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Iran Has Lost Its Top Position As Oil Exporter Without Developing Alternatives

An Iranian container ship near Rotterdam. FILE PHOTO

Iran's non-oil exports, which have suffered from weaknesses in its economic and management systems as well as from various sanctions over the years, is facing new problems following the coronavirus outbreak.

According to the Iranian Customs Administration, the total volume of Iran's exports and imports in April was reduced by 27 percent compared to the same month last year and reached to a little over $3.5 billion. The biggest loss was in the export sector that marked a 36 percent decline reaching to $1,652 million compared to $2,595 last April.

In fact, the real volume of Iran's non-oil exports is far less than the figure for what the Islamic Republic's Customs Administration calls non-oil commodities in its official statistics.

Undoubtedly, a serious public health crisis has adversely affected foreign trade in many countries. But the impact on Iran's economy is twice as much because it had already lost a large part of its oil exports as a result of international sanctions and the drop in the price of oil even before the coronavirus outbreak.

The fall in non-oil exports after the pandemic has given another hard blow to Iran's potential for having foreign currency income. In April, the volume of Iran's imports was higher than its export and faced the country with a $279 million deficit in its trade balance.

But coronavirus cannot be blamed for everything. Iran's inability to export an acceptable amount of non-oil commodities is the result of its faulty economic structure more than anything else. Iran is now a marginal player in the world oil market while it lacks the capability to export non-oil commodities. Iran now lags behind Bangladesh in the area of non-oil exports.

While during the past two decades of the 20th century many Third World countries diversified their exports, which propelled their development, Iran is still relying on a single commodity, oil, to keep its economy going.

During the same period, Iran lost its status as a major oil producer and exporter without attempting to diversify its non-oil exports.

With the Islamic revolution in 1979, Iran gradually lost its privileged status in OPEC to Saudi Arabia. In the meantime, increasing tensions between the Islamic Republic of Iran and the West, as well as the eight-year-long war with Iraq, made many Iranian oil fields obsolete and pushed foreign investors out of the country. During the past decades Iran has never been able to increase its oil output beyond four million barrels per day, while before the revolution it could easily produce six million bpd.

During half of this period, Iran produced one third of Saudi Arabia, but still remained the second largest oil producer in OPEC. Later, however, it lost this status to Iraq, Kuwait and the UAE as a result of sanctions. Now, it is the fifth largest oil producer in OPEC. In April it produced 1,969,000 barrels per day out of which it used 1,800,000 barrels for domestic consumption. According to OPEC, Iran's oil exports are currently under 200,000 barrels per day. Meanwhile the drop in oil price to 20 to 30 dollars per barrel has made the situation even worse for Iran.

This will take a long time to correct. So, what can Iran do to make up for the loss of revenues? Ayatollah Khamenei, the Islamic Republic of Iran's Supreme Leader's solution was going back to a 1950s concept: Economy without oil. Iran's technocrats told him this was impossible. Instead, Iran could continue with oil production at a reasonable level and try to create a strong services section including tourism, trade, air travel, and other sectors like, for instance, the UAE.

The Islamic Republic has brought Iran's oil industry on the verge of destruction during the past 41 years without trying to develop its agriculture, industry and services sectors and becoming competitive in the world market. It also failed to attract foreign investment and benefit from efficient economic diplomacy.

A recent report by the Research Center of the Iranian Parliament (Majles)noted some of the shortcomings in the area of non-oil exports. The research showed that although officials claim the country's non-oil exports have grown ten-fold in 17 years, the figure is an outcome of manipulation. A large part of what officials call non-oil commodities consist of petrochemical products, gas by-products and other oil-based commodities.

"Still, a large part of Iran's non-oil export is under the influence of oil," says the report, adding that the real volume of Iran's non-oil exports is half of what officials claim. "It is no more than $22 billion to $24 billion [annually] based on the most optimistic assessments," the report says, adding that this figure is mainly about exporting traditional goods such as pistachio, saffron and hand-woven carpets. Nevertheless, the figure is much lower than the annual non-oil exports of countries such as Turkey, Thailand and Malaysia and even Bangladesh which makes $30 billion out of selling clothes only.

The situation of Iran's non-oil exports is fragile as it also suffers from a limited number of destinations. Based on the report by the Majles Research Center, 52 percent of Iran's non-oil export income comes from China, Iraq and the United Arab Emirates. A small change in political relations could lead to a significant reduction in Iran's income.

In other words, this means that Iran has lost its privileged status in the oil market to its rivals without compensating the loss with exporting industrial goods. This is a country that has lost precious opportunities during the past decades and has sacrificed the interests of its current and future generations for ideological dogmas.

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    Fereydoun Khavand

    Fereydoun Khavand is a French-Iranian economist living in Paris. He has been teaching at various French universities and is a regular contributor to Radio Farda as an economic analyst.