The Iranian Economy:
Challenges and Opportunities

MAHDI GHODSI
VASILY ASTROV
RICHARD GRIEVESON
ROBERT STEHRER
Mahdi

The Vienna Institute for International Economic Studies
Wiener Institut für Internationale Wirtschaftsvergleiche

The Iranian Economy : FULL TEXT

Abstract
The Iranian economy has greatly benefited from the lifting of international sanctions in 2016, when the
JCPOA nuclear deal came into force. Oil production and exports rebounded strongly, which spilled over
into non-oil sectors. However, the economy is yet to return to its 1976 peak in real per capita GDP
terms, reflecting numerous challenges over the past four decades, including poor policy choices and the
fallout from persistent conflict with the US. This report presents a broad overview of the Iranian
economy, and identifies the main challenges to long-run economic development, including in foreign
trade and investment, fiscal, monetary and exchange rate policy, and the institutional environment. It
concludes that an already difficult situation for Iranian policymakers will be exacerbated by the US
decision to pull out of the JCPOA, and the introduction of new sanctions.
Keywords: Iran, European Union, international trade, foreign direct investment, macroeconomic
environment, privatisation, political economy of sanctions
JEL classification: E02, E62, F19, F31, F51, G32, O13, P48

CONTENTS
۱٫ Introduction ………………………………………………………………………………………………………………………………….. 1
۲٫ The legacy of history: Iranian international relations and trends in economic
development since the 1970s …………………………………………………………………………………………………….. 2
۲٫۱٫ Developments after the Revolution ……………………………………………………………………………………..2
۲٫۲٫ The role of sanctions and isolation ……………………………………………………………………………………..5
۲٫۳٫ The role of the public sector and ownership structures ………………………………………………………….6
۲٫۴٫ Current Iranian relations with the EU and the US ………………………………………………………………….8
۲٫۵٫ The current US withdrawal from the JCPOA ………………………………………………………………………10
۳٫ Key economic and structural indicators of the Iranian economy in a comparative
perspective …………………………………………………………………………………………………………………………………… 14
۳٫۱٫ Level of development ………………………………………………………………………………………………………14
۳٫۲٫ Governance ………………………………………………………………………………………………………………….15
۳٫۳٫ Business environment ……………………………………………………………………………………………………..15
۳٫۴٫ Infrastructure and communications ……………………………………………………………………………………17
۳٫۵٫ Human capital ……………………………………………………………………………………………………………….18
۳٫۶٫ Environment ………………………………………………………………………………………………………………….21
۳٫۷٫ Demographics ……………………………………………………………………………………………………………….23
۴٫ Iran’s macroeconomic environment and challenges ……………………………………………………….. 25
۴٫۱٫ Fiscal policy ………………………………………………………………………………………………………………….25
۴٫۲٫ Sovereign wealth fund …………………………………………………………………………………………………….26
۴٫۳٫ External balances …………………………………………………………………………………………………………..28
۴٫۴٫ Exchange rate: Is the rial overvalued? ……………………………………………………………………………….29
۴٫۵٫ Monetary policy ………………………………………………………………………………………………………………31
۴٫۶٫ Structure of the economy …………………………………………………………………………………………………33
۵٫ Openness, trade and FDI …………………………………………………………………………………………………………… 38
۵٫۱٫ Iran’s Openness ……………………………………………………………………………………………………………..38
۵٫۲٫ Trade in services …………………………………………………………………………………………………………….40
۵٫۳٫ Trade in goods ……………………………………………………………………………………………………………….41
۵٫۴٫ Trade relations with the EU-28 …………………………………………………………………………………………47
۶٫ Summary, conclusions, and challenges ahead …………………………………………………………………… 56
References ……………………………………………………………………………………………………………………………………………… 60