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Quick Facts
- Population:
- GDP (PPP):
- $818.7 billion
- 1.0% growth
- 3.1% 5-year compound annual growth
- $10,865 per capita
- Unemployment:
- Inflation (CPI):
- FDI Inflow:
Iran’s economic freedom score is 42.3, making its economy the 171st freest in the 2012 Index. Its score has increased by 0.2 point from last year, with a notable decline in business freedom offset by small improvements in five of the 10 economic freedoms. Iran is ranked 16th out of 17 countries in the Middle East/North Africa region, and its overall score is well below the world and regional averages.
Heavy state interference undermines economic freedom in every category measured in the Index and seriously degrades economic dynamism. As a result of rampant corruption and deficiencies in the legal framework, the rule of law remains fragile and uneven. The government dictates most production and investment activity and derives most of its revenue from the oil sector.
The private sector, largely marginalized by the restrictive regulatory environment, is further weighed down by government inefficiency and mismanagement. Efforts to enhance the business climate have been modest, undone on occasion in the interest of maintaining the status quo. A recent move to cut subsidies, which had swollen to a level equal to roughly one-third of economic output, has been implemented erratically, causing substantial uncertainty in the affected sectors.
Background
President Mahmoud Ahmadinejad’s regime, after greatly expanding government spending, now plans to replace subsidies with cash payments to low-income Iranians. Iran’s economy, once one of the Middle East’s most advanced, has been crippled by the 1979 Islamic revolution, the Iran–Iraq war, gross mismanagement, and corruption. International concern about Iran’s nuclear development and support for terrorism remains high. Oil export revenues, which provide about 85 percent of government revenues, increased in 2010 despite a gradual decline in production; higher world oil prices have partially offset the impact of U.S., EU, and U.N. economic sanctions. Iran’s economy remains burdened by high inflation, corruption, costly subsidies, and an increasingly bloated public sector, and educated Iranians continue to seek better opportunities overseas.
Corruption pervades all branches of government. Resorting to a court system infected by bribery and cronyism is often counterproductive; finding a local business partner with substantial political patronage is a more effective way to protect contracts. The constitution allows the government to confiscate property acquired either illicitly or in a manner not in conformance with Islamic law. Few laws protect intellectual property rights.
The top income tax rate is 35 percent, and the top corporate tax rate is 25 percent. All property transfers are subject to a standard tax. A value-added tax (VAT) has been collected intermittently. The overall tax burden is estimated to be 9.3 percent of total domestic income, and government spending is equivalent to 27.8 percent of GDP. The budget balance is in slight surplus, with public debt standing at 11.6 percent of total domestic output.
The private sector continues to be hampered by a restrictive and burdensome regulatory environment. Although procedures for launching a business are relatively streamlined, the cost of completing licensing requirements is over three times the level of annual average income. Employment regulations are restrictive, and the labor market remains stagnant. Monetary stability is weak, and tight government controls distort price levels.
The trade weighted tariff rate is prohibitively high at close to 20 percent, with layers of non-tariff barriers further restricting trade activity. The investment regime is heavily regulated by the state, and foreign investment is banned in many sectors. Strict government controls limit access to financing for businesses. State-owned commercial banks account for a majority of total banking-sector assets, with credit allocation directed by the government.