Comments on the Iranian Economy – November 2014
By Dr. M. Javad Ardalan
Director of Oxford Persian Institute (www.oxpe.co.uk)
The price of crude oil has fallen continuously since June 2014. Current oil prices are the lowest since September 2010. In addition to sanctions constraints on its oil exports, the drop in the oil prices has affected the Iranian economy. The current Iranian budget assumed an oil price of USD100 per barrel. It is difficult to predict the effects of falls in oil prices on the economy of Iran. However President Rouhani’s government intends to boost alternative sources of revenue in order to minimise the budget deficit which is at least 30 percent of total spending.
Growth rates in the Chinese and European economies have slowed, limiting the demand for oil. Supply from the North American shale production is increasing. The current policies of Saudi Arabia are inclined to growing its market share rather than maintaining its oil prices. These indicate a further fall in oil prices. The lifting of sanctions on Iranian oil will have a further depressing effect on oil prices. Once lack of Iran oil supply was a mutual problem for Iran and the West, now it is clear that a reduced oil income is more of an Iranian problem.
Historically some 90 percent of Iranian foreign currency revenue is generated from the oil and gas exports. However, the current situation has encouraged Iranian leaders to look to alternative sources of income to close the budget deficit – although this isn’t an immediate solution to balancing the budget. Agriculture, handicrafts, tourism and mining are sectors which are attracting more attention now.
Agriculture is an important segment of Iran’s economy and contributes approximately 11 percent to the overall GDP of the country and the sector employs around one-third of the work force (Ministry of Commerce, 2009). Iran’s main agricultural food products are wheat, rice, grains, sugarcane, fruits, cotton, wool and dairy products. Although Iran may not be able to become a net exporter of agricultural products, self-sufficiency in the sector will change the balance of foreign currency.
Iran’s handicraft industry contributes around 3 percent to the GDP and employs over 5 million people. The carpet industry alone employs approximately 1.2 million people Iran exports around USD 500 million worth of carpets every year. In 2008, this represented around 30 percent of the world market. Carpets made in other countries, are often sold as Persian carpets. The industry was so well respected that during sanctions, other industries have used the carpet traders as buffering point to transfer money to or from Iran, according to people familiar with the matter.
Tourism is of growing importance for foreign currency earnings. Apart from Islamic religious sites, UNESCO has rated Iran among top 10 countries in the world for tourism. By ensuring safety for tourists and promoting its culture, the Iranian government can easily attract more tourists to a country which, since the 1979 revolution, has not generally welcomed foreign holiday visitors.
The mining sector contributes around 4 percent to the country’s GDP. Iran is capable of exporting products such as minerals, coal, iron ore, lead, zinc, chromium, uranium and gold. The Iranian government can develop this industry further to increase its contribution to the overall economy of the country. Iran’s rich natural resources can help the economy to fight the problems faced due to reduction in oil prices – but this will take time. So far, only 8 per cent of Iran has been explored for minerals.
