Like their counterparts in other hydrocarbon-dependent states, Iranian officials have long talked about the importance of reducing reliance on oil revenues. But the need for transition to a non-oil economy has become critical, following the Trump administrations reimposition of secondary sanctions in November 2018, which has left China as the only major purchaser of Iranian crude.
The transition is well under way in the private sector, with a boom in manufacturing. For the past decade, companies have been looking beyond Irans large domestic market to export an increasingly diverse range of goods to a wider range of markets, turning the devaluation of the rial to their advantage. In 2019-20, non-oil exports, totaling $41.3 billion, exceeded oil exports for the first time in Irans modern history. Around half of Irans non-oil exports were in manufactured goods, meaning that Irans factories earned more than double what the countrys oil rigs earned in export revenue last year.
Sanctions pressure contributed to a 7% decline in total non-oil exports, but the total remains near historic highs. Iranian consumer goods and industrial productsranging from cookies to stainless steelare exported widely within the Middle East as well as further afield to China, Russia and Europ
Manufacturing is also a major contributor to employment. Between March 2018 and December 2019, the manufacturing sector added 472,000 jobs, exceeding the 315,000 jobs lost in the quarter following the reimposition of U.S. sanctions. New employment helped soften the blow of sanctions, keeping Irans chronic high joblessness from getting worse.
The pivotal role of the manufacturing sector in supporting the economy is also clear in data for GDP growth. While the oil sector contracted 35% in 2019-20, the manufacturing sector only contracted by 1.8%. The sector in fact grew 2.4% in the final quarter, between January and March of this year.
Despite the rebound, Irans largest industrial enterprises continued to languish. The automotive and steel sectors, dominated by inefficient state-owned companies, have been hit hard by the sanctions, which have increased the price and reduced the availability of raw materials. They have also felt the impact of inflation, which has depressed domestic consumption. The private sectorincluding small and medium enterprises which produce food products, home goods, and apparel, among other consumer productshas compensated for the struggles of the state firms.
The coronavirus pandemic has introduced a new challenge for the manufacturing sector. The virus hit Iran hard, leading to more than 180,000 confirmed cases and nearly 9,000 deaths. The countrys economic recovery was derailed as a national lockdown brought factories to a halt and regional borders were closed, interrupting trade.
Iranian authorities eased the lockdown in mid-April, and that decision appears to have paid-off in the short term. Purchasing Managers Index (PMI) data published by the Iran Chamber of Commerce, show that private-sector manufacturers returned to expansion in the first month following the relaxation of the lockdown. As the pandemic continues to depress oil prices, the non-oil exports will be even more important for the countrys economy this year.
But new threats loom. Given the pivotal role of Irans manufacturing sector in the countrys economic resilience, the U.S. may seek to tighten the sanctions noose. In January, the White House issued a new executive order targeting the construction, mining, manufacturing, or textiles sectors of the Iranian economy. The administration is in effect targeting the private sector and the millions of blue-collar workers in the countrys factories, contrary to its stated intention of using sanctions to restrict the financial resources of government authorities.
If the Trump administration follows through on this order the impact will undermine any post-pandemic rebound.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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