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Country Report

Iran

Generated on August 21st 2018

Economist Intelligence Unit 20 Cabot Square London E14 4QW United Kingdom

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© 2018 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. ISSN 2047-5020

Symbols for tables "0 or 0.0" means nil or negligible;"n/a" means not available; "-" means not applicable Iran 1

Iran

Summary 2 Briefing sheet

Outlook for 2018-22 4 Political stability 5 Election watch 5 International relations 6 Policy trends 6 Fiscal policy 6 Monetary policy 7 International assumptions 7 Economic growth 8 Inflation 8 Exchange rates 8 External sector 9 Forecast summary

Data and charts 10 Annual data and forecast 11 Quarterly data 12 Monthly data 13 Annual trends charts 14 Monthly trends charts 15 Comparative economic indicators

Summary 15 Basic data 17 Political structure

Recent analysis Politics 19 Forecast updates Economy 25 Forecast updates 31 Analysis

Country Report August 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Iran 2

Briefing sheet Editor: Nicholas Fitzroy Forecast Closing Date: August 14, 2018 Political and economic outlook The Economist Intelligence Unit expects the current authorities to remain in power in 2018 22. But unrest under the president, Hassan Rouhani, will intensify as the government struggles to address structural economic issues, such as large-scale youth unemployment. Following the reimposition of US nuclear-related sanctions, Mr Rouhani will also come under increasing pressure from hardliners within the regime, weakening his position and halting his push for economic and social reform. We expect Iran's fiscal account to record deficits in 2018/19 2022/23 as proposed current spending cuts are delayed in order to appease protesters, while oil output falls. Given US withdrawal from the nuclear deal, Iran's oil exports are likely to fall by 800,000 barrels/day (b/d) compared with 2017 levels, driving the economy into recession in 2019/20-2020/21, worsened by deteriorating business and consumer sentiment. Efforts to unify the dual currencies will fail as renewed US nuclear-related sanctions increase domestic demand for foreign exchange. We forecast that the rial will be devalued from IR42,700:US$1 at present to an average of IR73,071:US$1 in 2022. We expect that the current account will remain in surplus in the forecast period (2018 22), despite declining oil export volumes, given the concurrent rise in global oil prices combined with a falling import bill as the economy slides into recession. Key indicators 2017a 2018b 2019b 2020b 2021b 2022b Real GDP growth (%) 3.8 1.6 -3.4 -1.2 0.5 0.9 Consumer price inflation (av; %) 10.0c 13.6 16.5 16.2 13.5 13.2 Government balance (% of GDP) -1.8 -2.6 -3.0 -3.5 -3.3 -3.2 Current-account balance (% of GDP) 3.4 6.0 3.2 3.5 4.8 4.5 Unemployment rate (%) 12.7 12.7 12.8 12.8 13.0 13.2 Exchange rate IR:US$ (av) 33,226 42,530 56,990 63,829 68,935 73,071 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Actual.

Country Report August 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Iran 3

Key changes since July 3rd Given rising economic pressure on Iran, we now expect a renewal of some form of dialogue between the US and Iran later in 2018 22. However, this will not happen in 2018 19 and is unlikely to yield results in the forecast period. Recent oil market developments, most notably reports that South Korea reduced its oil imports from Iran by 43% year on year in July, have led us to reduce our oil export forecasts from around 2m b/d in 2019 20 to 1.7m b/d. The oil export forecast changes have led us to revise down our 2018-22 current-account surplus forecast, from an average of 6.2% of GDP to 4.4% of GDP. We have also revised our real GDP growth forecast for 2019 from a contraction of 2.8% to a contraction of 3.4%. Central bank inflation data for July soared well above our expectations, at 18%, and we have therefore further increased our inflation forecasts, most noticeably from 11.3% to 13.6% in 2018, and from 15.5% to 16.5% in 2019. The month ahead TBC—Iran continues nuclear deal talks with European signatories: Given security and business interests, we expect the European partners to the deal to remain committed to it. They are also likely to promise non US dollar credit lines and protection of European investments to keep Iran in the deal. TBC—Consumer price inflation (August): Preliminary inflation data from the central bank show prices rising by 18% in July. The currency stabilised in mid August following the implementation of the first US sanctions deadline. However, with another deadline coming up, currency depreciation and inflationary pressures will accelerate again. Major risks to our forecast Scenarios, Q2 2018 Probability Impact Intensity Net foreign direct investment turns significantly negative as a result of US Very Very high 25 sanctions high Very Planned major foreign investments in Iran's infrastructure fail to materialise High 20 high Very The nuclear deal collapses following US withdrawal High 20 high US sanctions lead to a near halt in foreign trade financing High High 16 Restrictions on internet access hinder the development of broadband and Very high Moderate 15 e-commerce Note. Scenarios and scores are taken from our Risk Briefing product. Risk scenarios are potential developments that might substantially change the business operating environment over the coming two years. Risk intensity is a product of probability and impact, on a 25-point scale. Source: The Economist Intelligence Unit.

Country Report August 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Iran 4 Outlook for 2018-22 Political stability The Economist Intelligence Unit expects the position of the president, Hassan Rouhani, to weaken in 2018 22, despite him being re­elected comfortably in May 2017. His major foreign policy achievement is the 2015 Joint Comprehensive Plan of Action (JCPOA), a nuclear deal signed with world powers that lifted nuclear-related sanctions on Iran in return for stringent restrictions on its nuclear programme. However, on May 8th the US president, Donald Trump, withdrew the US from the agreement, lifting US waivers on nuclear-related sanctions in order to re-impose and widen US sanctions. This move undermines Mr Rouhani, and strengthens the position of his more hardline opponents, some of whom had opposed the deal. Partly as a result of this, the president's previous push for economic liberalisation and social reform is unlikely to make any progress in the forecast period. US sanctions will enforce the need for a less open economy, while fears of regime- threatening unrest as economic conditions worsen are likely to lead to tighter social restrictions in some cases. In particular, the Islamic Revolutionary Guards Corps (IRGC) will probably strengthen its grip over both the economy and the country's foreign policy agenda, given its long-standing opposition to the US. As economic conditions deteriorate and water shortages worsen, the intensity of widespread protests against the authorities will mount, sporadically turning violent. However, the lack of a clear leader for protestors to unite around and the strength of the security services mean that we do not expect regime change in 2018 22. Although the authorities have been relatively united against the protests seen across the country this year, historical divisions will re-emerge as different factions look to use unrest to their advantage. In particular, the hardliners will look to pin the country's economic woes on Mr Rouhani and his administration. Furthermore, they will continue to interfere in daily decision-making. Notably, the intrusions of the unelected Guardian Council (a vetting body dominated by hardliners) will prove a continual source of irritation for the president. This situation will be exacerbated by the unpredictable interventions of the IRGC in the country's political and economic spheres, as well as the residual dominance of vested business interests. In this context, there is a heightened risk (albeit not our central scenario) that Mr Rouhani may come under enough pressure to force him to step down, leading to an early election. Amid these political machinations, speculation about the position and future of Ayatollah Ali Khamenei will increase, reflecting his advanced age (78) and his poor health. The identity of his potential successor remains uncertain, with the orientation of the Assembly of Experts—which selects the supreme leader—also unclear. However, Ebrahim Raeisi—Mr Rouhani's main rival in the May election and a hardline conservative with support from the security establishment—is the leading contender, having recently been elevated by Ayatollah Khamenei to the position of chair of the prestigious Imam Reza shrine in Mashhad.

Country Report August 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Iran 5 Election watch The next legislative election will take place in 2020, followed by a presidential poll in 2021. Popular disillusionment with the political class (largely over economic hardship) is at its highest for many years. Whereas large-scale protests in 2009 had been backed by reformists in opposition to the hardliners within the regime, now protests are in opposition to the political elite as a whole. Neither reformists nor hardliners have widespread credibility in the current climate, with parts of the population opposing the country's expensive military adventures abroad, which are supported and led by the hardline establishment, but also frustrated by the lack of social liberalisation and the poor economic situation presided over by the moderate Mr Rouhani. The country's demographics—youthful and urbanising—should favour a reformist or moderate candidate in the next election. However, it is likely that there will be considerable apathy among reformist supporters, in turn driving low voter turnout and violent protests. As such, and given that economic conditions are likely to deteriorate following the US pulling out of the JCPOA, the likelihood of a hardliner coming to power in 2021 is rising. In particular, a popular military leader, Qassem Soleimani, who heads the foreign division of the IRGC, could emerge as a contender if he were to pursue a political career. Moreover, although not our central scenario, it is possible that Mr Rouhani could be ousted, leading to an early election.

International relations In the short term, Iran will look to salvage the JCPOA by ensuring guarantees of investment from its European partners. However, with European companies unlikely to take new risks by investing in the Iranian economy, the benefits of the JCPOA for Iran will largely dissipate in the medium term, meaning that the deal will become increasingly redundant and is unlikely to last the forecast period. Iran will instead mainly look to strengthen its ties with countries such as India, China and Russia as the key sources of investment and trade. In addition, Iran's foreign policy is likely to shift following the US withdrawal from the JCPOA. The foreign policy debate in Iran has long been split between those that wish to implement a more open approach and integrate with the West, and those that advocate cutting off relations with the West and its allies. The latter group will be empowered in the short term by Mr Trump's decision, which in effect vindicates the hardliners in Iran that were sceptical of the US' commitment to the deal. As a result, we expect Iran to maintain its support for proxy forces in Syria, Iraq and Lebanon —although it has indicated that it would be willing to push for a ceasefire in Yemen. This will increase the reliance of the Syrian president, Bashar al Assad, on Iranian­backed ground forces in the civil war there. Iran will probably also use proxy forces to pressurise and occasionally confront US-backed troops in the region, in both Iraq and Syria, for example, thereby increasing the risks of a major flare-up. That being said, as economic pressure ratchets up on Iran and domestic protests increase in intensity, it will become increasingly likely as the forecast period progresses that the Islamic Republic will be forced to reopen dialogue with the US—although we do not expect another deal to be agreed in 2018 22. Meanwhile, given heightened Iranian concerns that the US or its regional allies, Israel and Saudi Arabia, could target Iran militarily, Iran will probably arm and prepare for conflict—although this is not its goal. Although Iran itself does not want a direct war, the ongoing military support for its proxy forces in Syria has already unnerved Israel. In light of this growing security dilemma, which has led to increasingly intense Israeli air strikes on Iranian positions in recent months and a first Iranian military response from southern Syria, a sporadic, low-intensity conflict between the two in Syria looks likely in the early part of the forecast period. In addition, there is now a growing risk that Israel and/or the US will launch air strikes on Iran, should the Iranians choose to restart their nuclear weapons programme (not our central scenario).

Country Report August 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Iran 6 Policy trends The government will now focus primarily on combating US sanctions, which will target transactions using US dollars and companies involved in trade or investment in Iran that also have exposure to the US economy. This will take two main forms. First, the authorities will step up efforts at circumventing sanctions by pursuing barter deals with India and China, among others, sourcing state­led financing from allies where possible and trading in non­US currency— something that could apply to European companies without activities linked to the US. Second, there will be a partial return to the resistance economy, whereby precedence is given to home- grown products in order to shield the economy from external pressures. The planned overhaul of business regulation will continue in order to attract urgently needed investment, including revisions to the 2002 Foreign Investment Promotion and Protection Act. However, it will have negligible impact following the US nuclear deal withdrawal. Given his weakened position, Mr Rouhani will make little headway in his efforts at a privatisation drive, including divesting assets away from the IRGC, in order to improve transparency, outmanoeuvre US sanctions and soothe popular anger at elite-level corruption. It is unlikely that such moves will significantly alter the shape of Iran's economy. A lack of clarity over the IRGC's holdings, major opposition from parts of the conservative establishment, particularly following Mr Trump's JCPOA decision, and the private sector's inability to absorb such divestment will provide the major obstacles.

Fiscal policy Macroeconomic stabilisation was the main economic theme of Mr Rouhani's first four years as president (2013 17). However, Mr Rouhani is now faced with two conflicting issues: large­scale protests over a number of economic grievances, and also the major economic constraints associated with renewed US nuclear-related sanctions. The need to pacify angry protestors has already led the government to back-track on plans to raise fuel prices by 50% in fiscal year 2018/19 (March 21st-20th) and is likely to result in the shelving of plans for further revenue-raising measures, such as higher sales taxes. But just as protests are forcing the authorities to abandon fiscal rationalisation plans, the reimposition of US sanctions will lead to significant cuts to key oil export revenue, while also limiting the ability of Iran to borrow abroad to fund fiscal spending. As such, we expect less sensitive capital spending to be curtailed to free up capacity for higher current spending. Even then, it will not be enough to make up for the reduction in oil export revenue. We, therefore, expect the fiscal deficit to expand from 1.8% of GDP in 2017/18 to an average of 3.1% of GDP in 2018/19-2022/23. The government is aiming to raise US$30bn a year in foreign financing, probably mostly in the form of bilateral soft loans, as part of plans to plug its deficits. This will not be possible in light of US sanctions, although some domestic debt issuance and bilateral borrowing from sovereign-backed lenders in China, among others, will be possible.

Monetary policy Bank Markazi (the central bank) shifted towards a more expansionary monetary stance in 2017, in a bid to support economic growth. The authorities cut bank reserve requirements from 13% to 10%, stepped up pressure on banks to increase their lending to small- and medium-sized enterprises, and capped rates at 10% for short-term deposits and 15% for one-year deposits. Nonetheless, rapid depreciation of the market exchange rate has already forced the authorities into a managed depreciation and (failed) unification of the dual currencies. With pressure on the rial ongoing owing to the US pull-out from the JCPOA, interest rates are likely to be pushed upwards again in the forecast period in support of the exchange rate, in order to combat a rapid withdrawal of funds from the Iranian economy.

Country Report August 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Iran 7 International assumptions 2017 2018 2019 2020 2021 2022 Economic growth (%) US GDP 2.3 2.7 2.5 0.8 1.8 1.8 OECD GDP 2.4 2.3 2.2 1.3 1.9 1.9 World GDP 3.0 3.0 2.9 2.3 2.8 2.8 World trade 4.6 4.0 3.8 2.7 3.9 3.7 Inflation indicators (% unless otherwise indicated) US CPI 2.1 2.4 2.4 1.3 1.8 1.9 OECD CPI 2.1 2.3 2.3 1.8 2.0 2.0 Manufactures (measured in US$) 2.5 7.9 3.2 1.9 3.8 3.2 Oil (Brent; US$/b) 54.4 73.6 72.5 68.0 74.8 78.0 Non-oil commodities (measured in US$) 7.6 4.9 0.4 1.6 -0.1 1.4 Financial variables US$ 3-month commercial paper rate (av; %) 1.1 2.0 2.7 2.6 1.7 2.0 Exchange rate IR:US$, official rate (av) 33,226 42,530 56,990 63,829 68,935 73,071 Exchange rate US$:€ (av) 1.13 1.20 1.19 1.21 1.21 1.24

Economic growth With US secondary sanctions partly reintroduced on August 6th and set to be widened in early November, Iran will start to experience a number of major constraints on economic growth, as investor and consumer sentiment deteriorate. Internationally, most governments are unlikely to comply directly with US sanctions on oil imports from Iran, given a desire to maintain the JCPOA. However, we expect the risks for private importers with exposure to the US market, combined with the likelihood that a few countries will comply with the US, to lead to a reduction in Iran's oil exports by around 800,000 barrels/day (b/d) in 2019/20-2020/21, from a total average of around 2.5m b/d in 2017. However, with cut-priced deals likely to attract Chinese and possibly Indian buyers, oil exports could start to creep up again in the later stages of the forecast period. As a result, the economy will slide into recession in the middle years of 2018 22, with the contraction averaging 2.3% in 2019/20-2020/21. In addition, fresh inward investment from Europe will dry up, and major European investors, such as Total and Siemens, will withdraw from Iran without the guarantee of a sanctions waiver. Private consumption will also be curtailed by rising prices and a rapidly depreciating currency. That being said, the recessions are unlikely to be as deep as they were during the previous nuclear sanctions regime in 2012 15, given some ongoing investment from Asian countries, such as China and India. Indeed, in the later stages of the forecast period, once the impact of the US sanctions becomes clearer and methods of circumventing them become more established, investment from these countries is likely to rise. Financing will largely be offered by state-linked banks and lenders from these Asian countries, without exposure to the US and with sovereign backing.

Economic growtha % 2017a 2018b 2019b 2020b 2021b 2022b GDP 3.8 1.6 -3.4 -1.2 0.5 0.9 Private consumption 2.5 1.0 -1.0 -1.5 0.1 0.4 Government consumption 3.9 4.0 -3.0 1.0 3.5 2.0 Gross fixed investment 1.4 1.8 -2.3 -2.0 1.2 2.2 Exports of goods & services 1.8 3.2 -14.2 -2.3 0.5 1.3 Imports of goods & services 13.4 6.0 -15.0 -6.0 0.2 0.3 Domestic demand 5.5 1.5 -0.9 -1.4 0.5 0.7 Agriculture 3.2 1.7 1.5 1.2 1.3 1.5 Industry 3.0 1.6 -2.5 -2.7 0.1 0.5 Services 4.4 -3.6 -5.0 -0.2 0.9 1.1 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts.

Country Report August 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Iran 8 Inflation Year-on-year inflation slowed from an average of 10% in 2017 to 9% in January-May. However, since the US' decision to withdraw from the JCPOA, inflation has already trended up sharply, reaching an annual high of 18% year on year in July. The re-imposition of US nuclear-related sanctions and the rapid depreciation of the rial will both continue to push up the cost of imports. As a result, we expect annual average inflation to quicken from 13.6% in 2018 to an average of 16.4% in 2019 20. Thereafter, as the Iranian economy adapts to sanctions by finding ways to import more easily, we expect inflation to stabilise at an average of 13.4% in 2021-22.

Exchange rates The rial had already plunged to record lows of IR60,000:US$1 on the open market in the months leading up to Mr Trump's announcement as speculation over the nuclear deal's longevity led to a sell-off. This prompted the authorities to unify the official rate and market rates at IR42,000:US$1 in April, in an attempt to stem the depreciation (the official rate was IR38,000:US$1 at the time). Iran is running a current-account surplus and we estimate that it has foreign-exchange reserves in excess of US$130bn (more than 16 months of import cover). In theory, this offers it the financial resources to support the official exchange rate. However, confidence in the rial has collapsed since Mr Trump's announcement, with the rial currently at around IR105,000:US$1 on the black market. Indeed, so rapid has the weakening of the rial been since then on the black market, that the authorities have now effectively been forced to abandon unification plans, allowing the reopening of some foreign-exchange bureaux. Given soaring demand for foreign currency, combined with inefficient distribution by the central bank and regulatory frailties, unifying the exchange rates will remain out of reach, with a significant differential between the official and unofficial rates in place throughout 2018 22, and widening in the early part of the forecast period. As a result, the authorities will be forced to make further managed depreciations, with the official rate reaching an average of IR73,071:US$1 in 2022.

External sector We now expect renewed US nuclear-related sanctions to result in a drop of up to 700,000- 800,000 b/d of oil exports from 2017 levels, peaking in 2019 20. However, the combination of high oil prices compared with 2016 17, and much lower imports as both consumption and investment­ driven demand decline, means that the trade balance is expected to remain in surplus in 2018 22. Moreover, given the additional impact of currency weakening, thereby pushing up the cost of imports and making Iran's non-oil exports more competitive to those willing to purchase them, we expect the trade surplus to expand slightly in the later stages of the forecast period. The non-merchandise deficit will remain wide, despite the falling import bill, as tourism credits are curtailed by the increasingly tense domestic and geopolitical security environment. Overall, we forecast that the current account will remain in surplus, at an average of 4.4% of GDP in 2018 22.

Country Report August 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Iran 9 Forecast summary Forecast summary (% unless otherwise indicated) 2017a 2018b 2019b 2020b 2021b 2022b Real GDP growth 3.8 1.6 -3.4 -1.2 0.5 0.9 Crude oil production ('000 b/d) 3,800 3,785 3,671 3,524 3,482 3,447 Oil exports (US$ m) 68,456 77,548 58,332 57,026 62,359 64,213 Consumer price inflation (av) 10.0c 13.6 16.5 16.2 13.5 13.2 Consumer price inflation (end-period) 10.0c 17.0 15.6 16.6 13.3 13.0 Lending rate (av) 18.0 20.0 22.0 22.0 23.0 22.0 Official net budget balance (% of GDP) -1.8 -2.6 -3.0 -3.5 -3.3 -3.2 Exports of goods fob (US$ bn) 98.1 111.7 89.4 86.8 92.5 94.6 Imports of goods fob (US$ bn) 75.5 80.1 73.7 70.0 69.3 70.7 Current-account balance (US$ bn) 15.8 25.0 10.6 11.8 17.6 17.5 Current-account balance (% of GDP) 3.4 6.0 3.2 3.5 4.8 4.5 External debt (end-period; US$ bn) 8.0 7.3 6.3 6.3 6.8 7.2 Exchange rate IR:US$ (av) 33,226 42,530 56,990 63,829 68,935 73,071 Exchange rate IR:US$ (end-period) 36,074 50,579 62,962 68,450 73,556 77,692 Exchange rate IR:¥100 (av) 29,630 39,176 53,383 61,344 68,935 74,372 Exchange rate IR:€ (end­period) 43,264 59,936 75,555 82,824 90,106 97,115 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Actual.

Country Report August 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Iran 10 Data and charts Annual data and forecast

2013a 2014a 2015a 2016a 2017b 2018c 2019c GDPd Nominal GDP (US$ m) 539,466 443,976 393,436 425,403 460,976 414,108 336,728 Nominal GDP (IR trn) 9,934 11,517 11,414 13,151 15,317 17,612 19,190 Real GDP growth (%) -1.9 4.3 -1.3 13.4 3.8 1.6 -3.4 Expenditure on GDP (% real change)d Private consumption -1.0 3.1 -5.6 3.8 2.5 1.0 -1.0 Government consumption 1.6 2.7 9.9 3.7 3.9 4.0 -3.0 Gross fixed investment -6.9 3.5 -5.9 -3.7 1.4 1.8 -2.3 Exports of goods & services 0.0 12.0 -2.8 41.3 1.8 3.2 -14.2 Imports of goods & services -18.7 -5.7 -16.7 6.1 13.4 6.0 -15.0 Origin of GDP (% real change)d Agriculture 4.7 3.8 8.1 4.2 3.2 1.7 1.5 Industry -5.1 4.9 2.6 24.7 3.0 1.6 -2.5 Services -1.5 2.4 0.8 3.6 4.4 -3.6 -5.0 Population and income Population (m) 77.4 78.4 79.4 80.3 81.2 82.0 82.8 GDP per head (US$ at PPP) 16,955 17,829 17,571 19,949 21,641 22,148 21,609 Recorded unemployment (av; %) 10.4 11.5b 11.8b 12.4b 12.7 12.7 12.8 Fiscal indicators (% of GDP)d Public-sector revenue 13.4 14.0 15.7 16.8 16.1 15.9 15.6 Public-sector expenditure 14.3 15.1 17.4 18.7 18.7 18.5 18.7 Public-sector balance -0.9 -1.1 -1.7 -1.9 -1.8 -2.6 -3.0 Net public debt 9.7 10.0 12.2 12.5 13.2 14.2 16.1 Prices and financial indicators Exchange rate IR:US$ (av) 18,414 25,942 29,011 30,915 33,226 42,530 56,990 Exchange rate IR:US$ (end-period) 24,774 27,138 30,130 32,376 36,074 50,579 62,962 Consumer prices (av; %) 39.3 17.2 13.7 8.7 10.0a 13.6 16.5 Stock of money M1 (% change) 10.5 7.1 0.2 33.0 12.6 13.0 8.0 Stock of money M2 (% change) 28.1 34.8 24.6 28.1 22.0 18.3 14.4 Lending interest rate (av; %) 11.0 14.0 14.2 18.0 18.0 20.0 22.0 Current account (US$ m)d Trade balance 29,326 18,061 5,354 20,843 22,596 31,591 15,710 Goods: exports fob 92,910 88,976 62,995 83,978 98,142 111,670 89,383 Goods: imports fob -63,584 -70,915 -57,641 -63,135 -75,546 -80,079 -73,672 Services balance -6,820 -6,878 -4,785 -5,941 -7,916 -7,752 -6,496 Income balance 2,034 1,845 241 928 669 772 1,064 Current transfers balance 565 543 427 558 467 416 366 Current-account balance 25,105 13,571 1,237 16,388 15,816 25,027 10,642 External debt (US$ m) Debt stock 6,993 5,758 6,321 5,378 7,957 7,307 6,329 Debt service paid 438 512 796 2,101 439 609 418 Principal repayments 396 473 718 1,964 358 521 371 Interest 43 39 79 138 81 88 47 International reserves (US$ m) Total international reserves 107,950b 111,029b 115,994b 133,701b 120,551 100,001 91,101 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Fiscal years (March 21st-March 20th). Source: IMF, International Financial Statistics.

Country Report August 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Iran 11 Quarterly data 2016 2017 2018 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Central government finance (IR

bn)a Revenue 255,500 580,900 n/a n/a n/a n/a n/a n/a Expenditure 370,200 703,100 n/a n/a n/a n/a n/a n/a - - Balance n/a n/a n/a n/a n/a n/a 114,700 122,200 Output GDP at constant 2011/12 prices (IR 1,665.9 1,704.9 1,750.6 1,797.0 1,723.0 1,810.8 1,790.3 1,847.2 trn) GDP at constant 2011/12 prices (% 8.8 11.6 17.2 16.0 3.4 6.2 2.3 2.8 change, year on year) Prices Consumer prices (2011=100) 96.3 99.0 100.6 104.0 107.3 107.7 110.0 113.5 Consumer prices (% change, year 7.5 9.2 8.9 10.5 11.4 8.8 9.3 9.1 on year) Financial indicators Exchange rate IR:US$ (av) 30,404 31,113 31,948 32,390 32,446 33,031 35,039 37,054 Exchange rate IR:US$ (end-period) 30,700 31,460 32,376 32,422 32,489 33,805 36,074 37,743 M1 (end-period; IR trn)b 1,364.4 1,480.3 1,540.7 1,630.3 1,647.1 1,682.4 1,734.4 1,946.7 M1 (% change, year on year) 21.4 25.4 33.0 19.3 20.7 13.7 12.6 19.4 M2 (end-period; IR trn)b 10,595.011,227.111,848.612,533.913,149.113,899.514,450.115,299.8 M2 (% change, year on year) 29.7 28.6 28.1 23.2 24.1 23.8 22.0 22.1 Sectoral trends Crude oil production (m barrels/day) 3.65 3.78 3.79 3.75 3.82 3.79 3.81 3.81 Crude oil prices (US$/barrel) OPEC basket 42.39 43.00 47.52 52.03 48.58 50.00 59.43 64.70 Balance of payments (US$ m)a Exports fob 18,905 19,239 n/a n/a n/a n/a n/a n/a Oil & gas 11,640 13,167 n/a n/a n/a n/a n/a n/a Imports fob 12,383 15,112 n/a n/a n/a n/a n/a n/a Trade balance 6,522 4,127 n/a n/a n/a n/a n/a n/a Current-account balance 5,231 3,459 n/a n/a n/a n/a n/a n/a a Iranian fiscal years (March 21st-March 20th). b 20th of month. Sources: Bank Markazi, Economic Trends; International Energy Agency, Oil Market Report; IMF, International Financial Statistics; Platts.

Country Report August 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Iran 12 Monthly data Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Exchange rate IR:US$ (av) 2016 30,173 30,186 30,225 30,290 30,375 30,547 30,894 31,079 31,365 31,650 31,951 32,243 2017 32,367 32,385 32,417 32,426 32,445 32,469 32,638 32,952 33,501 34,266 35,180 35,670 2018 36,503 37,081 37,579 40,941 42,042 42,406 43,425 n/a n/a n/a n/a n/a Exchange rate IR:US$ (end-period) 2016 30,183 30,197 30,260 30,310 30,460 30,700 30,952 31,253 31,460 31,778 32,091 32,376 2017 32,366 32,403 32,422 32,293 32,450 32,489 32,735 33,208 33,805 34,954 35,265 36,074 2018 36,952 37,299 37,743 41,811 42,155 42,590 44,070 n/a n/a n/a n/a n/a M1 (% change, year on year) 2016 7.4 10.4 13.2 12.2 14.8 21.4 24.2 29.7 25.4 25.9 27.6 33.0 2017 27.8 23.3 19.3 21.4 26.9 20.7 14.4 12.4 13.7 13.0 13.9 12.6 2018 19.3 21.7 19.4 21.4 19.9 25.0 n/a n/a n/a n/a n/a n/a M2 (% change, year on year) 2016 27.2 28.7 30.0 29.5 29.7 29.7 30.0 29.2 28.6 28.3 28.0 28.1 2017 26.0 24.1 23.2 23.7 24.1 24.1 23.3 24.3 23.8 23.3 22.6 22.0 2018 22.3 23.0 22.1 21.6 20.3 20.4 n/a n/a n/a n/a n/a n/a Deposit rate (av; %) 2016 16.1 16.4 14.8 14.8 14.8 14.9 14.9 14.9 12.9 12.9 12.8 12.8 2017 12.7 12.7 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 2018 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Lending rate (end-period; %) 2016 14.2 14.2 18.0 18.0 18.0 18.0 18.0 18.0 18.0 18.0 18.0 18.0 2017 18.0 18.0 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 2018 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Consumer prices (av; % change, year on year) 2016 9.6 8.9 8.4 7.3 7.7 7.5 8.5 9.6 9.5 9.3 8.7 8.9 2017 9.3 10.3 11.8 12.7 11.2 10.3 9.4 8.6 8.4 8.4 9.6 10.0 2018 9.7 9.4 8.3 7.9 9.7 13.7 18.0 n/a n/a n/a n/a n/a Sources: IMF, International Financial Statistics; Haver Analytics.

Country Report August 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Iran 13 Annual trends charts

Country Report August 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Iran 14 Monthly trends charts

Country Report August 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Iran 15 Comparative economic indicators

Basic data Total area 163.6m ha Population 73.6m (2010, Statistical Centre of Iran) Towns with populations in excess of 500,000 Country Report August 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Iran 16

Population in '000 (2007, Statistical Centre of Iran) Tehran (capital): 7,705 Mashhad: 2,411 Isfahan: 1,583 Tabriz: 1,379 Shiraz: 1,205 Qom: 1,042 Ahvaz: 790 Bakhtaran (formerly Kermanshah): 643 Climate Continental, with extremes of temperature Weather in Tehran (altitude 1,220 metres) Hottest month, July, 22­37°C (average daily minimum and maximum); 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 1392 began on March 21st 2013 Currency Rial (IR); IR10 = 1 toman. (Although all government statistics are given in rials, in conversation Iranians refer to tomans.) The dual exchange rate system (one official rate managed by the central bank and one free market rate) was unified in early April 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)

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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, the Assembly of Experts (the body that chooses the rahbar) and the presidency National elections Next elections: 2020 (legislative); 2021 (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. Hassan

Country Report August 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Iran 18 Rouhani was elected as president in June 2013 and subsequently won a second four-year term in the May 2017 election Executive The post of prime minister was abolished in 1989. The current cabinet was approved by the Majlis in August 2013 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 Key ministers President: Hassan Rouhani Head of presidential office: Mohammed Nahavadian Commerce & industries & mines: Mohammed Reza Nematzadeh Culture (acting): Abbas Salehi Defence: Hossein Dehqan Economy & finance: Ali Tayebnia Education (acting): Mohammad Bathaei Energy: Hamid Chitchian Foreign affairs: Mohammed Javad Zarif Health: Hassan Qazizadeh Hashemi Intelligence: Mahmoud Alavi Interior: Abdolreza Rahmani Fazli Justice: Mostafa Pour-Mohammadi Petroleum: Bijan Namdar Zanganeh Speaker of the Majlis: Ali Larijani Head of the Supreme National Security Council: Ali Shamkhani Adviser for Supervision & Strategic Affairs: Mohammed Bagher Nobakht Head of the Iranian Atomic Energy Organisation: Ali Akbar Salehi Central bank governor Valiollah Seif

Country Report August 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Iran 19 Recent analysis

Generated on August 21st 2018 The following articles were published on our website in the period between our previous forecast and this one, and serve here as a review of the developments that shaped our outlook. Politics Forecast updates Deal close on legal status of Caspian Sea July 5, 2018: International relations Event On June 21st the Russian government approved a draft convention on the legal status of the Caspian Sea, recommending that the Russian president, Vladimir Putin, sign it. Analysis According to Kommersant, a Russian newspaper, the final version of the agreement is due to be signed by the leaders of the five littoral states—Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan—in Kazakhstan on August 12th. The ratification of the convention would end 20 years of negotiations over the legal status of the Caspian Sea. Agreement on the sea's legal status would remove a significant obstacle to a trans-Caspian pipeline, linking Turkmenistan's gasfields to Azerbaijan, and ultimately consumers in Turkey and Europe. According to a draft text of the deal, published on the official Russian legal information portal, the signatories will be permitted to construct pipelines on the seabed on a bilateral basis without seeking the approval of the other Caspian states. Given Turkmenistan's serious economic crisis, the country's leadership is likely to be open to such a project to reduce its dependence on China. However, raising the financing for the project will be difficult as it will also require significant investment in Turkmenistan itself to expand capacity. The draft convention sets the limits of the states' territorial waters at 15 nautical miles from the coast, with the limits of sovereign fishing waters set at a further 10 nautical miles. Most of the Caspian will therefore be left open for shared use, but Russia has secured an agreement that only the five signatories may deploy military forces on the sea. Hydrocarbon fields are to be divided into national sectors, but the draft does not establish the borders of these sectors, stating only that they will be determined based on agreements between neighbouring states. Russia, Azerbaijan and Kazakhstan have already concluded agreements on the division of the northern Caspian and established joint ventures to develop offshore fields. The draft convention suggests that Iran, which in the past has sought an equal division of the Caspian shelf, will drop its challenge to the legality of these agreements. A bilateral agreement between Iran and Azerbaijan over hydrocarbon rights, which includes the disputed Sadar Dzhangal field, also appears likely. Impact on the forecast The agreement may boost investment in offshore fields, particularly in the southern part of the Caspian. Negotiations over a trans-Caspian pipeline will intensify, but no investment agreement is likely to be reached in the forecast period.

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IRGC official threatens to shut Strait of Hormuz July 5, 2018: International relations Event Ismail Kowsari, a senior officer in Iran's Islamic Revolutionary Guards Corps (IRGC), stated on June 4th that Iran would prevent other nations' oil from being exported through the Strait of Hormuz, should its own oil exports be blocked by US sanctions. Analysis The US is attempting to drive Iran's oil export volumes down to zero through secondary sanctions. However, should Iran's oil exports actually be forced close to zero, it would no longer have an incentive to keep global oil shipping lanes open. Given that Iran borders the Strait of Hormuz, a narrow chokepoint through which around one-third of the world's seaborne oil trade passes, this would be a major threat to the global oil market, risking a globally damaging oil price shock. Soaring oil prices would ramp up inflationary pressures, in turn weighing on global growth rates. As a result, Mr Kowsari's comments should be taken as a direct counter threat to US pressure. Nevertheless, Iran has repeatedly threatened to close the strait in recent years, without acting on it. Moreover, the US—which has a naval base in nearby Bahrain, as well as a military base in Qatar —has confirmed that it would take military action to ensure the chokepoint stayed open. And crucially, it looks extremely unlikely that Iran's oil exports will be cut to anywhere near zero, with countries such as China and Turkey set to ignore US sanctions. Even if the strait remains open, however, rising tensions in the Gulf could put upward pressure on oil prices, given the recent tightening of the oil market and therefore its increasing responsiveness to geopolitical tensions. Mr Kowsari's comments also highlight the growing risk of military confrontation between Iran and the US. The US remains reluctant to engage in further costly military activities in the Middle East under Donald Trump, but, given the importance of Hormuz to the global economy, the US, along with its oil-exporting Gulf allies, Saudi Arabia and the UAE, would be forced to act if Iran closed the strait. Impact on the forecast We still do not expect Iran to close the Strait of Hormuz. However, we consider it to be among the top ten threats to the global economy, given the major oil price shock and knock-on impact on global inflation rates that would result. The likelihood of this scenario unfolding will also rise as Iran's oil exports decline in 2019 20.

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Women allowed in stadiums for first time since 1979 July 6, 2018: Political stability Event For the first time since the Islamic Revolution of 1979, the regime has allowed women to enter football stadiums, in order to watch Iran's World Cup games. Analysis For decades the authorities refused to allow mixed-gender audiences at male sports events on moral grounds. Since his first election in 2013, the current president, Hassan Rouhani, has pushed for some social liberalisation, including ending the compulsory hijab (headscarf), allowing women in stadiums and opening up the use of social media. However, he has made only piecemeal progress, as conservative hardliners within the regime have opposed such moves. Mr Rouhani's position has been weakened further by the withdrawal of the US from the 2015 nuclear deal, of which the president is a major proponent. That being said, the economic turmoil in which Iran finds itself also presents some opportunities for reformists. The Iranian rial has plunged to around IR80,000:US$1 on the black market, from IR40,000:US$1 at the beginning of the year, owing primarily to the threat of renewed US sanctions. The dramatic reduction of people's purchasing power and a consequent pick-up in inflation has already resulted in large-scale protests in the Grand Bazaar in the capital, Tehran, while water shortages are also driving protests in Khuzestan. Under such pressure, some hardliners are pushing for Mr Rouhani to be removed, effectively making him the scapegoat for the country's problems. However, this would risk a significant escalation of protests. Moreover, markets would probably view such destabilising moves negatively, exacerbating the current currency crisis. The supreme leader, Ayatollah Ali Khamenei, is thus unlikely to sanction Mr Rouhani's removal, in the short term at least. In this context, and without the financial resources to pacify protests over widespread economic grievances, the authorities have few options available. The empowerment of hardliners means that social liberalisation on a significant scale is unlikely at present. However, as in the case of permitting women into stadiums to watch the football, the regime will probably make occasional further modest social concessions, in tandem with bolstering its security crackdown, in order to ensure the theocratic system's survival. Impact on the forecast We still expect Mr Rouhani's reform agenda to take a back seat. However, such is the financial and social pressure on the regime that pragmatism dictates some modest concessions will be made in 2018 22. This is an adjustment we will include in our next political stability forecast.

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Israel seeks understanding on Syria from Russia July 12, 2018: International relations Event The Israeli prime minister, Binyamin Netanyahu, met the Russian president, Vladimir Putin, on July 11th in Moscow as the two countries sought to reach an understanding on post-war Syria. Analysis The visit had been preceded by an Israeli air strike on Iranian military positions in Syria at the T 4 airbase near Homs on July 8th and followed by the infiltration of a Syrian drone into Israeli airspace and Israeli retaliatory strikes on July 11th against Syrian targets as heightened military tensions continue on Israel's border with Syria. Russia did not respond to either event. Israel's concerns over Syria have intensified as Syrian forces have recaptured territory from rebels in the south of the country, including areas adjacent to the Israeli-occupied Golan Heights. As one of two key allies of the Syrian regime (the other being Iran) and the only one Israel can talk to, Russia is the only diplomatic conduit for pursuing Israeli interests in Syria, which are focused on preventing Iran from establishing a permanent military presence there. Mr Netanyahu said after his meeting with Mr Putin that Israel would not oppose the regime of the Syrian president, Bashar al Assad, retaking control over southern Syria or seek to topple the regime, thereby addressing two key Russian concerns. Israel's main worry with the regime is if it violates the 1974 disengagement agreement, which limits the Syrian army's presence on the Golan border. Mr Assad may try to fill the vacuum left by the UN peacekeeping forces that fled to the Israeli side of the border during the Syrian civil war and place troops and heavy weaponry there. However, Mr Netanyahu has shown no signs of retracting his demand that Iranian forces, which include Shia militias such as Lebanon's Hizbullah, that are answerable to Iran's Revolutionary Guards, leave all of Syria and not just the area adjacent to Israel. On this account, Russia appears to be attentive. Although no firm agreement seems to have been reached, Iranian proxies have taken only a minor part in Mr Assad's southern Syria campaign, possibly because of Russian pressure on the Syrian regime. Impact on the forecast The situation remains delicate, and Russia's attempts to balance Syrian and Iranian interests with its ties with Israel will be hard to sustain. Russia will unsuccessfully push for the long-term withdrawal of Iranian troops. We maintain our view that the risk of low-level conflict in the region escalating into full military confrontation is high.

Country Report August 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Iran 23

Military threats escalate between Iran and the US July 30, 2018: International relations Event Following an escalating war of words between Iranian and US officials, the leader of the external branch of Iran's Islamic Revolutionary Guards Corps, Qassem Suleimani, has warned that war between the two countries would destroy all that the US has. General Suleimani also stated that "if you start the war, we will end it." Analysis Such rhetoric indicates the risk of military conflict is growing, a conflict that would probably send global oil prices skyrocketing. The US president, Donald Trump, who tweeted on July 23rd that Iran would suffer the consequences of its threats "the likes of which few throughout history has ever suffered", has backed up such threats before when launching military strikes against the Syrian regime in April 2017 and 2018. Moreover, his national security adviser, John Bolton, has previously advocated air strikes against Iran. Meanwhile, the IRGC has grown in influence in Iran since the May withdrawal of the US from the 2015 nuclear agreement, meaning a more confrontational foreign policy is probable. However, we still think that both sides want to avoid direct military confrontation. Another foreign war is not a popular proposition in the US and despite ordering US air strikes on Syria, Mr Trump has also voiced a desire to withdraw forces from the Middle East. Moreover, the threat of impending US sanctions is already wreaking havoc on the Iranian economy, with the unofficial currency depreciating by more than 100% since end-2017 against the US dollar, and a number of major European companies announcing they are withdrawing investment from Iran. This economic war is proving effective, driving intermittent protests in Iran. The US is thus likely to continue with such a low-cost method of squeezing the Iranian regime. In addition, despite the tough rhetoric, the Iranian authorities know that direct military conflict with the US would be unwinnable and devastating for its own economy (although indirect conflict, such as cyber-attacks could be stepped up). This is why serious threats, such as restarting its nuclear weapons programme and shutting the Strait of Hormuz have remained empty thus far. Indeed, although unlikely in the short-term, it remains possible that after a period of sustained pressure on Iran, both sides will return to the negotiating table later in the forecast period. Impact on the forecast While we expect flash points between pro­US and pro­Iranian proxy forces to flare up in 2018 22, a direct military conflict remains outside our core forecast.

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Political and military establishment rejects US talks August 1, 2018: International relations Event Iranian officials have rejected an offer of talks by the US president, Donald Trump. Analysis After several weeks of intensifying rhetoric that had raised the (still very small) prospect of military conflict between Iran and the US, Mr Trump shifted gear on July 30th by offering to meet Iranian leaders for unconditional talks. However, a number of Iran's senior political and military figures publicly rejected Mr Trump's offer, citing the US's backtracking on its commitments to the 2015 nuclear deal. Mr Trump's strategy, buoyed by his recent nuclear-related talks with the North Korean leader, Kim Jong un, appears to be rooted in the belief that the economic pain being felt by Iran in the face of US sanctions will force it to return to the negotiating table in a weaker position than before. But at this stage, diplomacy is unlikely to progress between the US and Iran. Iran's mistrust of the US following its withdrawal from the nuclear deal is one major factor, but there is also domestic opinion to consider. Bowing to US demands so easily will make Iran's establishment look weak to its own population, while also angering hardliners opposed to such talks. In addition, the Iranian leadership has survived sanctions before and, although its position is particularly precarious given widespread social unrest, it will probably be considering holding out for the remainder of Mr Trump's presidency, in the hope that he loses the next presidential election and a more amenable US president comes to power. That being said, the prospect of negotiations is possible in the medium term, given the economic and social pressures that we expect to mount on the Iranian regime, but in the short term the option is off the table, particularly with the nuclear deal still alive among its non US signatories. In the meantime, Mr Trump will therefore look to maximise the financial constraints on Iran by blocking exemptions for foreign companies doing business with Iran and pressuring allies to halt imports of Iranian oil—which we expect to be partly successful. Impact on the forecast Iran's initial reaction to Mr Trump's offer supports our view that, in the early part of the 2018 22 forecast period, a return to the negotiating table is not likely.

Country Report August 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Iran 25 Economy Forecast updates Authorities to allow oil sales on stockmarket July 3, 2018: Policy trends Event The Iranian authorities have announced that they are planning to allow private companies to export crude oil, via the Iranian stock exchange, in an attempt to circumvent soon to be reimposed US secondary sanctions. Analysis Around 60,000 barrels/day (b/d) of Iranian non-crude oil products are already traded on the Iranian stock exchange. Iran's first vice-president, Eshaq Jahangiri, has stated that Iran will now offer crude oil on the exchange, for all private-sector buyers to purchase and then export. This, along with the possibility of trading oil with foreign state-run companies not in US dollars, and possibly barter deals with countries such as India, should keep the majority of Iran's oil exports in the market. The US president, Donald Trump, has called for importers of Iranian oil to shut down all business with Iran, with the aim of reducing Iran's vital oil exports to zero and forcing the country to return to the negotiating table with the US over its nuclear programme and other regional activities. Given the reach of the US financial system, most European importers are likely to curtail their imports. However, China and India—Iran's two largest oil importers—have shown little sign of abiding by US sanctions. Between the two Asian countries they import over 1m b/d, almost half of the 2.7m b/d currently being exported by Iran. Indeed, in late June, India's Ministry of Petroleum and Natural Gas stated that it does not adhere to unilateral sanctions, only UN sanctions. Meanwhile, Turkey, which imports around a further 250,000 b/d from Iran, has also indicated that it will not bow to the US sanctions. State-led oil companies from all of these countries are thus likely to maintain current levels of imports in the short term at least (although non-state actors may look to reduce imports). Iran's oil exports are therefore expected to fall to around 2m b/d in 2019 from 2.5m b/d in 2017, compared with much more severe cuts of around 1m b/d in 2012 15 during the previous round of US nuclear-related sanctions. Impact on the forecast We currently forecast that Iran's oil exports will average around 2.1m b/d in 2019-20, down from 2.7m b/d at present. Given Chinese, Turkish and Indian resistance to US sanctions, any changes to this forecast are likely to be only minor, despite European withdrawal. However, even at this level, the cut to exports will be enough to drive the Iranian economy into recession in 2019 20.

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Central bank opens up secondary currency market July 10, 2018: Exchange rates Event Valiollah Saif, the governor of Bank Markazi (the central bank), has announced the establishment of a secondary currency market. Mr Saif stated that 20% of the foreign currency earned by non-oil exporters (excluding steel, petrochemicals and minerals) can now be sold at market rates to importers. Analysis The move comes not long after the April decision by Bank Markazi to unify Iran's two exchange rates at IR42,000:US$1. However, this rate was already far stronger than the market rate of around IR60,000:US$1 at the time of unification. The gap has widened further since then, as collapsing confidence in the rial in the wake of the decision by the US president, Donald Trump, to reimpose nuclear-related sanctions on Iran, has driven the rial to around IR80,000:US$1. Although ample foreign reserves technically give the Iranian authorities the resources to support the official rate in the medium term, to do so would lead to a rapid fall in reserve levels. Moreover, Bank Markazi's network has proved ineffective at sufficiently distributing hard currency. Given that US sanctions are yet to even be introduced (they are staggered to begin in August and November), Bank Markazi's effort to unify the currencies has in effect failed already in light of the opening-up of a new legal secondary rate. Of real concern for the authorities is the prospect of major cuts to Iran's oil exports—the country's primary source of foreign exchange. Not only are many importers starting to find ways of reducing oil purchases in order to avoid potential US sanctions, but oil is traded in US dollars internationally, making it difficult to continue trading once the US sanctions come into play. Although some countries, such as China, are likely to be keen to initiate trade in their own local currency, the operational hurdles being presented may nevertheless push many non-state actors to look for oil elsewhere. In this context, Iran's secondary market rate will continue to weaken in 2018 22. Impact on forecast We were already forecasting that Iran's currency unification would fail, and we continue to expect the official and secondary currency rates to weaken on average throughout 2018 22.

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US could consider oil sanction waivers July 17, 2018: Economic growth Event The US secretary of state, Mike Pompeo, announced on July 10th that the US may consider granting sanctions waivers for countries and companies buying oil from Iran after the US deadline on November 4th. Analysis The US State Department declared in late June that it was aiming to reduce Iran's oil exports to zero, down from 2.7m barrels/day (b/d) in May. However, Mr Pompeo's subsequent announcement amounts to an admission that such a goal is impossible and probably undesirable, given the likely impact of rising oil prices on US inflation. First, some importers of Iranian oil—particularly China, and also India's state­owned entities— have indicated that they will ignore US sanctions and may even increase oil imports from Iran. Other US allies, such as Japan and South Korea, as well as some European companies, have largely stated that they are looking to wind down imports but are struggling to implement a plan that eliminates them entirely once US sanctions take effect in November. In light of this, and given Mr Pompeo's announcement, the US might be willing to grant waivers to allied countries, as long as they show efforts to reduce oil imports from Iran. However, the US administration's hardline attitude towards Iran suggests that such waivers would not be permanent and would depend on the continued reduction of oil purchases, effectively making them delays to the implementation period rather than absolute waivers. Second, with other oil producers such as Venezuela, Libya and Nigeria suffering from declining output in recent months, combined with OPEC-led production quotas, oil prices have risen to close to US$80/barrel. If US sanctions reduce Iran's oil exports (as was the case in 2012 16) by 1.2m b/d, there would probably be a further steep climb in oil prices, driving up petrol prices in the US. With congressional elections due in November, the US president, Donald Trump, wants to avoid such price spikes. There are options available to do this, including Saudi Arabia ramping up output or the US using its own strategic oil reserves. However, should these fail to cover lost Iranian production, granting waivers to importers of Iranian oil would be necessary. Mr Pompeo is therefore keeping the US's options open for now. Impact on the forecast Our expectation that Iranian oil exports will fall to around 2m b/d in 2019, from an average of 2.7m b/d in April-June 2018, remains unchanged by Mr Pompeo's announcement.

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Authorities replace central bank governor July 30, 2018: Policy trends Event Valiollah Seif has been removed from his position as governor of Bank Markazi (the central bank) by the authorities, and replaced by Abdolnasser Hemmati. Analysis The new governor, Mr Hemmati, was recently appointed ambassador to China, suggesting his move to the central bank was hastily arranged. He has financial experience as former head of the state insurance company, and managing director of Bank Melli and the privately owned Sina Bank. He has also been a advocate of privatising state assets in an attempt to boost the private sector. However, his track record is unlikely to restore confidence in the Iranian economy, with the threat of US sanctions looming. New US sanctions, restricting Iran's access to US dollars, come into force on August 6th, with a wider set coming into play on November 4th which threaten measures against third parties buying Iranian oil or dealing with Iran's central bank. The threat of US sanctions has already had a devastating effect on Iran's currency, with the rial depreciating from around IR40,000:US$1 at end-2017 to weaker than IR100,000:US$1 at present. Mr Seif has faced particular criticism for this, with accusations that he failed to adequately prepare for the US president, Donald Trump, withdrawing from the 2015 nuclear deal. The replacement of Mr Seif may thus be the first step in a reshuffle of the cabinet and top officials in an attempt to quell public anger at the worsening economic situation as tighter US sanctions loom. There has been speculation that Iran's president, Hassan Rouhani, will replace Mohammed Bagher Nobakht, head of the Planning and Budget Organisation. Meanwhile, around 90 parliamentary deputies recently signed a petition to impeach Masoud Karbasian, the finance minister. Regardless of the truth of these reports, with Iran's economic struggles set to deepen once US sanctions actually come into play and some oil exports are curtailed, the pressure on public officials will continue to rise, probably leading to further resignations and sackings. Such political instability is itself likely to drive further divisions within the political establishment, as rival conservative hardline and moderate reformist camps vie for influence and attempt to apportion blame on each other. We expect this to stifle any potential pro-market reforms, among other policies. Impact on the forecast The replacement of Mr Seif highlights the deteriorating economic situation and the way in which it is set to drive growing political instability, in line with our current political and economic forecasts.

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Rapid currency depreciation pushes up inflation July 30, 2018: Inflation Event Central bank data show that inflation accelerated to 13.7% year on year in June, up from 9.7% in May, the highest rate since 2015. Inflation rose by 4.3% month on month. Analysis Eleven of the 12 categories recorded in the index registered double-digit year-on-year rises, with the largest, food and beverages, rising by 16.8% (8.8% month on month), and tobacco by over 28%. The fact that prices rose so consistently across all categories highlights the importance of two factors, both stemming from the US withdrawal from the 2015 nuclear deal, and the impeding reimposition of US sanctions on Iran's oil exports and use of US dollars. First, the collapse of the Iranian rial, which weakened on the unofficial market from around IR40,000:US$1 at end 2017 to IR80,000:US$1 in June, has begun to dramatically increase the price of imported goods. Second, as panic sets in over the impact of US sanctions, businesses and consumers have begun to hoard certain goods. This has lowered the supply of goods, while driving up demand, thereby increasing prices. The currency has weakened further since June, with the widely used unofficial exchange rate now at around IR110,000:US$1, as Iranians look to secure their savings in non-rial-denominated assets, such as gold, property and foreign currency. With US sanctions set to be introduced in two waves, in August and November, and the detrimental effects of those sanctions likely to peak in 2019 20, we expect the rial to depreciate further in the coming years, pushing up the rate of inflation as imports become both more expensive in local-currency terms and more difficult to source, as US sanctions curtail trade. Rising prices have particularly bad implications for the president, Hassan Rouhani, who has highlighted the easing of inflation since his first electoral victory in 2013 as one of his key successes. The reversal of this, coupled with the fact that rising food prices are likely to exacerbate ongoing social unrest, means the authorities will come under mounting pressure in 2019 20. We expect to see intensifying and increasingly violent protests and disillusionment with the political establishment that is likely to be reflected in poor turnout for future elections. Impact on the forecast The central bank data fit with recent revisions to our forecasts for inflation, which we now expect to peak at an annual average of 16.2% in 2020. However, we are likely to weaken our 2018 19 currency forecasts, given the most recent data.

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IRGC calls for revolutionary action to support currency August 1, 2018: Exchange rates Event The Islamic Revolutionary Guards Corps (IRGC) has called on the president, Hassan Rouhani, to take revolutionary action to stem the rapid depreciation of the rial. Analysis With the reimposition of US sanctions approaching on August 6th, demand for hard currency has soared, sending the rial to as low as IR120,000:US$1 on the unofficial market (it is currently at IR107,000:US$1, compared with around IR40,000:US$1 at end 2017 and the current official rate of IR44,090:US$1. The situation is likely to worsen as the sanctions bite, investment is withdrawn and oil exports are curtailed. Pressure on the authorities will therefore continue to mount. Valiollah Seif has been replaced as governor of Bank Markazi (the central bank), and a list of 200 members of parliament has demanded that Mr Rouhani replace both his economy and finance minister and his industry minister. Mr Rouhani's position is weakening and the increasingly authoritative tone of the IRGC demonstrates its growing influence. The IRGC is likely to benefit from US sanctions to some degree, as the withdrawal of US investment offers a vacuum for the IRGC to fill, taking up vacant construction and industrial contracts. Moreover, following the US's backtracking over the 2015 nuclear deal, a diplomatic solution to Iran's problems looks less likely, empowering the more hardline IRGC. In this light, although Mr Rouhani currently has the support of the supreme leader, Ayatollah Ali Khamenei, his decision-making will increasingly be influenced by the IRGC. However, little can be done to prevent the collapse of the currency—the authorities have tried to influence the market by providing US$239m in foreign exchange at the official rate over the past two months, while arresting currency traders using the unofficial rate. Yet the negative sentiment towards Iran's economy and the inefficiencies in the central bank's hard-currency distribution mean the authorities are unlikely to have the capacity to keep the exchange rate stable. The depreciating currency is likely to be used by Iran's hardliners to scapegoat and remove those in power that they oppose, citing economic incompetence. Indeed, we expect pressure on Mr Rouhani to largely focus on the depreciating currency in the coming months, exacerbated by large-scale currency-related protests. Impact on the forecast The IRGC's call largely supports our view that Iran's hardliners will exert a growing influence over decision-making in Iran as a result of the reimposition of sanctions, and that currency depreciation will continue to ramp up pressure on the government.

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Fiscal deficit lower than budgeted for 2017/18 August 9, 2018: Fiscal policy outlook Event Data from Bank Markazi (the central bank) for the fiscal account show a deficit of IR270trn (US$6.2bn; equivalent to 1.8% of GDP) for fiscal year 2017/18 (March 21st-March 20th), compared with a budgeted deficit of IR321.4trn. Analysis The Iranian government typically underspends its budget, and again in 2017/18 both current and capital spending fell below budgeted levels. Nevertheless, current spending still increased by 17.2% to IR2,429.4trn. This is partly because social unrest—which exploded into widespread protests in December and January, and has recurred intermittently since—has put some fiscal rationalisation plans on hold, including a proposed 50% hike in fuel prices. With the economy likely to come under greater stress in coming months as US nuclear-related sanctions come into force, negatively affecting living standards, it will be even harder to cut elements of the current spending bill. As a result, the key area that the authorities can cut without provoking short-term social tensions remains capital spending. In 2017/18 the authorities increased development spending to IR439.2trn, from IR386.6trn the year before. However, this was less than two-thirds of the IR713.7trn budgeted. Part of this is due to inefficiency in implementing projects, but it is also likely that capital spending has been forgone in order to create the spending capacity necessary to deal with the back-tracking on fiscal rationalisation plans. In addition, as US sanctions come into effect in late 2018, international oil companies are likely to wind down imports of Iranian oil to some extent. With oil prices having risen in 2017/18, oil and oil product receipts have increased by 24.4%, contributing to the better than budgeted performance of the fiscal account. As a result, a key source of revenue will be curtailed in 2018/19-2022/23. In previous sanctions eras, Iran has cut spending and reduced the fiscal deficit—a necessity given the difficulty in securing foreign financing to meet any shortfall. However, with current spending probably too sensitive to cut and capital spending relatively small, Iran is likely to run similar (or larger) budget deficits going forward, probably relying on domestic bond issuance and loans from allied countries, such as China. Impact on the forecast The deficit is lower than our 2017/18 estimate and we will adjust our estimate accordingly. We are also likely to slightly lower our forecasts for 2018/19-2022/13, given the probable cuts to capital spending in the 2018-22 forecast period.

Analysis EIU global forecast - Growth will slow in 2019 July 19, 2018: Forecast summary Since the start of 2018 trade policy has become the biggest risk to our central forecast for global economic growth. The US president, Donald Trump, is shifting his country's previous qualified support for free trade in a protectionist direction. On June 15th the US confirmed that US$34bnworth of China's goods would be subject to additional tariffs of 25%, with the possibility that another US$16bnworth of goods would be targeted after an extended period of public comment. China responded in kind. The threat to the global economy increased when, on July 10th, the US Trade Representative announced plans to levy tariffs of 10% on a further US$200bnworth of Chinese imports to the US. A resolution looks unlikely in the short term, as discussions between the two countries have so far failed to resolve the dispute. At the heart of the dispute between China and the US is a disagreement over intellectual property and China's technology transfer practices, although the US trade team is divided on this issue, with Mr Trump also focusing on the US's trade deficit with China. For now, high-frequency

Country Report August 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Iran 32 indicators have shown little effect from the trade dispute, and The Economist Intelligence Unit expects only a modest macroeconomic impact. However, there is a significant risk that the dispute could escalate to a point that would be harmful for business confidence, investment, diplomatic ties and, ultimately, the global economy. Furthermore, the Trump administration's trade strategy has raised tensions with the US's traditional allies, threatening to upend the multilateral system. Initially, when the US announced import tariffs on steel and aluminium in March, Canada, Mexico and the EU were given exemptions. The exemptions were removed by the Trump administration on June 1st, sparking a round of retaliatory tariffs from these traditional US allies. Reaffirming his approach to the allies, Mr Trump deepened divisions in the G7 on June 8th 9th when he failed to agree to the joint communiqué in support of a rules­based trading system. Following the withdrawals from the Paris climate accord, the Iran nuclear deal and the Trans-Pacific Partnership, the outcome of the G7 meeting and the related trade tensions with key US allies again demonstrate that Mr Trump's "America First" policies do not align with a multilateral system of global governance. The rest of the world is adjusting to this approach. On trade, US protectionism is incentivising countries to develop regional trade agreements and diversify their trade partners. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) will come into effect in early 2019, after Japan became the second country to ratify the agreement, and additional countries have expressed their interest in joining. We expect more countries to develop trade ties with new trading partners, isolating the US economy and risking the market share of US exporters. Multiple threats are challenging vulnerable emerging markets Rising uncertainty about global trade, increases in US interest rates and the strengthening US dollar will put additional strain on vulnerable emerging markets. For example, since April Turkey, Brazil and Argentina have experienced sharp currency depreciations. As global interest rates gradually rise from ultra-low levels, investors are becoming less forgiving of countries with financial, macroeconomic or political vulnerabilities. Turkey is illustrative here, given its structural current-account deficit, necessitating large external financing needs, and the high levels of foreign-currency denominated debt held by the private sector. Steep policy rate increases by the central bank have been required to stem capital outflows. For now, we believe that most emerging- market currencies will be able to weather a moderately faster pace of monetary tightening in the US, provided that overall economic conditions remain favourable. Despite this, we expect further short-lived periods of volatility as global markets adjust to the gradual shift away from easy money. In this environment, we expect the number of countries seeing their currencies come under pressure to rise over the next two years. Geopolitical risks foreshadow greater volatility We also note the economic risks posed by the complex and deepening tensions in the Middle East. Various proxy conflicts between Iran and Saudi Arabia have the potential to further destabilise the region. Mr Trump's decision to withdraw the country from the Iran nuclear deal is another signal that the US is inclined to offer stronger support to its traditional allies in the region, Israel and Saudi Arabia, in the coming years. We expect regional security in the Middle East to deteriorate following the US withdrawal. The move gives hardliners in Iran the upper hand over their moderate counterparts, which is likely to lead to a more confrontational foreign policy. Most worryingly, a proxy conflict between Israel and Iran in southern Syria has a significant chance of escalating. Heightened geopolitical risk in the Middle East increases the likelihood of volatility in global energy markets. The rebalancing of the oil market pursued by OPEC over the past 18 months means that geopolitical developments now have a more pronounced effect on prices. News of the US's withdrawal from the Iran deal sent prices above US$75/barrel for the first time since 2014. Ismail Kowsari, a senior officer in Iran's Islamic Revolutionary Guards Corps (IRGC), stated on June 4th that Iran would prevent other nations' oil from being exported through the Strait of Hormuz, should its own oil exports be blocked by US sanctions. Although we do not expect Iran to close the Strait of Hormuz, the likelihood of this scenario unfolding will rise as Iran's oil exports decline in 2019 20.

Country Report August 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Iran 33 The global economy will remain healthy, although vulnerable to shocks Although the global economy is more vulnerable to shocks, our central forecast is that the underlying fundamentals are strong enough to maintain a healthy growth rate for 2018 19. Global growth accelerated markedly in 2017, to 3%, its fastest rate since 2011, and we expect the same rate of growth in 2018. Global growth will decelerate in 2019, to 2.9%, owing largely to weakness in Latin America, especially Brazil and Argentina, where political uncertainty and market turbulence in 2018 will have a lingering effect. The global economy will continue to follow the trends in the world's two largest economies, China and the US. Risk has returned to the Chinese economy as the global trade dispute combines with other concerning trends. Financial markets have become more volatile, with domestic equity markets having fallen by more than 20% since late January. Although investors are likely to be pricing in the risk from China's external environment, domestic demand is a more serious cause for concern. The effects of tighter monetary policy, corporate deleveraging efforts and a crackdown on shadow financing have become more apparent in the economy this year, having raised the cost and availability of capital for both firms and consumers. As a result, both private consumption and investment are softening. Although we recognise the risks, we believe that the Chinese economy will weather these challenges, and continue to expect growth in China to slow in 2019. The US economy continues to strengthen. Some 213,000 new jobs were created in June—the third month this year that employment has increased by more than 200,000. The unemployment rate increased to 4%, from 3.8%, but this reflected a rise in the labour force of 601,000, as sustained economic growth attracts previously disengaged workers. We continue to expect a business- cycle downturn in the US in 2020. Capacity constraints will emerge in the economy in the second half of 2019, pushing up inflation and forcing the Federal Reserve (Fed, the US central bank) to signal a faster pace of interest-rate increases. This acceleration will be sufficient to trigger a short- lived decline in private consumption and investment in early 2020. Our core forecast is that the dip will be shallow and the rebound relatively rapid, owing to the Fed cutting interest rates aggressively in response. Slowing growth in the world's two largest economies means that global growth will moderate to 2.3% in that year. As the US recovers, the global economy will receive some support in 2021 22, enabling an acceleration to annual average growth of 2.8%. Global monetary conditions will tighten Among developed markets we expect falling unemployment and slowly building inflation to push central banks towards monetary tightening. In the US, the Fed, having first raised rates in December 2015 following the global financial crisis, will increase rates three times this year and four times in 2019. The European Central Bank, responding to the entrenched economic growth in the EU, is set to end the tapering of its quantitative easing (QE) programme in 2018. The Bank of Japan (the central bank) will also begin to wean itself off QE in 2019. By the second half of that year the shift to tighter monetary policy will begin to dampen private consumption growth in many developed markets, as borrowing will become more expensive. Consequently, the period between mid 2017 and mid 2018—where growth has been strong, inflation benign and monetary policy still loose—may feel like the sweetest spot for the global economy in the current business cycle.

World economy: Forecast summary 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Real GDP growth (%) World (PPPa exchange rates) 3.4 3.6 3.4 3.2 3.7 3.8 3.8 3.4 3.7 3.7 World (market exchange rates) 2.4 2.8 2.8 2.3 3.0 3.0 2.9 2.3 2.8 2.8 US 1.7 2.6 2.9 1.5 2.3 2.7 2.5 0.8 1.8 1.8 Euro area -0.2 1.4 2.0 1.8 2.6 2.1 1.8 1.6 1.7 1.7 Europe 0.8 1.9 2.0 1.8 2.7 2.2 2.0 1.8 2.0 2.0 China 7.8 7.3 6.9 6.7 6.9 6.7 6.4 6.3 5.5 5.3 Asia and Australasia 4.6 4.1 4.3 4.1 4.5 4.5 4.4 4.0 4.2 4.2 Latin America 2.8 1.4 0.5 -0.5 1.2 1.5 2.3 2.4 2.8 2.9

Country Report August 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Iran 34 Middle East & Africa 2.1 2.8 2.5 4.2 1.7 2.2 2.8 3.0 3.5 3.8 Sub-Saharan Africa 4.7 4.5 3.0 1.1 2.6 2.9 3.0 2.9 3.6 3.9 World inflation (%; av) 3.9 3.5 3.2 3.8 4.5 6.0 5.1 3.3 3.3 3.4 World trade growth (%) 3.3 3.1 2.3 2.3 4.6 4.0 3.8 2.7 3.9 3.7 Commodities Oil (US$/barrel; Brent) 108.9 98.9 52.4 44.0 54.4 73.6 72.5 68.0 74.8 78.0 Industrial raw materials (US$; % -6.8 -5.1 -15.2 -2.2 20.2 7.0 0.2 -0.4 -0.9 -0.4 change) Food, feedstuffs & beverages (US$; % -7.4 -5.2 -18.7 -3.5 -0.9 3.1 0.5 3.4 0.5 2.8 change) Exchange rates (av) ¥:US$ 97.6 105.9 121.0 108.8 112.1 108.6 106.8 104.1 100.0 98.3 US$:€ 1.33 1.33 1.11 1.11 1.13 1.20 1.19 1.21 1.21 1.24 a Purchasing power parity. Source: The Economist Intelligence Unit.

Tech sector can still thrive, despite US sanctions July 23, 2018 A combination of favourable labour market conditions, focused government investment and incentives, and a sheltering from external competition has helped many technology start-ups to thrive in Iran. Government control of internet and social media remains an impediment to the sector developing to its full potential, while US sanctions will also limit foreign investment and trade. Nevertheless, such is the importance of the tech sector to Iran's fortunes, the authorities are likely to help drive innovation in instances where it does not raise security issues. The re-imposition of US sanctions on Iran in two upcoming waves on August 6th and November 4th, will have a major negative impact on Iran's economy, with crucial oil exports set to be curtailed, the currency already rapidly weakening, and investment being withdrawn. During the previous US nuclear­related sanctions era of 2012 15, Iran's economy contracted by an average of 1.1% a year and inflation averaged 24% as a result of import restrictions and a weakening currency. In this environment most industries suffered. However, Iran's technology sector thrived in comparison with the rest of the economy, offering hope that it could continue to do so again, despite renewed US sanctions. Foundations set for technological innovation Since 2013 Iran has experienced a relative boom in the development of high-tech products and industries for three main reasons. First, a youthful and well-educated population provide helpful labour market conditions to drive technological innovation. Two-thirds of Iranians are under the age of 35, with a large proportion of these graduating from university with science-related degrees. Moreover, beyond a developing labour base with information technology (IT) and engineering skills, a large, young population also provides a significant consumer market to incentivise technology producers and to purchase new innovations—in 2014 only 2m of Iran's population owned smartphones, now 48m do. This environment has given rise to technology start-ups such as a ride-sharing app, Snapp, which now has 600,000 registered drivers; an on- demand delivery service, Alopeyk; and an online retailer, Digikala, which was launched ten years ago and now accounts for 85% of Iran's online retail market. Outside the consumer and retail sectors, Iran has also developed increasingly potent cyber warfare capabilities. Second, the government has pumped significant investment into the technology sector in recent years. The government has invested US$5.3bn in technology infrastructure and research and development since 2013, leading to an expansion in Iran's internet bandwidth capacity from 122.6 Gbps in 2013 to 995 Gbps in 2017, for example. Tech companies have also benefited from tax exemptions and financial incentives in this time. Lastly, although a stringent international sanctions regime in 2012 15 in effect cut Iran off from the global economy, limiting trade, knowledge-sharing, and access to external financing, it may also have benefited Iran in some specific sectors—notably IT and research and development. In the

Country Report August 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Iran 35 absence of foreign competition, Iranian firms have been sheltered to some degree, and given more time to develop than they would have had in more competitive markets. This, combined with government support, has in many cases allowed start-ups to thrive, with consumers largely limited to only Iranian products and services. Weakening oil export volumes and a shrinking economy will mean the authorities have only limited resources available to financially support technological development in the 2018 22 forecast period. However, the infrastructure and labour market are now largely in place to support growth and innovation. Government interference remains stifling Political challenges will, however, remain a constraint on the pace of development, mainly owing to government fears of dissent snowballing into outright rebellion. As a result, technological development is largely done on the government's terms, with the internet still highly regulated. Several social media sites and applications are under control and censorship. Iran has blocked access to YouTube, Twitter and Facebook since the widespread protests in 2009, and has threatened to permanently shut down Telegram—the country's most popular messaging app. In addition, the internet speeds are often deliberately restricted in areas where social unrest is simmering. With unrest boiling over already in 2018, and likely to intensify in the medium term as economic grievances such as unemployment are exacerbated by the impact of US sanctions, the regime will probably crack down further on internet freedoms and access. In addition, there will be clear downsides to the imposition of US sanctions. With government resources strained, the shortage of foreign investment will also prove a hindrance to the technology sector. Sanctions will also make the import of high-tech software more expensive as it becomes harder to source, and as the depreciating rial pushes up import costs. Furthermore, there is a risk that the shutting-off of Iran once again from the US financial system will lead to a brain drain, as talented youths looks to leave the country for more open and flourishing economies. This is particularly concerning, given that many of the people driving the start-up boom in Iran are those that returned to the country following Mr Rouhani's victory in 2013 and after the lifting of nuclear-related sanctions in 2016. As Mr Rouhani comes under growing pressure form hardliners, those same tech workers may well choose to leave again. Nevertheless, the scale of those coming through Iran's education system with skills applicable to high-tech development indicates that a brain drain would not halt tech sector growth, despite proving a constraint. Tech sector still likely to be a rare growth highlight in 2018-22 The relatively low ratio of investment/growth in the sector and the hundreds of thousands of jobs that have been created highlight the importance of technological development in Iran at a time when unemployment is on the rise and driving popular anger. As a result, although government restrictions on internet and social media usage will remain an impediment to development, the authorities will likely provide incentives and investment to the sector where possible. And unlike many other sectors, the tech sector will probably continue to grow, driven by a skilled and dynamic workforce, given a large number of already well-established tech companies.

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