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Global Trends and Politics

Iran: Outstanding opportunities, huge hurdles

After many years of tough negotiations and innumerable setbacks, the nuclear agreement between Iran and the western powers was finally signed on 14 July. The economic sanctions imposed against Iran will now gradually be lifted: a major opportunity – for Iran itself, as well as for many international trading partners.

21.07.2015

The sanctions have hit Iran hard. The country is excluded from the international payments system SWIFT and trade with the rest of the world is extremely restricted, as is the export of oil. Since the UN Security Council imposed the sanctions in 2006, Iranian economic output has increased by only around 2.3% on average – a disappointingly low figure for an economy at this stage of development. The population is struggling with annual rates of inflation near 20% (2014). Economic isolation has cut Iran off from the global finance markets; only a handful of countries still trade with Tehran. This has left the country in sore need of economic stimuli, but high economic hurdles must be cleared if it is to become a regional economic power again.

The lifting of sanctions will not spare the country from painful reforms. For years, economic isolation has prevented technology transfer, lack of investment has lastingly weakened production potential, and corruption is stunting all dynamic economic development. The country must first regain the trust of international trade partners. At the outset at least, such partners will consider the overall political climate fragile and will shy away from major investment. At the same time, the dramatic fall in oil prices to below US$ 50 at times last year has dealt another blow to the Iranian economy. The national budget depends on oil exports. A breakeven budget can only be achieved with an oil price of around US$ 130. Fiscal policy must therefore be placed on a new and more robust footing – with moderate tax increases, as well as more efficiently organised fiscal authorities. Consolidation of expenses and reform of the financial system are also unavoidable.

The road to Iran's re-emergence as a regional economic power may be rocky, but worth the trouble.

Even though the road is stony, it will be worth pursuing for both Iran and the rest of the world, for the country's economic potential is immense. With around 80 million inhabitants, Iran is already the second largest country in the MENA region today after Egypt.

A quarter of the total population is under 15 years of age; the pool of young people (who are often very well educated) is enormous. And Iran has a large, often commercially successful middle class. Absolute growth in economic output in Iran between now and 2020 will probably be the second highest in the region after Saudi Arabia. But the Iranians are not the only ones poised for an economic boom – many other national economies with high export rates are also waiting in the wings. The financial and insurance sector can also benefit from the tremendous amount of catching up the country has to do.

With a premium volume of around US$ 9bn, Iran is already one of the biggest primary insurance markets in the MENA region. For the period up to 2025, premium income is expected to grow by between 5% and 6% per year on average after adjustment for inflation, yielding a premium volume equivalent to US$ 19bn. That would be around the current size of the Polish insurance market. The latest political developments and Iran’s enormous economic potential give grounds for hope. But it is still too early for celebrations. It will take some time before the Iranian government can win back the trust of the international community and the Iranian economy that of international investors. Accomplishing this will require more than just an agreement on Iran's nuclear activities.

Munich Re Experts
Michael Menhart
Chief Economist at Munich Re
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