Iran has an oil dependent economy. As a result the country's financial fortune is directly related to the price of oil in the international market. Diversification of the Iranian economy away from oil has been on the pre and post revolution agendas for economic development. Apart from recent growth in the country's gas and manufacturing sector, success in the diversification plan has generally been limited. This is has been due to lack of commitment from the country's politicians. Other responsible factors include internal and external political instability in the country created by the revolution in 1979. This was followed by the massive economic damages suffered from Iraq's imposed war against Iran in 1980. The gigantic human toll of close to one million Iranians killed, plus economic damages estimated to be close $400 billion USD were a major set back for the Iranian economy. According to one estimate based on Iran's current economic conditions, it will take the Iranian economy 90 years to fully repair the damage caused by the war. Since the end of the war in 1988 the Iranian economy embarked on a reconstruction programme. Primarily focusing on rebuilding the country's oil infrastructure, the authorities also embarked on the reconstruction of Iran's heavy industries and cities destroyed by war. However reconstruction efforts have been hampered by a number of earth quakes which caused considerable human and financial damage.

In the period between 1988 – 2000 the Iranian economy was lead by its oil and gas sector (as prime income generators for the economy), followed by (in consecutive order) gains made by the construction, manufacturing and agriculture sectors of the economy. Lacking the required capital to finance the reconstruction program, the Iranian government had to borrow money.

However the US sanctions made this a more expensive and difficult task for Iran. Nevertheless over the next ten years the Iranian government made a concerted effort to reduce its debt level, owing to the high borrowing costs and also the fact that the ruling regime did not wish to provide western lenders with a tool (ie. the debt) to manipulate the regime's internal and external policies. Therefore the start of 2000 saw Iran with a reduced debt level and continued government expenditure. Strong import control and rising price of oil provided the government with trade surpluses. The significant increase in the price of oil for the year 2004 produced a bumper year for the Iranian economy which lead to an increase in the country's GDP by as much as 6.5%. Further improvements are expected in the Iranian economy as a result of planned investment in the country's infrastructure and economy by the government. Although previously the privatisation plans for the economy have endured set backs, it is expected that they will be placed on the upcoming presidential election agenda for the year 2005 thus providing re-newed impetus for the privatisation of the economy. Iran's increasing young and educated population is expected to be another major driver for implementation of the needed privatisation plans. This is based on the fact that the Iranian government alone is unable to create the required 800,000 new jobs jobs a year to keep the country's youth employed.

Therefore participation of foreign and local private capital in the economy in the form of investments is required to create employment. Iran's bloated and often inefficient state sector is an obstacles for economic growth. Although the government is aware of this issue it is yet unwilling to take any drastic measures such as mass layoffs due to the risks it may create against political stability of the country. Furthermore massive state conglomerates called ‘Bonyads' which are government affiliated religious and political commercial organisations managing around 1000 companies are another burden on the economy. This is due to the fact that most of the companies in their portfolios are loss making. It is expected that the the burden placed by such factors on the economy which have contributed to the country's inflationary problems will lead to renewed efforts by the Iranian government to create a more suitable macroeconomic environment. This is expected to include reduced bureaucracy and improved regulations protecting the rights of private businesses and investors.

Political stability is another important factor which is needed to encourage investment. This was confirmed in 2004 by the international rating agency Fitch which described investing in Iran as highly speculative. Iran's economy is also dependent on regional events and the Iranian government's foreign policy, especially regarding its relations with the US. The sanctions placed by the US have hurt Iran's economy as they have prohibited investment by US companies, prohibited sale of important technology to Iran, and reduced Iran's exports to the US significantly. Furthermore US hostility to Iran have affected Iran's plans to join the World Trade Organisation. Although unlikely for the foreseeable future, any improvements in relations between the two countries is expected to have a positive impact on the Iranian economy. Improvements in regional security, especially in Iraq and Afghanistan are also expected to have a positive impact on Iran's economy, especially on its nascent tourism industry. Expected areas of growth in Iran's economy for the next coming years are the food and auto sector (owing to growing population), the gas sector (as means of diversifying the economy away from oil) and the transportation sector (growing population and the need to replace old transportation equipment such as cars and aircraft).

By: Meir Javedanfar

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