Iran’s economic potential still relies on reform and stability

The country has the chance to change direction, open up, and win the investment that would transform its natural and human resources into the economic engine needed. It just needs the will.

Sara Padovan

Iran's economic hopes are closely aligned to its political decisions.

Iran’s economic potential still relies on reform and stability

Amer Ziab Al-Tamimi

last update on 25 Jul 2025

During the 12-day war with Israel in June, Iran’s military and nuclear infrastructure suffered damage that is likely to cost billions of dollars to repair. Now that the guns have fallen silent, how able is it to muster the finances? On a broader level, what is the potential in Iran’s economy, and what are its current capabilities?

The country remains an energy superpower, with an oil industry that traces its beginnings back to 1901, when British businessman and speculator William d’Arcy won a concession to explore, obtain, and market oil, natural gas, asphalt, and ozokerite (a kind of paraffin) in southern Persia.

For almost eight decades, the country enjoyed substantial oil revenues, Iran’s oil production peaking in the 1970s. According to the International Energy Agency, Iranian oil production reached its zenith in 1976 at 6.6 million barrels per day. By 1978, Iran had become the second largest oil producer and exporter in OPEC (the Organisation of Petroleum Exporting Countries), ranking fourth globally in oil production.

Then came 1979

Success lasted until Ruhollah Khomeini’s revolution ousted the Shah in 1979. The devastating Iran-Iraq War soon followed, from September 1980 to August 1988, during which Iranian oil production and exports declined. Ali Khameini became Supreme Leader in 1989 and Iran set about improving its capabilities, eventually pumping out 3.9 million barrels per day (bpd) in 2008.

Yet tension between Iran and the West was never far from the surface and additional sanctions were imposed in 2006 after Iran refused to halt its uranium enrichment programme. These US-led sanctions targeted investments in oil, gas, petrochemicals, exports of refined petroleum products, business dealings with the Islamic Revolutionary Guards Corps (IRGC), banking, shipping, and insurance, to name but a few.

By 1978, Iran had become the second largest oil producer and exporter in OPEC, ranking fourth globally in oil production

The sanctions caused the Iranian oil industry problems when it came to maintenance and development, which led to a drop in production capacity. They also prevented international oil companies from investing in the Iranian oil industry and improving its production and export capabilities.

Unlocking capacity

If successful, the ongoing nuclear negotiations with Western powers could lead to sanctions relief, unlocking the oil sector's untapped potential and re-establishing long dormant international partnerships. Current estimates indicate that Iran still has more than 10% of the world's proven oil reserves. Iran has the capacity to produce more than five million bpd, along with substantial natural gas production capabilities and refinery output, but so far in 2025, its exports have topped out at 1.7 million bpd.

Reuters — Iran's economy relies on hydrocarbons, but other sectors such as manufacturing and agriculture also contribute.

Gas is a huge area of potential. Iran shares the giant South Pars field with Qatar, the world's largest natural gas field that holds an estimated 1,800 trillion cubic feet of natural gas reserves. If conditions stabilise, the South Pars field could help kickstart Iran's production and export capabilities. Yet capital investment will be needed. Would the Gulf states be willing to provide it through their national oil companies, to establish partnerships with Iran?

Tehran is low on options. Economic conditions have deteriorated, as have Iranians' standard of living, as a result of inflation and the deteriorating exchange rate of the national currency, leading to rising unemployment rates. Most analysts feel that improved relations with the outside world lie at the heart of the solution, but this requires some fundamental shifts in direction, not least over Iran's nuclear ambitions.

Shutterstock — An Iranian 5,000 rial note. Inflation is estimated at around 43% for 2025.

Although reliable and audited data on the Iranian economy remains largely unavailable, the International Monetary Fund (IMF) recently reported that its growth rate could reach 0.3% in 2025, while inflation for 2025 was estimated at 43.3%. The World Bank estimated Iran's gross domestic product (GDP) at $405bn in 2023, and projects it to rise to $437bn by 2025. With a population of 92 million, this given an annual per capita income of more than $4,750.

Looking to the Gulf

Relations between Iran and the Gulf have been strained since the Iran-Iraq War, when the Gulf sided with Iraqi dictator Saddam Hussein. Iran's recent attack on an American air base in Qatar did nothing to help matters. Yet trading relations between Iran and the Gulf states have deep roots, with the Gulf having historically relied on Iran for essential food imports, for instance.

In terms of commerce, links are flourishing. The United Arab Emirates, for instance, is still Iran's second-largest trading partner after China. UAE exports to Iran have grown dramatically in recent years, from $6bn in 2018 (when President Donald Trump withdrew from the Iranian nuclear deal) to $22bn in 2024. The UAE is also a big importer of liquefied natural gas (LNG) from Iran.

Improved relations with the outside world lie at the heart of the solution, but this requires some fundamental shifts in direction

Other Gulf states maintain moderate trade relations with Iran, but a Chinese-brokered détente between Saudi Arabia and Iran in 2023 went a long way towards re-establishing dialogue. For some, the ultimate prize would be a comprehensive free trade agreement between Iran and the Gulf Co-operation Council (GCC).

Growth requirements

Beyond oil and gas, Iran has other industrial sectors with huge potential. The agricultural sector, for example, contributes more than 10% towards its GDP, a percentage that could rise with investment and agreements. Iran also has the benefit of a professional, educated, and skilled workforce, although more than four million are believed to have left to pursue employment opportunities abroad.

Atta Kenare/AFP — Iranians in the border city of Chah Bahar work on a section of a pipeline running between Iran and Pakistan. Energy exports could surge with investment.

Although there is investment interest from the Gulf states, the investment climate would need to be right. Laws and regulations governing investment activities and protecting investors' rights therefore remain essential prerequisites. Iran's economic policymakers will need to recognise this as a critical priority if foreign direct investment is sought.

The stability of the national currency exchange rate is perhaps the most crucial factor for attracting investment. Attracting investment is unrealistic when the dollar exchange rate stands at 86,900 tomans (or 869,000 rials) and is subject to negative fluctuations. In 1979, the dollar was only 70 rials. Capital flight since the revolution is estimated to be up to $40bn.

Setting the stage

Gulf states could use their sovereign wealth funds or mobilise private-sector capital for promising and economically viable projects in Iran, but this would first require political stability, a shift toward market economies, liberalisation of ownership, greater transparency, and a bigger role for the Iranian private sector. In essence, that means moving away from today's system, in which the IRGC has a stake in almost everything.

Iran will not be able to benefit from substantial investments from Gulf states, European countries, or the United States without undertaking the fundamental political and economic reforms necessary to restore the country to recovery and prosperity, but these aspirations may prove difficult to achieve in the short term. If ever a country proved that politics and economics are linked, it is here.

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