Iran

Politics:

• Analysis

  Iran politics: Quick View - US sanctions head of Iran's nuclear agency

  Event

  The US has imposed sanctions on the head of Iran's nuclear agency.

  Analysis

  Fereydoun Abbasi-Davani, the director of the Atomic Energy Organisation of Iran, was listed by the US Treasury Department in its latest list of individuals and entities who will be subject to asset freezes and barred from any interaction with US businesses or citizens. The US authorities listed several companies that it alleges support the development of Iran's nuclear programme; most of the companies operate businesses related to power generation or transfer and machinery.

  These new US sanctions come at the same time as a visit of International Atomic Energy Agency (IAEA) inspectors to Iran. The IAEA representatives had wanted to visit the Parchin military facility, which they suspect had been used in the past (and could have been used more recently) to test material for a military application of the nuclear programme. However, Iran again refused to allow access, and it maintains that Parchin is a conventional military site. According to Reuters, "progress" had been made in these latest talks, but the report gave no indication of what future visits to Iran by the IAEA would entail or whether one side had made significant concessions.

  At present, a resolution of the nuclear impasse still seems highly unlikely. Iran is in a position where it can continue to develop its nuclear facilities and supplies while simultaneously engaging in talks. Hence it has little incentive to offer up major concessions such as halting uranium enrichment or shipping its uranium supply out of the country. From the perspective of the US and its allies, however, they likely view the harsh sanctions they have placed on Iran's oil and gas and financial sectors as being effective in doing serious damage to Iran's economy and threatening the government's ability to continue to finance its nuclear projects.

  At the same time, an announcement from the Iranian envoy to the IAEA, Ali Asghar Soltanieh, that a new round of IAEA talks will be held in January makes the prospect of a military clash less likely. The Economist Intelligence Unit maintains a view that an ejection of IAEA inspectors by Iran would be a red line for the US in particular, as there would be no objective observation of Iran's nuclear activities.

  December 14, 2012

• Background

  Iran: Political forces at a glance

  Political outlook: Political forces at a glance

  Present government: The president, Mahmoud Ahmadinejad, who was elected in June 2005 and re-elected for a second and final term in 2009, will face a hostile parliament for the remainder of his term and will be unable to maintain his unorthodox and populist conservative agenda. Mr Ahmadinejad appears to have lost a degree of support from the supreme leader, Ayatollah Ali Khamenei, owing to his support for figures who are opposed by the religious establishment. The president's attempts to chart an independent line on domestic and international affairs will be sharply curtailed. Nevertheless, he will remain an outspoken and confrontational figure both at home and in Iran's dealings with foreign partners or adversaries.

  Parliamentary forces: Seeking to keep in check the more extravagant measures advocated by the president is a 290-member directly elected Majlis (parliament). The current Majlis was elected in March 2012 for a four-year term, and a conservative alliance of parties opposed to the president won 182 of the available seats. The United Fundamentalists Front, led by the speaker of parliament, Ali Larijani, won the single largest block of seats, empowering this ally of Ayatollah Khamenei. Parliament, which will receive at least tacit support from the supreme leader, will continue to challenge the authority of the president through legal means, such as sending his proposals for assessment by the judiciary and periodically threatening figures close to Mr Ahmadinejad with impeachment. However, parliament holds little power over foreign or security policy. It also has a limited impact on the budget, as a large share of Iran's government spending is granted to state-enterprises, which are not accountable to the legislature.

  Extra-parliamentary forces: In addition to the presidency and parliament, a number of other institutions play a role in the Iranian political system. Chief among these is the supreme leader. This is an institutional embodiment of the political concept at the heart of Iran: velayat-e-faqih (rule of the Islamic jurisprudent). The current supreme leader is Ayatollah Ali Khamenei, who has in the past tended to adopt an inclusive approach to power, allowing both hardline and moderate figures to influence policy. However, Ayatollah Khamenei has recently made moves against the president (such as reinstating a minister Mr Ahmadinejad had dismissed) and has said that the post could be removed at some point in the future. The clerical establishment behind Ayatollah Khamenei will focus on controlling the political scene in the forecast period by ensuring that an unpredictable president or parliament is not elected. To do this, the religious institutions of the state will play a more active role. The Expediency Council's public role is to mediate between the Majlis and the Guardian Council, a 12-man body appointed by the supreme leader, which in practice is dominated by senior clerics. The Guardian Council vets legislation and political candidates for their Islamic conformity. The supreme leader remains vital to the stability and ultimate direction of the system. In theory he can be removed by the Assembly of Experts, which is made up of clerical figures. However, this is unlikely, not least because the Guardian Council is responsible for approving the candidates for election to the Assembly.

  July 25, 2012

• Structure

  Iran: Political structure

  Official name

  Islamic Republic of Iran

  Legal system

  Based on the constitution of 1979, which was amended in 1989

  Legislature

  290-member Majlis-e-Shuray-e Islami (National Assembly). All candidates for the Majlis must be approved by the 12-member Guardian Council, six of whom are appointed by the supreme leader (rahbar) and six by the judiciary. Majlis legislation must also be approved by the Guardian Council. The Expediency Council mediates between the Majlis and the Guardian Council

  Electoral system

  Universal adult suffrage for elections to the Majlis, to the Assembly of Experts (the body that chooses the rahbar) and for the presidency

  National elections

  Next elections: March 2016 (legislative); June 2013 (presidential)

  The supreme leader (rahbar)

  Ayatollah Ali Khamenei

  Head of state

  President, elected by universal suffrage for a four-year term for a maximum of two terms. Mahmoud Ahmadinejad was controversially re-elected in June 2009

  Executive

  The post of prime minister was abolished in 1989. The current cabinet was approved by the Majlis in September 2009

  Main political trends

  Parliamentary factions are loose. The new Majlis is dominated by the United Fundamentalist Front and the Stability of Islamic Revolution Front, both conservative groups close to the supreme leader

  President: Mahmoud Ahmadinejad

  Head of presidential office: Gholam-Hossein Elham

  Key ministers

  Commerce & industries & mines: Mehdi Ghazanfari

  Culture & Islamic guidance: Mohammed Hosseini

  Defence: Ahmad Vahidi

  Economy & finance: Shamseddin Hosseini

  Education: Hamid Reza Hajibabai

  Energy: Majid Namjou

  Foreign affairs: Ali Akbar Salehi

  Health: Marzieh Vahid Dastjerdi

  Intelligence: Haidar Moslehi

  Interior: Mostafa Mohammed Najjar

  Justice: Morteza Bakhtiari

  Petroleum: Rostam Qasemi

  Speaker of the Majlis: Ali Larijani

  Head of the Supreme National Security Council: Said Jalili

  Head of the Management & Planning Organisation: Amir Mansour Borghei

  Head of the Iranian Atomic Energy Organisation: Fereydoun Abbasi-Davani

  Central bank governor

  Mahmoud Bahmani

  December 11, 2012

• Outlook

  Iran: Key developments

  Outlook for 2013-17

  • The supreme leader, Ayatollah Ali Khamenei, will maintain his authority over the forecast period. His rule has been strengthened by the success of candidates loyal to him in the March parliamentary election.
  • The president, Mahmoud Ahmadinejad, will find it difficult to implement policy in his final months in office owing to an antagonistic parliament. Someone with closer links to the clerical elite will be his likely successor.
  • Tensions with the US and its allies will remain high after the imposition in 2012 of new, more stringent sanctions on Iran. Nevertheless, we do not expect Israel or the US to launch a military strike against Iran.
  • Iran's fiscal position will be weak in the forecast period as tax revenue falls, owing to the fragile economy, and oil income declines. The net fiscal deficit is forecast to average 4.3% of GDP a year in 2013-17.
  • After declining by an estimated 3% in 2012, real GDP is expected to contract by a further 1.2% in 2013, as sanctions hinder exports of crude oil and private consumption declines. Anaemic GDP growth is forecast in 2014-17.
  • Bank Markazi (the central bank) will struggle to maintain the value of the rial as its access to foreign exchange is crimped by sanctions. Inflation will remain high but will decline from an estimated 30% in 2012 to 15% in 2017.
  • As a result of declining oil sales, the current account is expected to record small deficits throughout the forecast period.

  Review

  • Following the eight-day conflict between Hamas and Israel, Iran highlighted its military support for Hamas. The latter thanked Iran, but relations between them are strained by policy differences over Syria.
  • Following a rebuke from the supreme leader, Mr Ahmadinejad has said he will refrain from public quarrels. The president had been engaged in a bitter row with the judiciary.
  • In its attempt to promote economic self-sufficiency, the government moved to ban Iranian firms from exporting agricultural goods such as wheat, flour and sugar, and industrial products including steel, aluminium and other metals.
  • The latest quarterly report from the IAEA, the UN nuclear watchdog, has shown a rise in stocks of uranium enriched by 20% from 96 kg three months ago to 139 kg, prompting calls for a renewed diplomatic push.
  • Iran has reiterated its support for the troubled Iran-Pakistan gas pipeline and pledged US$500m of funds, but US opposition may restrain Pakistan.

  December 11, 2012

Economy:

• Background

  Iran: Country fact sheet

  Fact sheet

  Annual data	2011a	Historical averages (%)	2007-11
  Population (m)	74.8	Population growth	1.2
  GDP (US$ m; market exchange rate)	435,251	Real GDP growth	3.7
  GDP (US$ m; purchasing power parity)	987,870	Real domestic demand growth	3.5
  GDP per head (US$; market exchange rate)	5,816	Inflation	17.3
  GDP per head (US$; purchasing power parity)	13,201	Current-account balance (% of GDP)	6.3
  Exchange rate (av) IR:US$	10,616b	FDI inflows (% of GDP)	0.8
  a Economist Intelligence Unit estimates. b Actual.

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  Background: Iran became an Islamic Republic after a popular uprising overthrew the regime of the pro-Western shah in 1979. As vali-e-faqih (the supreme Islamic jurisprudent), Ayatollah Ruhollah Khomeini became the supreme religious and political leader. From 1980 to 1988 Iran was at war with Iraq. On his death in 1989 Ayatollah Khomeini was succeeded by Ayatollah Ali Khamenei (who lacked his predecessor's religious credentials). Mohammed Khatami, first elected president in 1997, tried to introduce social and political reforms, backed by a reformist Majlis (parliament). However, the conservative establishment blocked these efforts, and in 2004 and 2012 conservatives won control of parliament. In 2005 and again in 2009 Mahmoud Ahmadinejad, a populist conservative, was elected to the presidency. Disputes over the fairness of his re-election in 2009 led to some of the most intense street protests since 1979.

  Political structure: Iran is defined as an Islamic Republic in its constitution. The president is elected every four years by popular vote, although all candidates must be vetted by the Guardian Council. Superimposed on this republican constitutional structure are several unique Islamic features: the vali-e-faqih exercises considerable power over the government, and the conservative Guardian Council approves all legislation to ensure that it complies with Islamic law.

  Policy issues: Iran's five-year economic plans have emphasised a gradual move towards a market-oriented economy, but political and social concerns have hampered progress. Faster movement, however, occurred under the third five-year plan (2000-04), which advocated a more ambitious programme of liberalisation, diversification and privatisation. The resolution of Iran's external debt problems eased the policymaking environment and facilitated the unification of the exchange rate at the start of 2002 (although this has been offset to a degree by the effect of financial and trade sanctions in 2012). The government showed some commitment to reform by beginning to remove the costly subsidy system at the end of 2010.

  Taxation: Iranian tax laws are complex and have been applied inconsistently. The government has lowered unified corporation tax rates and aims to simplify tax administration, but progress will continue to be slow, and foreign firms are likely to continue to face some uncertainty when assessing their tax liabilities.

  Foreign trade: Oil earnings comprise over 80% of export revenue. A tightening of sanctions, particularly those imposed by Europe, will put a strain on Iran's ability to export oil. Iran's oil and non-oil trade will suffer throughout 2013-17 as trade partners seek to engage with other countries out of fear of running foul of sanctions

  Major exports 2010	% of total	Major imports 2010	% of total
  Oil & gas	79.3	Intermediate goods	46.6
  Petrochemicals	2.9	Capital goods	36.0
  Carpets	0.5	Consumption goods	17.4
  Leading markets 2011	% of total	Leading suppliers 2011	% of total
  China	21.0	UAE	30.6
  India	9.3	China	17.2
  Japan	8.9	South Korea	8.4
  Turkey	8.7	Germany	4.8

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  December 13, 2012

• Structure

  Iran: Economic structure

  Data and charts: Annual trends charts

  
  

  

  December 11, 2012

• Outlook

  Iran: Country outlook

  Iran: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: The Economist Intelligence Unit expects the supreme leader (and ultimate religious and political authority), Ayatollah Ali Khamenei, and the hardline and confrontational president, Mahmoud Ahmadinejad, to retain their posts (although Mr Ahmadinejad will be required to step down at the end of his second term in June 2013). Ties between the two will remain strained, as the supreme leader has become increasingly identified with conservative factions intent on blocking Mr Ahmadinejad's agenda. The impact of expanded international sanctions will compound already high domestic political tensions, and pressure will remain on Mr Ahmadinejad, with various regime insiders and members of parliament (MPs) blaming him for Iran's economic woes.

  ELECTION WATCH: A parliamentary election in March was a boon for Ayatollah Khamenei as a conservative group close to him that has in the past been fiercely critical of Mr Ahmadinejad won a big majority. The composition of parliament will further frustrate the president's ability to pass legislation.

  INTERNATIONAL RELATIONS: Tension over its nuclear programme will shape Iran's international relations. The US and the EU will maintain financial and trade sanctions on Iran in an attempt to coerce it into making concessions on its nuclear policy. The Islamic Republic has retaliated with threats to shut the Strait of Hormuz, a vital oil supply chokepoint, but neither side appears eager to engage in actual confrontation. As both sides appear keen to avoid an escalation, negotiations between Iran and the P5+1 (the five permanent members of the UN Security Council and Germany) have resumed, but have been unsuccessful and are now taking place at a lower diplomatic level. This largely reflects a deadlock over reciprocity: Iran will not consider suspending uranium enrichment without a lifting of at least some of the sanctions on it, but the US considers the maintenance of these sanctions as vital to ensuring a shift in Iranian thinking.

  POLICY TRENDS: With the tightening of sanctions, Iran will aim to improve its economic self-sufficiency. Government investment will prioritise the oil and gas sector, but raising finance to increase production will be affected by sanctions and, indeed, Iran may struggle to replace lost oil output. Although the government has announced plans to invest considerable sums across a number of sectors, including refineries, we believe that government investment will be constrained by lower oil revenue. The privatisation programme will also continue, but will only be open to domestic investors. Many of the privatisations involve "justice shares" distributed to the public, and others have appeared to entail shifting assets between different parts of the Iranian state. We expect the privatisation process to slow in the forecast period, as the number of available firms suitable for divestment diminishes.

  ECONOMIC GROWTH: Real GDP growth will be held back by sanctions on Iran's oil exports, high inflation and declining oil production. We expect the economy to contract by 1.3% in 2013/14, following an estimated contraction of 3% in 2012/13, as crude exports continue to suffer under US sanctions and the EU import embargo. This is forcing the Iranian authorities to cut back on oil production. The economy is forecast to recover slightly in 2014/15-2017/18, growing by an average of 1.6% assuming that Iran's oil exports start to edge up again as the major purchasers of Iranian oil adjust to international sanctions. Such growth is substantially below Iran's historical trend and potential given its hydrocarbons wealth, and in real terms the economy will remain smaller than it was in 2010/11 until 2016/17. Given uncertainty about the course of sanctions and diplomacy, the risks to this forecast are considerable and mostly on the downside. A further tightening of sanctions could lead to even less growth than we currently expect, leaving the economy hamstrung throughout the forecast period.

  INFLATION: Inflation will remain high, driven primarily by sanctions, which have caused a dramatic weakening of the unofficial value of the rial and surging prices for imports-owing both to the weaker exchange rate and scarcer supply. Iran is a major consumer of refined fuel, and a domestic production shortage means that the country will need to import petrol to meet demand, exacerbating Iran's vulnerability to imported inflation. There are serious concerns over the accuracy of officially published inflation data; Bank Markazi (the central bank) has not published inflation statistics since April, when inflation was 24% year on year, and press reports indicate inflation is well above official levels. After reaching an estimated peak of 30% in 2012/13, official average inflation is forecast to remain above 20% in 2013/14, before falling back gradually to 15% in 2017/18. Furthermore, in the face of declining government revenue, there is a risk that the authorities will print money to fund spending. This would feed an inflationary spiral.

  EXCHANGE RATES: The rial's market value has fallen by as much as 80% since 2011, reaching a low of around IR35,000:US$1 in October. In the short term, Iranians will shift their savings into safer assets such as gold or the dollar. Bank Markazi has tried to limit depreciation by raising interest rates, introducing a new multiple-exchange-rate system and opening a foreign-exchange centre to satisfy demand for dollars; further moves to control the exchange market are likely in a bid to stabilise the rial. The official rate has been set at IR12,260:US$1, with a IR15,000:US$1 rate for importing capital and intermediate goods. (All other imports will be purchased using the black-market rate.) However, amid the loss of confidence in the currency, these levels will be difficult to maintain and the central bank is likely to devalue the rial again in the short term. We project further depreciation over the forecast period as barriers to accessing foreign exchange make official rates difficult to maintain.

  EXTERNAL SECTOR: Iran's external balances will be weakened by sanctions. The trade balance will deteriorate from a surplus of US$35bn in 2011/12 to a small deficit, estimated at US$335m, in 2012/13 as exports of crude oil decline sharply. We expect the trade balance to move back into a small surplus from 2013/14, but growth in the surplus will be curbed by new restrictions on the purchase of Iranian industrial and agricultural goods. Unlike many other Middle Eastern oil producers, Iran will be less sensitive to US consumption patterns given a long-standing prohibition on US imports of Iranian oil. The non-merchandise deficit is expected to remain relatively steady. The restrained import bill is likely to suppress growth in services debits, and income debits will be depressed by reduced foreign participation in the economy. Following more than a decade of current-account surpluses, we estimate a deficit of 1.9% of GDP in 2012/13. We forecast small deficits, averaging 0.6% of GDP, over the forecast period, reflecting the ongoing squeeze on crude exports.

  December 10, 2012

• Forecast

  Iran: Country forecast summary

  Country forecast overview: Highlights

  • The ability of the supreme leader, Ayatollah Ali Khamenei, to exert his authority over the president will be strengthened by the victory of his allies in the parliamentary election. With Mahmoud Ahmadinejad leaving office in June 2013, Ayatollah Khamenei will seek to ensure that someone beholden to him takes over.
  • Political instability is expected to continue. Mr Ahmadinejad's position will be challenged by parts of the clerical establishment and by his opponents from within both the reformist and the conservative camps. Mr Ahmadinejad's second, and constitutionally final, term is set to end in June 2013, and manoeuvring in the lead-up to the poll is likely to undermine policymaking. The presidential election will probably be heavily stage-managed by the regime to ensure a compliant candidate is selected as president.
  • Tensions between Iran on the one hand and the West and Israel on the other over the former's nuclear programme will persist, but we still do not expect a military clash. The US, the UK and the EU will maintain sanctions on Iran in an effort to force the Islamic Republic to curtail its nuclear ambitions. Iran may oscillate between adopting a more confrontational stance and attempting to engage in diplomacy in its attempts to manage the pressures it faces.
  • UN and unilateral sanctions against Iran will hinder efforts by the government to attract investment (especially into the hydrocarbons sector) and will encourage it to pursue economic self-sufficiency.
  • The government will need to tighten its fiscal stance as revenue continues to be affected by lower oil revenue caused by sanctions. Parliament has cast doubt on the sustainability of subsidy reforms (begun in 2010), saying that the next round of subsidy cuts may be suspended. Nevertheless, a new president from 2013 will probably be required to consolidate spending. The net fiscal deficit is forecast to average 4.3% of GDP a year in 2013-17.
  • After declining by an estimated 3% in 2012, real GDP is expected to contract by a further 1.2% in 2013, as sanctions weaken exports of crude oil and private consumption declines amid high inflation. Anaemic GDP growth is forecast in 2014-17, as oil exports stabilise at a lower level with a base of demand from the major Asian purchasers of Iranian crude. However, this forecast is subject to substantial risks, largely downward. The current account is forecast to post small deficits throughout 2013-17 as oil output and receipts decline.

  Country forecast overview: Key indicators

  Key indicators	2012	2013	2014	2015	2016	2017
  Real GDP growth (%)	-3.0	-1.3	0.8	1.5	2.0	2.1
  Consumer price inflation (av; %)	30.0	21.0	17.0	16.1	16.0	15.0
  Official net budget balance (% of GDP)	-5.2	-5.8	-4.6	-4.2	-3.6	-3.2
  Unofficial gross budget balance (% of GDP)	-4.8	-5.4	-4.2	-1.2	-0.7	-0.4
  Current-account balance (% of GDP)	-1.9	-1.2	-0.8	-0.3	-0.2	-0.1
  Commercial banks' lending rate	16.0	16.5	16.5	16.5	16.5	16.5
  Exchange rate IR:US$ (av)	12,176	13,271	13,669	13,943	14,222	14,364

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  December 13, 2012

View detailed map

Country Briefing

Total area

163.6m ha

Population

55.8m (1996 census); 75.1m (IMF year-end 2010)

Towns with populations in excess of 500,000

Population in '000 (2007 Economist Intelligence Unit estimates)

Tehran (capital): 7,705

Shiraz: 1,205

Mashhad: 2,411

Qom: 1,042

Isfahan: 1,583

Ahvaz: 790

Tabriz: 1,379

Bakhtaran (formerly Kermanshah): 643

Climate

Continental, with extremes of temperature

Weather in Tehran (altitude 1,220 metres)

Hottest month, July, 22-37°C (average daily maximum and minimum); coldest month, January, minus 3-7°C; driest month, July, 3 mm average rainfall; wettest month, January, 46 mm average rainfall

Official language

Persian (Farsi)

Measures

Metric system. Some local measures are used, including: 1 jerib=0.108 ha; 1 artaba=0.66 hl; 1 rey=11.88 kg

Calendar

The Iranian year begins on March 21st, and contains 31 days in each of the first six months, 30 days in the next five months and 29 in the 12th month (30 in every fourth year). The system relates to the Prophet Mohammed's flight from Mecca in 622 AD, but, unlike the Islamic calendar, follows solar years. The Gregorian equivalent can be found by adding 621 years to the Iranian date. The Iranian year 1390 began on March 21st 2011

Currency

Rial (IR); IR10 = 1 toman. (Although all government statistics are given in rials, in conversation Iranians refer to tomans.) The multiple exchange rate was replaced by a single floating rate at the start of fiscal year 2002/03

Time

3.5 hours ahead of GMT

Public holidays

Many holidays are religious and based on the Islamic year. Exceptions include New Year (Nowruz) celebrations (March 21st-24th)

March 20, 2012