Iran’s average economic growth rate over the past two years has been 3.4%. However, unlike independent analysts, policymakers are projecting much higher figures, as high as 8%, for this year and beyond. This optimism is misplaced.
Achieving such high growth requires significant groundwork. Unfortunately, Iran lacks the necessary infrastructure and economic stability. This unrealistic approach leads to bad policy decisions. Instead of focusing on long-term sustainable growth, officials resort to price controls, distribution schemes, and harmful tax increases. These measures will ultimately undermine the current modest growth.
The recent growth can be attributed to two temporary factors: the US waiver on oil sales and the easing of COVID-19 restrictions. These factors are no longer in play.
Independent analysts see a clear pattern: Iran’s economy prioritizes high inflation over sustainable growth. This is evident in the breakdown of recent growth. Sectors like agriculture, industry, tourism, and IT have seen minimal or negative growth, while the capital account balance has declined.
The real growth driver is the oil and gas sector, which has been experiencing a declining capital account balance since 2009. This unsustainable model stifles long-term growth.
Iran’s high capital account dependence, compared to other countries, reflects its low productivity. For instance, despite having the second-highest number of petrochemical plants in Asia, Iran captures only 2% of the global market. Additionally, domestic demand for petrochemical products is limited. Similar inefficiencies exist in the steel industry.
Consequently, Iran’s long-term growth is directly tied to the capital account balance, while short-term growth fluctuates with oil prices and export volumes.
The recent 33% growth in the oil sector translated into a 13% GDP increase compared to 2019. However, this is unsustainable. Declining oil demand will likely reverse this trend, negatively impacting the budget and inflation.
Furthermore, the increased oil revenue from 2020 (from $20 billion to $60 billion) wasn’t used for capital investment. Instead, it went towards currency exchange and non-capital goods imports, failing to generate lasting value.
Realizing this, government economists now predict only 1.7% growth over the next eight years, even with a 4.5% investment growth rate. This is far lower than the unrealistic projections of other officials.
To maintain the current oil-driven growth, Iran would need significantly higher oil exports, either through increased volume or higher prices. This seems unlikely considering current sanctions and their impact on the budget and development plans.
To achieve the ambitious 8% growth target, Iran would need a much heavier capital account balance, which is simply not available.
In conclusion, Iran’s current economic growth is fragile and unsustainable. Focusing on long-term growth through diversification and productivity improvements is essential.
