SIPRI Has Revised Four Years of Data on Iran's Military Spending

SIPRI—the Stockholm International Peace Research Institute—has just published its “Yearbook” for 2022. The flagship annual publication offers civilian and military leaders around the world a way to compare military spending between countries and to gauge which countries are investing in greater military power.

Last year, I identified a major problem with the data about Iran’s military spending. The 2021 Yearbook estimated Iran’s military spending at $24.6 billion, a total that put it just above Israel in the rankings, as the 14th largest military spender in the world. This did not make sense.

Iran’s military, while posing a threat within the region, does so primarily because of inexpensive missile and drone systems and heavy reliance on proxy forces. Iran’s military lacks the kinds of advanced aircraft, armour, and other systems that are typically found in the arsenals of the world’s top military spenders.

A closer examination of the SIPRI data, and communication with SIPRI’s researchers, revealed that the Swedish think tank had been using the wrong exchange rate to convert Iran’s local currency military expenditures into dollar values. The researchers were using the “official” central bank exchange rate, which has for several years been a subsidised exchange rate used exclusively for the import of essential goods.

This common mistake has been rectified. SIPRI researchers note in the 2022 Yearbook dataset that they are using the NIMA exchange rate to convert to dollars, which results in a far better estimate of the Iranian state’s true purchasing power. The historical data has been corrected going back to 2018.

The impact of the correction is significant. The revised figures mean that instead of ranking as the 14th largest military spender in the world in 2021, Iran was actually ranked 39th. In 2022, spending totalled $6.8 billion. That is a mere fraction of the military spending of regional rival Saudi Arabia, which spends an estimated $75 billion. Iran even spends less on its military than regional minnow Kuwait.

SIPRI should be commended for making this correction. But in certain respects, the damage has been done. For several years their data was used to suggest that Iran posed a much greater threat to regional and global security than it truly did. A significant number of authoritative publications and news reports relied upon the SIPRI data to put Iran’s military spending in context and unfortunately used the inflated dollar totals published between 2018 and 2021. Those inflated figures conformed to a pervasive and convenient narrative—this may explain why the issue went unresolved for so long.

Photo: IRNA

SIPRI Has Overstated Iran's Military Spending For Years

SIPRI—the Stockholm International Peace Research Institute—produces the world’s most authoritative data on global military expenditure and the arms trade. The SIPRI Yearbook, a flagship annual publication, offers civilian and military leaders around the world a way to compare military spending between countries and to gauge which countries are investing in greater military power.

This year, the SIPRI Yearbook includes some significant statements about Iran’s military expenditure—which is estimated at $24.6 billion. In a factsheet summarising key trends, SIPRI’s researchers declared “Iran increased its military spending by 11 percent, making it the 14th largest military spender in 2021. This is the first time in 20 years that Iran has ranked among the top 15 military spenders.”

We are accustomed to thinking about Iran as a major military spender because we frequently hear about the country’s military, its missile programme, and its nuclear weapons ambitions. But on closer examination, SIPRI’s figures for Iran do not add up.

Iran is a country that is under the most significant sanctions programme in the world and its economy has stagnated for a decade. But SIPRI’s data suggests that Iran is spending even more than Israel, ranked 15th in the world with $24.4 billion in military expenditure in 2021. The comparison with Israel—a country in which the military is constantly procuring the most advanced military equipment in the world, including from foreign manufacturers—is clarifying. If Iran were indeed spending even more money, what could it possibly be spending all that money on? Iran produces nearly all its military hardware domestically, has basically no heavy armour, no modern air force, no modern naval fleet, and few advanced weapons systems. The country’s defence is primarily assured by a ballistic missile programme, which while impressive, is not a programme that costs nearly $25 billion to operate.

So where did SIPRI go wrong? The answer is simple and reflects a common mistake made by researchers who rightly want to put Iranian financial data into a comparative framework. To produce global rankings and to make data on military spending comparable over time, SIPRI converts local currency expenditures into US dollars. In 2021, SIPRI calculated Iran’s total expenditure in local currency at IRR 1033 trillion. In an email exchange, a SIPRI researcher clarified for me that SIPRI defines military expenditure using the following formula:

Military expenditure = Ministry of Defence and Armed Forces Logistics Total + Armed Forces General Staff Total + Artesh Joint Staff Total + Sepah Joint Staff (IRGC) Total + Armed Forces Social Security Organization Total

This is a reasonable formulation and corresponds to how Iranian sources calculate military spending. So there is no reason to doubt SIPRI’s calculation of military spending in local currency terms.

For most countries, the next step in the analysis involves finding the average dollar exchange rate for the given year and dividing the total expenditure by that figure. But Iran does not have a single exchange rate and SIPRI’s researchers picked the wrong one. Over the years, they have relied upon data for Iran’s official dollar exchange rate published by the World Bank and sourced from the Central Bank of Iran. This was also confirmed in my email exchange with the SIPRI researcher. On face, this seems like the right approach—SIPRI is using an “official” rate from an authoritative source. But in Iran, the official exchange rate does not reflect market prices. It is a subsidised exchange rate that is only used for the importation of certain essential commodities, such as wheat and medicine. Since 2019, the official exchange rate has been capped at IRR 42,000. This is the rate that SIPRI mistakenly used to calculate Iran’s total military expenditure for 2021.

The exchange rate that ought to have been used is the exchange rate defined within the government budget itself. The Iranian government balances its budget by relying in part on foreign exchanges revenues, principally earned through the sale of oil. Prior to the budget for the Iranian calendar year 1395, which was submitted in November 2015, the official exchange rate was indeed the reference rate used in the budget. But after several years of sanctions pressure, the Central Bank of Iran could no longer prop up the value of the currency. So while the official exchange rate was kept low as a means to subsidise the purchase of key imports, a separate exchange rate was defined in the budget. The rates have diverged dramatically since.

Each budget includes a revenue target from the sale of oil and a target volume of oil sales. By comparing these two numbers with the price of oil fixed in the budget, it is possible to arrive at the dollar exchange rate on which the budget depends. This exchange rate, which we can call the budget exchange rate, expresses how many rials the Iranian government estimates it can spend for each dollar it earns. It is therefore a much better exchange rate to use when trying to account for different levels of purchasing power between countries when it comes to government expenditure.

For the draft budget in the Iranian calendar year 1401, which was submitted in November 2021 and forms the basis of SIPRI’s 2021 expenditure estimate, the budget exchange rate was IRR 230,000—a rate five times higher than the IRR 42,000 official rate. In other words, SIPRI’s 2021 yearbook overstates Iran’s military spending by a factor of five. Using the budget exchange rate, Iran’s total military expenditure is just $4.5 billion, a total that places Iran outside of the Top 40 military spenders in the world. The below chart compares the military expenditures reported by SIPRI using the official exchange rate and expenditures calculated according to the budget exchange rate.

In the last few years, annual inflation in Iran has been as high as 40 percent, leading to a sharp increase in nominal expenditures. But by using the official exchange rate, which has been capped since 2019, SIPRI has failed to account for the impact of inflation on relative prices between the dollar and rial. In some respects, this is a surprising mistake for the researchers to make, as analysts of Iran’s military expenditures have warned about the difficulty of pinning down real expenditures given Iran’s topsy-turvy economy. In 2018, Jennifer Chandler, a researcher at IISS noted that in “large increases in local currency, impressive as they might seem, do not necessarily reflect an over-prioritisation of the regime on defence spending.”

Another way to examine whether Iran is spending more on its military is to simply convert from nominal to real spending in the local currency, avoiding the pitfalls represented by the exchange rate. To do so, we can deflate the nominal military spending using Consumer Price Index data published by the Central Bank of Iran. This analysis reveals that Iran’s military spending has been flat for two decades, just barely keeping up with inflation.

The Iranian government does take its defence seriously. But it has developed the means to ensure that defence cheaply by focusing on specific capabilities such as ballistic missiles and drones and by relying on proxies as part of a “forward defence” strategy. Iran’s military does not look like a military backed by $24.6 billion dollars of spending in a single year—where are the next generation fighters, battle tanks, and naval vessels? Yet, regional actors and Western governments continue to assess that the Iranian military poses a significant threat, even while real military expenditures have been flat. To put it another way, Iran has been able to maintain its military spending in the face of sanctions in part because it has long been parsimonious. This raises questions about the wisdom of trying to throttle Iran’s economy to address security threats.

The mistake SIPRI has made is understandable given the scope of the yearbook project and the difficulty of accounting for the peculiarities of each country’s economy. Yet, Iran is likely the country whose military spending is under the greatest international scrutiny, meaning that the impact of the mistake is profound. The exaggerated military expenditures unwittingly reported by SIPRI have reinforced the view of the Iranian military as especially large and threatening. The figures have also been used by a wide range of actors, including Iran’s regional rivals, to justify their own increases in military spending and the acquisition of advanced weapons systems. In this way, the presumed value of military spending has overshadowed the sober assessment of military capabilities. Encouragingly, SIPRI have told me they will “definitely investigate” the exchange rate issue. They will be forced to do so because of a planned change in Iran’s foreign exchange policy that will see the subsidised rate eliminated altogether during this budget year. But while a correction would be welcome, the damage has already been done.

Photo: IRNA