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Islamic Republic of Iran: Selected Issues

Author(s):
International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
March 2018
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Expanding Iran’s Non-Oil Exports1

  • Natural resources dominate Iran’s exports but account only for a small share of Iran’s GDP.

  • Iran needs to expand and intensify its trade with more partners to grow non-oil exports.

  • Improving Iran’s export competitiveness, attracting more foreign direct investments, removing barriers to trade and developing bilateral and multilateral trade agreements would aid Iran in reaching its targets for the development of the non-oil export sector.

A. Current Status of Non-Oil Exports

1. The comparatively low share of oil exports to GDP reflects Iran’s relatively large and diversified economy. Natural resources dominate Iran’s exports representing almost 53 percent of total exports but account only for 12.3 percent of Iran’s GDP. Iran exports more products than the average of MENA countries but many of its products are closely related to the oil sector (such as plastic and rubber products).

Oil Exports, 2016

Source: IMF staff calculations.

Number of products exported

Classification HS88–92 at 6-digit, 2014

2. Iran’s overall level of non-oil exports as a share of GDP and the degree to which it trades with other countries is low. Non-oil exports represent only 11 percent of GDP, in line with other oil exporting countries (who on average export 10.4 percent of GDP) but are low compared to upper middle-income (who on average export 24.2 percent of GDP), reflecting the legacy of import substitution, a reliance on domestic markets, and the impact of sanctions. Iran trades with relatively few countries. Iran exports its non-oil exports mainly to the largest economies in Asia (colored in red in the tree map below), with 37 percent of its non-oil exports going to China. Exports to Europe (colored in purple)—which represent a non-oil market 40 percent larger than the Asian one—remain subdued.

Non-oil exports

as a share of GDP, 2016

Source: IMF staff calculations.

Countries importing non-oil goods from Iran

share of total non-oil exports, 2015

Source: BACI database and IMF staff calculations.

Note: Each box represents the share countries import of Iran non-oil exports. Countries are grouped by regions.

3. Iran needs to expand and intensify its trade with more partners if it is to increase non-oil exports and achieve the Sixth Development Plan target of growing non-oil exports to 15 percent of GDP by 2020. Examining Iran’s main exports in three broad goods categories highlights the opportunities for Iranian non-oil exports:

  • Polyethylene (top export of plastic and rubber category, representing 11.6 percent of Iran’s non-oil exports). Iran mainly exports this good to China (84 percent) and Turkey (10 percent). However, the large European market—which imported US$ 9.5 billion of polyethylene in 2015 and accounted for 35 percent of the global market — is largely underexploited.

  • Car parts (top export of the transportation category, representing 0.1 percent of Iran non-oil exports). Iran mainly exports car parts to a small set of countries in Europe, namely Turkey (72 percent), France (24 percent), and Russia (3 percent).

  • Pistachios (top export of the vegetable category, representing 5.9 percent of Iran non-oil exports). Iran exports pistachios to a large share of world buyers.

Figure 1.Exploring New Markets: Where Do and Can Iran Exports Go? 3 examples

(share of product exported, 2015)

Source: WITS/Comtrade and Staff calculations

B. Policies to diversify and grow non-oil exports

4. Improving Iran’s export competitiveness will be key for non-oil exports to grow and diversify. Reforms to unify the exchange rate must be accompanied by deep structural reforms to improve competitiveness and raise non-oil exports. Iran’s Global Competitiveness Index rank—which improved seven notches to 69th—continues to be constrained by problems of access to finance, bureaucracy and policy uncertainty. The export sector is small. Some 250 companies account for 60 percent of total goods exports.

Global Competitiveness Index

2017–18

Source: World Bank Global Competitiveness Index.

5. Attracting more Foreign Direct Investment (FDI) would help the exporting private sector to develop and increase its technological know-how. Currently, FDI net inflows represent only 0.02 percent of GDP, below the level observed in other MENA countries (2 percent of GDP). Human-capital intensive exports are below emerging and developing countries average. To tackle technological obsolescence, knowledge transfer via FDIs could help Iran develop human-capital intensive exports and create high skill jobs.

Factor-intensity of goods exported

(share of goods exported, 2015)

Source: WITS/Comtrade database and IMF staff calculation.

Note: Classification of the goods intensity are from Hinloopen and van Marrewijk (2001). Natural-resource intensive products are excluded. Data for Iran corresponds to 2011.

6. Iran could also lower its administrative barriers to trade. It takes 25 days to clear exports, the longest in non-conflict MENA countries reflecting weak infrastructure (in particular air transport but also roads and ports), red tape and high tariffs. The proposed amendments to the Customs Law should help improve trade processing time. Domestic import tariffs averaged 20.9 percent in 2016 and restrictions on service trade (the fourth highest in the world) to protect inefficient enterprises.

Simple average import tariff

(in percent, 2016)

Source: Iranian authorities.

7. Bilateral and multilateral trade agreements could help expand market access for Iranian firms. The tariffs applied to Iran’s exports by its trading partners averaged 8.9 percent in 2014 (compared to an average of 2.9 percent applied to all other countries). Developing bilateral agreements, notably with the European Union (EU), could benefit Iran non-oil exporters.1

References

Prepared by Magali Pinat.

Iran has 12 FTA/PTA agreements (Afghanistan, Bangladesh, Belarus, Bosnia-Herzegovina, Cuba, Lebanon, Pakistan, Sri Lanka, Syria, Tunisia, Turkey, and Uzbekistan).

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