Estudios económicos
Iran, Islamic Republic of

Iran, Islamic Republic of

Population 81.4 million
GDP 5,290 US$
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Synthesis

major macro economic indicators

 

  2016 2017 2018 (e) 2019 (f)
GDP growth (%)* 13.4 3.8 -1.5 -6.0
Inflation (yearly average, %) 9.0 9.6 29.5 34.1
Budget balance (% GDP) -2.2 -1.8 -4.7 -5.2
Current account balance (% GDP) 4.0 2.2 1.3 0.2
Public debt (% GDP) 47.4 39.5 44.2 39.2

(e): Estimate. (f): Forecast. * Iranian calendar: 2019 year runs from the 20th March 2018 to the 21st March 2020.

STRENGTHS

  • Significant gas and oil reserves (second and fourth largest in the world, respectively)
  • Very low external debt
  • Strategic position in the sub-region
  • Large market

WEAKNESSES

  • US withdrawal from Vienna Agreement
  • High inflation
  • Social unrest
  • Unfavourable business environment
  • Lack of infrastructure
  • The presence of Revolutionary Guards in the country’s productive system and their collusion with political circles could hinder the opening-up of the economy
  • World Bank governance indicators place the country at a high level of risk

Risk assessment

Sanctions pushed the Iranian economy into recession in 2018

In May 2018, US President Donald Trump announced the withdrawal of the United States from the Vienna Agreement signed in 2015 between Iran and the P5+1 (the five permanent members of the UN Security Council plus Germany) and the restoration of US sanctions within 90 days (180 days for oil exports). Although this decision does not invalidate the previous agreement, it is likely to plunge the Iranian economy into a new period of recession by gradually cutting it off from the rest of the world. The first sanctions-related impacts began to be felt in 2018, and the economic situation is expected to steadily worsen. In response to the US measures, the European Union has put in place so-called blocking measures that would protect companies carrying out legal activities in Iran from the extraterritoriality of US sanctions (laws allowing non-US companies to be prosecuted abroad, provided they have a link with the US). Despite this, several European companies have said that they are shutting down their activities. At the same time, under American pressure, the main Asian partners have scaled back their purchases of Iranian oil, resulting in a decline in oil exports since August 2018. Exports are expected to fall from a monthly average of 2.1 million barrels per day (mbd) in 2017 to 1.1 mbd in 2019. The non-oil economy is also expected to suffer from declining trade and investment. Fears of a shortage of dollars caused the rial to collapse on the parallel foreign exchange market, prompting the central bank to intervene through commercial banks. The Iranian currency is said to have lost more than 80% of its value, driving up the prices of imported goods. Inflation is expected to rise again above 30%, hurting businesses and households alike.

 

The government deficit widens as the current account surplus narrows

The government deficit is expected to widen significantly in 2019 in view of the decline in budgetary revenues. These revenues will be hurt still further by the contraction of oil income, which represents 40% of revenues, and by the decline in non-oil revenues, which are expected to suffer from the economic recession. Rial depreciation, coupled with higher oil prices, should, however, help to mitigate the effects of the sanctions. In response to the US decision, the government is considering implementing a package of measures to support the private sector and address food and pharmaceutical shortages.

The reinstatement of sanctions is also likely to impact Iranian banks, which remain unprofitable and poorly capitalised. In 2016, the country undertook a comprehensive reform programme with the support of the International Monetary Fund to accelerate the upgrading of the banking system to international standards and strengthen its contribution to the economy. US authorities want to exclude Iran from the SWIFT network, which would prevent Iranian banks from making international transfers as was the case before 2015. Although the interbank communication network is managed by a Belgian cooperative society, it handles a large proportion of transactions in US dollars, which does not protect it from the extraterritoriality of American law. To defend European interests and maintain trade relations with Iran, the European Union is talking about setting up a euro-based exchange system that could replaceSWIFT.

Despite rial depreciation and declining imports, the contraction in oil exports, which account for 80% of total exports, will cancel out the current account surplus almost completely. Iranian reserves are decreasing but remain comfortable (14 months of imports).

 

US sanctions weaken the Iranian President

The American decision to withdraw from the Vienna Agreement will not be without consequences for Iranian policy. The restoration of sanctions has seriously weakened President Hassan Rouhani, who was re-elected in 2017 for a four-year term, and his government. Under pressure from Parliament, the Ministers of Labour and Economy were dismissed in August 2018. The President also had to defend his economic record before MPs. On that occasion, Ayatollah Khamenei reiterated his confidence in him, but Mr Rouhani seems to have lost a large part of his supporters in the reform camp and remains prey to criticism from conservatives. Ordinary Iranians were first in line to be affected by the sanctions and they are once again facing soaring inflation and shortages of consumer goods. There were many popular protests in 2018 and more are expected in 2019.

Iran's relationship with the Sunni countries in the region is expected to remain tense, but the country will continue its efforts to cooperate with European and Asian countries to limit the impact of sanctions and its isolation.

 

Last update : February 2019

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