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Iran has the second largest population, after Egypt, in the Middle East and North Africa region. Most of its 65.5 million people are young, with increasing hopes and expectations of a better future. Larger numbers of increasingly well-educated women seek opportunities to participate at all levels of Iran's labor market and civil society. The country's health and education indicators are among the best in the region.
Education: Fifteen years ago, the Government of Iran embarked on a comprehensive program to develop its human-resources capabilities. These efforts have enabled Iran to increase enrollment ratios, extend educational opportunities to the poorest regions of the country, and reduce gender gaps in all levels of education. Consequently, Iran is well placed to achieve the MDG target with regard to eliminating gender disparities. Similarly, youth literacy rates increased from 86 percent to 94 percent over the same period, rising significantly for girls.
Health: Health outcomes in Iran have improved greatly over the past twenty years and now generally exceed regional averages. Key to this success has been the Government of Iran's strong commitment to and effective delivery of primary health care. Iran's "Master Health Plan", adopted in the 1980s for the period of 1983-2000 accorded priority to basic curative and preventive services as opposed to sophisticated hospital based tertiary care, and focused strictly on the population groups at highest risk, particularly in deprived areas. Moreover, as a result of the prioritization and effective delivery of quality primary health care, health outcomes in rural areas are almost equal to those in urban areas, with outcomes in terms of infant and maternal mortality nearly identical between urban and rural areas.
Social Protection: Iran has a comprehensive social protection system with some 28 social insurance, social assistance, and disaster relief programs benefiting large segments of the population. These programs include training and job-search assistance, health and unemployment insurance, disability, old-age and survivorship pensions, and in kind- or in-kind transfers including subsidies (e.g., housing, food, energy), rehabilitation and other social services (e.g., long-term care services for the elderly), and even marriage and burial assistance.
Despite significant achievements in human development and poverty reduction, serious challenges to growth call for reform. While labor-market pressures continue to increase because of demographic dynamics and increased participation of women in the labor force, Iran's economy is still unable to generate enough needed jobs to absorb the new flows into the labor market and at the same time reduce unemployment extensively.
To overcome the unemployment problem, the challenge is to ensure high and sustainable economic growth with strong employment creation, driven by a broader participation of the private sector in the economy, particularly in non-oil and export sectors. Furthermore, the current shift of structure of the supply of labor toward higher female participation and higher skill composition requires a shift in the demand side, implying a qualitatively change in the growth structure toward the knowledge economy, a direction endorsed by the Fourth Five-Year Development Plan. This envisages upgrading the quality of the educational system at all levels, and improving its effectiveness in terms of a better alignment with the needs of the economy and the labor market. It also envisages reforming education curricula, and developing appropriate programs of vocational training, a continuation of the trend towards labor market oriented education and training.
A major challenge is how to channel the network of untargeted energy subsides amounting to about 10 percent of gross domestic product (GDP) -- into productive, job-creating, private-sector investment, the only viable vehicle for sustained growth. Another challenge is to reverse continued environmental degradation and inefficient use of Iran's considerable natural resources. Another growth constraint is limited access to knowledge and information technology and related infrastructure. Moreover, improved governance, public-sector inclusion, accountability, and transparency is needed. Finally, addressing these issues during transition requires a social safety net and programs to preserve stability and prevent the more vulnerable groups from descending into poverty. Iranian authorities have reached broad internal consensus even as political differences sharpen on the urgent need to advance the reforms necessary to meet these challenges.
Notwithstanding some improvements in social indicators, the Iranian economy continues to confront major challenges: employment creation is not sufficient to keep up in the labor force growth, inflation is high and rising; price subsidies and controls hinder efficiency; and major structural impediments prevent private sector development. Targeting the poor more accurately with existing programs should reduce poverty. Half of the poor in Iran about 4.5 million people, or 1.5 million households benefit from social coverage by government social safety net programs, charity institutions, and other nonprofit organizations. Whereas this support is partly effective, it is not specifically targeted to the poor, and remains expensive. Extensive subsidies, including energy subsidies, and credit subsidies that are excessively large (the energy subsidy alone is estimated at more than 12 percent of GDP) don't reach the poor particularly well. Subsidies for bread and medicine, for example, are highly untargeted vis-à-vis the poor.
The rate of unemployment dropped in 2004 for the second year in a row, reaching 11.2 percent (from 14.7 percent in 2002. This seems to be the outcome of the strong output growth of recent years, employment initiative schemes, higher investment, and private sector activity. However, due to Iran's high birth rate after the revolution, a large demographic bubble is coming to the labor and housing markets and finding them scarce. Iran must create at least 700,000 jobs per year. Therefore, the need to create jobs to reduce the current high unemployed and create opportunities for new entrants into the labor force remains.
From the early 1980s to 2001, the population growth rate declined from 3.7 percent to 1.4 percent, and the fertility rate fell from 6.8 to 2.6. Nonetheless, because of high growth rates in the 1980s, the labor force is still growing at close to 4 percent a year and approximately 700,000 additional new entrants join the job market every year. In addition, labor markets are witnessing the increasing participation of women which is anticipated to more than double over the next 10 years from its current level of 15%. On the demand side, the actual growth rate of the economy (5.8% on average over the past three years) has proven to be insufficient to meet the labor supply inflow. Even at the current growth rate of the economy, only 500,000 new jobs have been created; thus, the threat of an explosive unemployment problem.
Iran faces major environmental challenges, especially given its growing population and declining infrastructure. Air pollution poses a major urban environmental concern, especially the pollutants released into the atmosphere by motor vehicles, estimated at 5 million tons every year. Air pollution in Tehran and other major cities far exceeds the standards set by the World Health Organization, and is the cause of serious health problems for many Iranians. In Tehran, schools occasionally must close because of dangerously high levels of air pollution. In addition, the lack of adequate wastewater and disposal systems is contributing to ground and surface water pollution through infiltration and over-flowing-the effects of which pose serious health risks.
A large public enterprise sector, accounting for up to 60 percent, dominates Iran's manufacturing sector, and large quasi-public bonyads serve commercial and social service functions. These bonyads also enjoy extra-economic power, which compounds the existing institutional and legal impediments that are already hampering private sector development. Privatization and the creation of a level playing field for private firms has moved very slowly. In the financial sector, however, continued trend to liberalize the banking sector is being strengthened by the establishment of four private banks over the last two years. These private banks were given the flexibility to set the deposit and lending rate and the credit allocation which have helped boost confidence for business and lay the ground for more private sector activities. In this context, four newly private insurance companies were licensed in May 2003 and two more are underway.
The total effective demand for housing is estimated at about 570,000 units per year. To meet the Third Five-Year Development Plan household density objective, approximately 113,000 units need to be added per year for the next three years. An estimate for the low-income groups suggests that it needs slightly over 1 million housing units during the years 2000-04. The supply available, however, ranges from 66,000-133,000 housing units per year during the period of 1999-2003. This represents only 45% of the accommodation needed by these groups.
Recent Economic Developments
Iran's macroeconomic performance continues to be strong with high output growth dominated by the non-oil sector. In 2002/03 real output grew by 7.4 percent, the highest growth in the region, and non-oil sector grew at 7.8 percent with increasing momentum in investment (reaching 40 percent of GDP) and private-sector activities (constructions and manufacturing). This high growth performance is attributed partly to the private sector's response due to growing confidence following the recent progress made in structural reforms such as trade liberalization and foreign exchange unification. Some of this is also driven by higher than expected oil prices and the expansionary fiscal and monetary policies of the recent years.
The Government's fiscal policy stance improved significantly last year, from a deficit of 2.4 percent of GDP in 2002/03 to a deficit of 0.2 percent of GDP in 2003/04. This came as the result of expenditure cuts, particularly capital expenditures.
Higher oil prices kept the current account of the balance of payments in surplus at about 3 percent of GDP in 2002/03 and 1.5 percent in 2003/04. The decrease in the balance of payments surplus is mainly a result of the surge in imports as trade liberalization reform took effect, and buoyant domestic demand driven by fast GDP growth rates. The increase in Iran's oil export quota in OPEC in 2003/04 benefits the balance of payments. Gross official reserves are estimated to have reached US$24.4 billion in 2003/04 (about 6.5 months of imports). External debt remains very low at US$11.9 billion, equivalent to 8.8 percent of GDP in 2003/04, one of the lowest in the region.
World Bank Assistance
World Bank lending to Iran resumed in 2000 after a hiatus of seven years with the approval by the Bank's Board of Executive Directors of two operations: Health and Sewerage. This coincided with the beginning of the Government's large reconstruction effort.
A Country Assistance Strategy (CAS) for Iran-the World Bank Group's roadmap for its assistance to a given country-is currently in preparation. The overarching objective of the World Bank's partnership with Iran, is to support the country's economic transition and structural reform agenda towards a more open economy, sustainable growth with improved income distribution. Building on past experience, the CAS aims to help Iran advance key policy reforms and development objectives of Fourth Five-Year Development Plan. In particular, it will recommend an integrated reform of Iran's oversized, inefficient and untargeted subsidies system to reach its objectives of growth and social justice. It continues the emphasis on supporting Iran's effort in rebuilding its physical economic infrastructure and building capacity for a knowledge-based economy. Through its lending component, the CAS envisages continuing past Bank support in water resources and sanitation, the environment and agriculture infrastructure, as well as an integrated package in support of urban public transport and energy efficiency reform and development which are in the critical path of the important energy subsidy reform. The CAS will extend support to education, training and community-based development. The analytical and advisory program will include support for capacity building in the formulation of economic and sector policies, their sequencing, and implementation include public finance, economic management, remedying the investment climate, and human capital development, in addition to on-going work in public expenditure review and pension strategies.
The current portfolio consists of six active operations - Tehran Sewerage Project, Second Primary Health Care and Nutrition Project, Environmental Management, Earthquake Emergency Project, the Ahwaz and Shiraz Water Supply and Sanitation Project, and the Urban Upgrading and Housing Reform Project for a total commitment of $791 million.
All dollar figures are in US dollar equivalents. September 2006
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