attempting to do this by investing revenues in areas like automobile manufacturing, aerospace industries, consumer electronics, petrochemicals and nuclear technology. Iran has also developed a biotechnology, nanotechnology and pharmaceuticals industry. For energy, it currently relies on conventional methods, but in autumn 2007 will commission its first nuclear power plant in Bushehr. Iran is OPEC's second largest oil producer, exporting over three million barrels of oil per day; moreover, it holds 10% of the world's confirmed oil reserves. The strong oil market since 1996 helped ease financial pressures on Iran and allowed for Tehran's timely debt service payments. Iran also has the world's second largest natural gas reserves (after Russia). Iranian budget deficits have been a chronic problem, in part due to large-scale state subsidies (totaling more than US$30 billion per year) that include foodstuffs and especially gasoline.

Sectors of the Economy

Agriculture contributes just over 11% to the gross national product and employs a third of the labour force. The industrial sector-including mining, manufacturing and construction-contributed 42% of the GDP and employed 25% of the labour force in 2006. Mineral products, notably petroleum, dominate Iran's exports revenues (80%), but mining employs less than 1% of the country's labour force. In 2006, the service sector ranked as the largest contributor to the GDP (47%) and employed 45% of workers. In 2005, Iranian women accounted for 33% of the workforce (25 million people). In 2006, the average annual salary in Iran was US$2,700.

Agriculture

About 20% of the land in Iran is arable. The main food-producing areas are in the Caspian region and in the valleys of the northwest. Some northern and western areas support rain-fed agriculture, while other areas require irrigation for successful crop production.

Agriculture contributes just over 11% to the gross national product and employs 30% of the labour force. By 1997, the gross value of products in Iran's agricultural sector reached $25 billion and by 2003, a quarter of Iran's non-oil exports were agricultural based.

The principal obstacles to agricultural production are primitive farming methods, overworked and underfertilized soil, poor seed and scarcity of water. About one third of the cultivated land is irrigated; the construction of multipurpose dams and reservoirs along the rivers in the Zagros and Elburz mountains has increased the amount of water available for irrigation. Agricultural programs of modernisation, mechanisation, and crop and livestock improvement, and programs for the redistribution of land are increasing agricultural production.

Wheat, the most important crop, is grown mainly in the west and northwest; rice is the major crop in the Caspian region. Barley, corn, cotton, sugar beets, tea, hemp, tobacco, fruits (including citrus), potatoes, legumes (beans and lentils), vegetables, fodder plants (alfalfa and clover), spices (including cumin, sumac, and saffron), nuts (pistachios, almonds, and walnuts), and dates are also grown, and livestock is raised. Livestock products include lamb, goat meat, beef, poultry, milk, eggs, butter, cheese, wool and leather. Honey is collected from beehives, and silk is harvested from silkworm cocoons. The northern slopes of the Elburz mountains are heavily wooded, and forestry products are economically important; the cutting of trees is rigidly controlled by the government, which also has a reforestation program. In the rivers entering the Caspian Sea are salmon, carp, trout, and pike; sturgeon are abundant in the Caspian Sea.

Since 1979, commercial farming has replaced subsistence farming as the dominant mode of agricultural production. By 1997, the gross value of products in Iran's agricultural sector had reached $25 billion. Iran has attained 90% self-sufficiency in essential agricultural products; total wheat and rice production fails to meet domestic food requirements, however, making substantial imports necessary. By 2003, a quarter of Iran's non-oil exports were agricultural based. Major agricultural exports include fresh and dried fruits, nuts, animal hides, processed foods, and spices.

Manufacturing

Iran has a long tradition of producing artisan goods, including Persian carpets, ceramics, copperware and brassware, glass, leather goods, textiles and woodwork. Iran's rich carpet-weaving tradition dates from pre-Islamic times, and it remains an important industry and contributes substantially to rural incomes. Textile mills, based on domestic cotton and wool, employed about 400,000 people in 2000 and are centred in Tehran, Esfahan and along the Caspian coast.

Large-scale manufacturing in factories began in the 1920s and developed gradually. During the Iran-Iraq War, Iraq bombed many of Iran's petrochemical plants, and the large oil refinery at Abadan was badly damaged and forced to halt production. Reconstruction of the refinery began in 1988 and production resumed in 1993. However, the war also stimulated the growth of many small factories producing import-substitution goods and materials needed by the military.

The country's major manufactured products are petrochemicals (fertilizer plant in Shiraz), steel (mills in Esfahan and Khuzestan), and copper products. Other important manufactures include automobiles (with production crossing the 1 million mark in 2005), electric appliances (television sets, refrigerators, washing machines, and other consumer items), telecommunications equipment, cement, industrial machinery (Iran has the largest operational stock of industrial robots in West Asia) , paper, rubber products, processed foods (including refined sugar and vegetable oil), carpets, leather products and pharmaceuticals. Currently, 55 pharmaceutical companies in Iran produce more than 96%(quantitatively) of medicines on the market worth $1.2 billion annually.

Construction

The annual turnover in the construction industry amounted to US$38.4 billion in 2005. Until the early 1950s, the construction industry was limited largely to small domestic companies. Increased income from oil and gas and the availability of easy credit, however, triggered a subsequent building boom that attracted major international construction firms to Iran. This growth continued until the mid-1970s, when, because of a sharp rise in inflation, credit was tightened and the boom collapsed. The construction industry had revived somewhat by the mid-1980s, but housing shortages have remained a serious problem, especially in the large urban centres. Iran has also a large dam building industry. 70% of the Iranians own homes.

Defence Industry

Iran's 2005 defence budget was estimated to be $6.3 billion (3.3% of GDP) by London's International Institute for Strategic Studies or $91 per capita. Iran's defence industry has also taken great strides in the past 25 years, and now manufactures many types of arms and equipment. Since 1992, Iran's Defence Industries Organisation (DIO) has produced its own tanks, armoured personnel carriers, guided missiles, submarines, and a fighter plane . As of 2006, Iran had exported weapons to 57 countries, including NATO members, and sold $100 million worth of military equipment.

Energy and Petroleum

Iran holds 10% of the world's proven oil reserves. Iran also has the world's second largest reserves of natural gas (15% of the world's total); these are exploited primarily for domestic use. Since 1913, Iran has been a major oil exporting country. The chief oil fields are found in the central and southwestern parts of the Zagros mountains in western Iran. Oil also is found in northern Iran and in the offshore waters of the Persian Gulf. Domestic oil and gas, along with hydroelectric power facilities, provide the country with power. Iran will also commission its first 1 billion dollar nuclear power plant in Bushehr in 2008.

In the late 1970s, Iran ranked as the fourth largest oil producer (OPEC's second largest oil producer) and the second largest oil exporter in the world. Following the 1979 revolution, however, the government reduced daily oil production in accordance with an oil conservation policy. Further production declines occurred as result of damage to oil facilities during the war with Iraq. Oil production began increasing in the late 1980s due to the repair of damaged pipelines and the exploitation of newly discovered offshore oil fields in the Persian Gulf.

Major refineries are located at Abadan (site of the country's first refinery, built 1913), Kermanshah, and Tehran. Pipelines move oil from the fields to the refineries and to such exporting ports as Abadan, Bandar-e Mashur and Kharg Island. In the late 1990s, Iran's state-owned oil and gas industry entered into major exploration and production agreements with foreign consortiums.

By 2004, Iran's annual oil production was 1.4 billion barrels, creating a net profit of $50 billion. Iran also manufactures 50-80% of its industrial equipments domestically, including oil tankers, oil rigs, offshore platforms and exploration instruments. Iran is planning to open a commodity exchange, referred as 'International Petroleum Exchange', a petrobourse for petroleum, petrochemicals and gas in various non-dollars currencies, primarily the Euro.

Mining

Iran's mining industry is under-developed. Mineral production contributes only 0.6% to the country's GDP. Although the petroleum industry provides the majority of economic revenues, about 75% of all mining sector employees work in mines producing minerals other than oil and natural gas. These include coal, iron ore, copper, lead, zinc, chromium, barite, salt, gypsum, molybdenum, strontium, silica, uranium and gold (most as a coproduct of the Sar Cheshmeh copper complex operations). The mines at Sar Cheshmeh in Kerman Province contain the world's second largest lode of copper ore. Large iron ore deposits lie in central Iran, near Bafq, Yazd and Kerman. The government owns 90% of all mines and related large industries in Iran and is seeking foreign investment for the development of the mining sector. In the steel and copper sectors alone, the government is seeking to raise around US$1.1 billion in foreign financing.

Services

Urbanization has contributed to significant growth in the service sector. Important service industries include public services (including education), commerce, personal services, professional services and tourism. The tourist industry declined dramatically during the war with Iraq in the 1980s but has subsequently revived. About 1,659,000 foreign tourists visited Iran in 2004; most came from Asian countries, including the republics of Central Asia, while a small share came from the countries of the European Union and North America. The most popular tourist destinations are Esfahan, Mashhad and Shiraz. In the early 2000s, the industry still faced serious limitations in infrastructure, communications, regulatory norms, and personnel training.

Banking System

The government makes loans and credits available to industrial and agricultural projects, primarily through banks. Iran's unit of currency is the rial. In 1979, the government nationalized all private banks and announced the establishment of a banking system whereby, in accordance with Islamic law, interest on loans was replaced with handling fees; the system went into effect in the mid-1980s.

The banking system consists of the central bank also known as Bank Markazi Iran, which issues currency and oversees all state and private banks; several commercial banks that are headquartered in Tehran but have branches throughout the country; two development banks; and a housing bank that specializes in home mortgages. Accounts of the state-owned commercial banks are dominated by loans to state and Bonyad enterprises and to large-scale private firms. The government began to privatise the banking sector in 2001, when it issued licenses to two new privately owned banks.

The Tehran Stock Exchange trades the shares of more than 400 registered companies. The stock market capitalisation of listed companies in Iran was valued at US$42 billion in 2007.

Foreign Trade and Economic Relations

Petroleum constitutes the bulk of Iran's exports, valued at $46.9 billion in 2006. Iran's non-oil exports stood at $16.3 billion in the year ending March 20, 2007, a rise of 47.2% from the previous period. The total volume of imports to Iran rose by 189% from $13.7 billion in 2000 to an estimated $39.7 billion in 2005.

Iran's major commercial partners are China, Germany, South Korea, Japan, France, Russia and Italy. From 1950 until 1978, the United States was Iran's foremost economic and military partner; thus participating greatly in the modernisation of its infrastructure and industry. After the Iranian Revolution in 1979 though, the United States ended its economic and diplomatic ties, banned Iranian oil imports and froze $12 billion of its assets. In 1996, the US Government passed the Iran and Libya Sanctions Act which prohibits US and non-US companies from investing and trading with Iran for more than $20 million annually, with the exception, since 2000, for items like pharmaceuticals, medical equipment, caviar and Persian rugs.

Since the mid 90's, Iran has increased its economic cooperation with other developing countries in 'south-south integration' including Syria, India, China, South Africa, Cuba and Venezuela. Iran is also expanding its trade ties with Turkey and Pakistan and shares with its partners the common objective of the creation of a single economic market in West and Central Asia, known as ECO.

Since 2003, Iran has also increasingly invested in the economy and reconstruction of its neighbouring countries like Iraq and Afghanistan. In Dubai, UAE, it is estimated that Iranians expatriates are handling over 20% of its domestic economy with an equal proportion of its population. Money is invested in the local real estate market and import-export businesses, collectively known as the Bazaar, and geared towards providing Iran and other countries with the demanded consumer goods. The combined net worth of the Iranian citizens abroad was estimated to be around 1.3 trillion dollars in 2006.

More recently, Iran's Nuclear Program has become the subject of contention with the West because of suspicions regarding Iran's military intentions. This has led the UN Security Council to impose sanctions against Iran, on select Iranian companies linked to this program, thus furthering its economic isolation on the international scene.

Foreign Direct Investment

Foreign investment has been hindered by unfavourable or complex operating requirements in Iran and by international sanctions, although in the early 2000s the Iranian government liberalized investment regulations. In the early 2000s, foreign investors have concentrated their activity in a few sectors of the economy: the oil and gas industries, vehicle manufacture, copper mining, petrochemicals, foods and pharmaceuticals. Iran absorbed 24.3 billion dollars of foreign investment from Iranian calendar year 1372 (March 21, 1993) to April 20, 2007. Foreign transactions with Iran amounted to $150 billion between 2000 and 2007 worth of major contracts and both private and government lines of credit. Inversely, Iran had $62 billion worth of assets held abroad in 2007.

The most active investors have been Germans, Norwegian, British, French, Japanese, Russian, South Korean, Swedish and Swiss companies. The Swedish Svedala Industri has played a major role in developing Iran's copper mines since the late 1990s while Tata Steel of India has been investing in the steel sector. The Kia, Nissan, Peugeot and Renault auto companies have licensing agreements with Iranian auto manufacturers. Nestlé of Switzerland and Coca-Cola and Pepsi-Cola of the United States have joint ventures with Iranian companies. Total, Statoil, Shell, Gasprom, and Lucky Goldstar of South Korea have been active in Iran's natural gas industry. Iran's constitution prohibits direct concession of petroleum rights to foreign investors. Alcatel of France, MTN Group of South Africa and Siemens of Germany gained major telecommunications contracts in 2004 and 2005, respectively.

The largest amount of foreign investment was in the industrial sector, including food and beverage, tobacco, textiles, clothing, leather, chemical, steel and oil derivates. The figure exceeded $8.76 billion. Water, electricity and gas sector ranked second, attracting $874.83 million. In the third place, the real estate sector absorbed more than $406 million. Investments in service, telecommunication and transportation as well as mines reached $193 million, $14.3 million and $14.2 million respectively.