WB Predicts Bigger Growth for Iran

EghtesadOnline: The World Bank forecasts that recent developments in Iran point to the fact that the country's non-oil sector and investments are likely to play a bigger role in the next few years, which will spur Iran's growth to an average of 4.1% in 2017–19.

News ID: ۷۴۲۴۶۷

03 July 2017

According to the global lender, this positive growth outlook hinges on the assumption that some of the agreements between Iran and major foreign companies in the oil, gas and other key sectors, including manufacturing, will materialize.

"This [new landscape] would create renewed confidence, validating the very positive expectations generated in the immediate aftermath of JCPOA implementation in January 2016 and leading to gradually improving medium- to long-term growth dynamics as potential output starts to rise as well," WB said in its latest report on Middle East's second-largest economy.

The bank cautions, however, that as Iranian banks face barriers in establishing correspondent banking relations with large international banks, foreign direct investment inflows to Iran and trade relationships with the rest of the world are restrained, according to Financial Tribune.

The optimism is tainted by a caveat, as the bank warns there are significant downside risks to the moderate outlook. The major risk in the near future is considered to be the political uncertainty around the full implementation of JCPOA. This is likely to continue influencing consumer/investor confidence and may lead to a further weakening in private consumption and investment.

Furthermore, lower than projected oil prices could put pressure on government revenues and undermine growth.

Iran Economic Monitor

The report, dubbed Iran Economic Monitor, confirms that Iran's economy recorded an impressive recovery in 2016 in line with favorable expectations after the removal of the nuclear sanctions.

A number of new agreements have been signed between Iran and international partners, but renewed uncertainty regarding the full implementation of JCPOA has hindered project initiation.

According to Iran's Foreign Minister Mohammad Javad Zarif, more than 84 political delegations and numerous economic missions visited Iran in 2016 while in the same period Iranian delegations visited 57 countries.

Since January 2016, the total value of the agreements signed between Iran and potential investors is estimated to have reached $8-12 billion. However, even the higher estimates fall short of the authorities’ targets for the medium term.

Following a contraction of close to 2% in 2015, GDP grew by an estimated 6.4% in 2016, the fastest since 2010. While there are signs of a spillover into the non-oil sectors, this growth performance was driven primarily by the bounce back in oil production and particularly in oil exports, despite lower oil prices, the WB report said.

Iran’s ability to increase production despite the cuts agreed to by the rest of OPEC members helped production near its pre-sanctions levels, it added.

The surge in exports led to a sharp improvement in the current account surplus to 6.5% of GDP in 2016, as growth in imports remained stagnant.

As oil revenues gained pace, the budget performance also improved and the deficit shrank to 1.5% of GDP in 2016 from 1.9% a year ago.

Notwithstanding the achievement of single digit inflation in 2016, inflationary pressures have resurfaced toward the end of the year, as liquidity rose, the Iranian rial continued to depreciate and economic activity picked up.

Against this background, the Central Bank of Iran has postponed the unification of the official and market exchange rates to the end of 2017.

Significant Reforms

Going forward, implementing the domestic reform agenda is likely to bring the highest growth dividend in the medium- to long-term for Iran, even if the external conditions remain the same, the report said.

The challenge faced by the recently reelected President Hassan Rouhani and his government will be to prioritize the reforms outlined in the sixth five-year development plan (2017-22) and steadily implement them.

This would involve tackling the structural reform agenda that will boost non-oil sector growth, by creating a level-playing field for existing and new firms, improving the business environment and the efficiency of labor markets.

In the long run, the primary determinant of Iran’s growth prospects, according to the World Bank, is likely to be how effective the country utilizes its resources beyond oil and gas.

Growth simulations for Iran’s long-term growth prospects conducted for the report suggest there is great potential to be exploited in moving toward the technology frontier and better utilizing Iran’s abundant educated labor force.