Iran’s Economy Can Absorb $300 Billion Targeted in MOU
Iran’s economy is large relative to its current external liabilities stock, which sits at a miniscule 2.5% of GDP.
By D.A. Leusder
The Islamabad Memorandum of Understanding (MOU) between the U.S. and Iran was officially signed on June 17 at Versailles. The 14-point framework commits the U.S. to “develop a definitive, mutually agreed plan with at least $300 billion for the reconstruction and economic development of the Islamic Republic of Iran” in concert with “regional partners.”
Access to this capital, as well the release of Iran’s own frozen assets, are tied to Iran’s compliance with other points of the agreement. Under this framework, the U.S. will serve as the enabler of private sector- and regional capital flow into Iran. In practice, this entails U.S. Treasury waivers for oil exports immediately upon signing and full sanctions termination in the final deal., if agreed within 60 days after the signing of the MOU.
Despite some reports indicating that half of the headline figure is already “committed,” much about how the capital will be allocated remains uncertain. The MOU does not specify whether the $300 billion will be structured in a dedicated fund, or whether the amount will reflect commitments made across a range of investment vehicles.
However, assuming that the full amount of $300 billion is eventually disbursed, it is worth asking how these inflows will affect Iran’s external economic position and whether the Iranian economy is even large enough to absorb such significant inflows. After all, emerging market economies are vulnerable to large changes in their external balance sheets. If foreign claims on its economy increase too rapidly, then a windfall injection of investment in the near term could risk pushing Iran into a balance-of-payments or solvency crisis somewhere down the road.
Considering that the $300 billion will only flow into Iran in a scenario when Iran benefits from broad sanctions termination, a simple, illustrative model of Iran’s long-term growth path, is enough to dispel such fears, even within the large uncertainties that such exercises necessarily involve.
Iran’s economy is large relative to its current external liabilities stock, which sits at a miniscule 2.5% of GDP after being closed off from global capital markets for decades. And its oil export revenue, which is set to increase, underwrites its ability to acquire foreign exchange reserves and service its debt.
Then there’s the potential nature of the fund itself: as a reconstruction and economic development fund it is fundamentally not a loan facility. Such funds are generally equity-heavy: we can expect private investors and Gulf sovereigns to take project stakes and enter into joint ventures in the energy, petrochemicals, infrastructure sectors, with upside participation and risk-sharing.
We can therefore reasonably assume that the majority of the inflows will be foreign direct investment (FDI) as opposed to debt and that the returns and the capacity to service it would accrue across the economy wide. This enables projecting the path of external liabilities against GDP, as opposed to foreign exchange earnings or fiscal revenue more narrowly. On this basis, we can paint a stylized picture of Iranian growth over the next three decades, with the economy progressing sequentially through a reconstruction and opening up phase, a phase marked by investment ramping-up, a maturation phase of plateauing growth, and a wind down phase.
To project Iran’s external liabilities through 2056, we assume a 65% to 35% split for FDI and debt for the $300 billion and that the funds are disbursed across the three decades, with the annual rate of inflows halving in the last decade. We also need to account for returns generated by the inbound flows. That is, over time, what is the average return on investment, how much is reinvested or repatriated, and how much interest revenue leaves the country as the external debt stock grows?
As a relatively closed economy, Iran has no observable market cost of capital, so the returns figures are bracketed between two reference economies, Saudi Arabia and Turkey. The first is an investment grade and oil-rich economy with cheap debt but a high resource-sector FDI returns. The second is a large, diversified, sub-investment-grade emerging market with expensive debt but with moderate, broad-economy FDI returns.
For Iran, then, a realistic assumption is that both FDI returns and risk premia remain high throughout. Based on historical norms across comparative emerging markets, we can further assume a reinvestment ratio of 0.5 (50% of returns are put back into the economy) and a holding period for FDI (when capital starts exiting) of 15 to 20 years.
The crux is that a developing economy like Iran can’t efficiently absorb unlimited investment: skills, institutions, project pipeline and implementation capacity are bottlenecks. As the investment rate rises, the marginal efficiency of investment falls convexly. The relevant parameter here is the incremental capital output ratio (ICOR), which captures the additional capital investment required to produce a unit of output in GDP. It rises as investment becomes less productive. Iran’s realized ICORs in this model change over time (a different value of each in the four phases) but they are benchmarked against typical ranges for emerging markets.
Since the GDP denominator is expressed in U.S. dollars, exchange rate effects matter. We nonetheless assume only modest real movements in the long run. The gap between the managed NIMA/ETS “agreed” rate and the parallel market rate has effectively closed, so GDP is already priced at a market rate. That is, because the big adjustment has already happened, the path of Iran’s debt ratios isn’t artificially kept down by some hidden devaluation shock that would shrink the denominator. And even if Iran doesn’t immediately rein in high inflation, the picture doesn’t change much, since a correspondingly weaker rial leaves the rial-dollar real exchange rate (and, by extension, dollar-denominated GDP) roughly unchanged.
So, the real growth engine is non-oil endogenous growth: Iran’s annual oil revenue above the 2026 base driven by sanctions relief with the addition of the fund disbursements generate non-oil investment which leads to real GDP growth via a convex ICOR. This trend sits on top a conservative 2.45% autonomous structural growth trend for the non-oil based part of the economy, well below emerging market averages of 4 to 4.5% annually, which are similar to Turkey’s and Saudi Arabia’s long run averages.
Taking these together—the modest autonomous growth rate and the additive growth from both increasing oil revenue and investment fund inflows—the average growth rate in all scenarios is assumed not to exceed 3.5% per annum, well under the 4 to 4.5% long-run trends for similar economies.
This implies two things: that what matters most for the projections are different oil price scenarios, and, that what is driving the external liabilities share over time is the GDP denominator. Accordingly, the growth projections are based on three different oil price scenarios, derived from the World Bank and International Energy Agency (IEA) forecasts, from a 2026 war-adjusted nominal GDP baseline of just above $400 billion.
The realized total compound annual growth rate (CAGR) across these scenarios ranges between 2.2 and 3.6%. The “low oil” path, in which countries’ aspirational energy transition goals are realized, should be treated as the most realistic one. In the model, this path reflects lower export volumes, which feed back into the denominator. Based on the IEA’s 2024 Announced Pledges Scenario (APS), then, Brent crude oil falls to $58/bbl by 2050, with grade differentials (medium sour/heavy barrels trading below Brent) pulling Iran’s effective long run price down to $49/bbl and capping export volumes at 2.8 million barrels-per-day (bpd) instead of 3.2 million bdp in the central and high oil paths.
In that scenario, Iran’s economy expands to around $775 billion, just short of a 95% rise from our estimated 2026 baseline. This is conservative for both fast-growing diversified emerging markets and for major oil exporters. Iran’s own realized growth, despite sanctions, was 152% between 1994–2024, during which the median cumulative growth for similar oil exporting economies was well over 200%. And none of them benefited, as Iran might, from a large investment fund or a sanctions-induced low baseline conducive to catch-up growth.
So, in the most realistic ‘low oil’ scenario under conservative assumptions, Iran’s gross external liabilities ratio (Fig. 1) breaches 50% of GDP in 2037 and peaks at 76% in 2046, remaining elevated thereafter. This seems high. By comparison, Saudi Arabia’s and Turkey’s current shares sit at 58% and 48% respectively.
But the gross measure is the sum of the inbound FDI and debt stocks. As we recall, in Iran’s case this is likely skewed heavily towards equity. Accounting for the likely split, the projected stock of external debt (Fig. 2) peaks at a mere 15% in 2046 in the same scenario. This is well below the International Monetary Fund’s (IMF) medium 40% debt sustainability threshold for low income countries, and less than half the ratio of the two reference countries, both around 35%. The reason is simply that Iran’s starting point is very low at 2.5% of GDP.
A better metric for future solvency risk is the composition of the country’s entire external balance sheet: assets and liabilities. What the IMF and others consider a more precise measure of financial stress is the net external position. Based on the same projections, a current foreign asset stock of $90 billion and a conservative effective saving rate of ~5% of total oil export revenue once export volumes ramp to a 2.8 million bdp ceiling, Iran’s net international investment position (NIIP) turns negative but never becomes unsustainable (Fig. 3).
Though it briefly dips below –50% in the low oil path, this NIIP threshold is a statistical signal from the technical literature and is not widely considered meaningful: some countries sit well below it without experiencing financial stress and many debt crises have occurred at significantly higher NIIP ratios. The IMF’s External Balance Assessment (EBA) instead emphasizes its trajectory (the “NIIP-stabilizing current account”) and its composition: the active ingredient is net external debt, while equity type liabilities barely raise risk.
Put simply, NIIP includes equity, and equity isn’t debt: it has no fixed repayment, doesn’t roll over, and investors bear the downside. Iran’s negative net investment position stabilizes toward the end of the low oil path, and, crucially, is skewed towards FDI equity, reflecting the footprint of the $300 billion development and reconstruction fund.
What truly matters is the net debt component. If we exclude equity, then, we get a real measure of the difference between foreign assets and foreign defaultable liabilities, or NENDI (NIIP excluding non-defaultable instruments). In all three scenarios, Iran comfortably remains a net creditor, with its NENDI bottoming out at 9% of GDP in 2046 in the low oil projection (Fig 3.).
This means that solvency risk does not become an issue for Iran even under pessimistic assumptions on a realistic oil price growth path. This in itself does not quite rule out liquidity events: the risk of a “sudden stop” of capital inflows endangering Iran’s ability to roll-over its debt depends on the ratio of its gross short-term liabilities to its usable foreign exchange reserves. But the overall size of the debt leg remains modest throughout.
If Iran’s entire external debt stock only peaks at 15% of GDP, then even an adverse maturity profile (say a third of liabilities being short-term) means the volatile component remains small relative to usable reserves. And on the reserves side, the denominator improves alongside the inflows, since access to those $300 billion are premised on the same sanctions relief that unfreezes reserves and generates the foreign exchange revenue to expand the asset stock over time. These same inflows also mitigate the need for Iran to later refinance itself with short-term portfolio debt once its access to capital markets has normalized. As with all emerging markets seeking new capital inflows, Iran will need to make extensive domestic reforms to improve the attractiveness of its economy for foreign investors and creditors, especially considering the lingering effects of sanctions. But these complex reforms are worth pursuing given the structural opportunity presented by Iran’s minimal external liabilities.
Overall, it is highly unlikely for Iran’s external economic position over the next decades to be destabilized even if the full investment fund windfall is realized and oil markets are glutted. Its economy is too diversified and too large, while decades of sanctions have guaranteed that its debt stock remained small and that its reintegration into global oil markets can produce large relative gains from a low baseline. Barring any geopolitical reversal of fortunes, then, Iran’s ability to comfortably absorb investment at scale could well result in a sustained period of economic development and prosperity.
Dominik A. Leusder is a political economist and writer based in London. An experienced macroeconomic analyst, he has held various research roles at the London School of Economics and leading economic policy think tanks.
Section: (vision-iran-initiative) Photo: Mehdi Ghorbani