CBI: Non-Oil Sector to Expand by March 2018

EghtesadOnline: The Central Bank of Iran has projected that the country's non-oil sector's growth in the fiscal 2017-18 will outpace that of the preceding year, which was 3.3%.

News ID: ۷۴۴۸۰۰

03 February 2018

The closely-watched indicator, which often accounts for a meager share of the oil-dependent country's economic growth, has in recent years become a touchstone for measuring the level at which the economy is running on the right track.

CBI Governor Valiollah Seif had earlier put the country's economic growth for the current fiscal year (ending March 20) at 5%, indicating that the share of non-oil growth would be significant in the absence of the enormous uptick in oil exports that drove the 2016-17 growth. In that year, on the back of an oil export resurgence triggered by sanctions relief, the country achieved a 12.5% GDP growth.

The upbeat CBI forecast on its website marks the bank's performance in the 11 months leading to Feb. 1 on the occasion of the 39th anniversary of the Islamic Revolution, according to Financial Tribune.

The International Monetary Fund in its latest review of Iran's economy predicted growth to reach 4.2% in 2017-18, which it said would be sustained or even rise to 4.5% over the medium term, if the financial sector reform takes hold.

In its report, CBI also notes that the median growth for the country in the past four years (with Hassan Rouhani at the head of the government) has been 3.3%--a noteworthy development after successive years of lackluster growth or contraction registered by the previous administration.

The bank also notes that its monetary easing program of helping buoy the working capital of enterprises, especially of small- and medium-sized ones, has had a major impact on attaining positive growth rates.

According to the bank in the first half of the current year to Sept. 22, economic growth has been 4.5%, with the non-oil sector accounting for 4.1%. It noted that during H1, all the main economic sectors have had a positive value added, including agriculture at 2%, oil at 4%, industries and mines at 4.5% and services sector at 3.8%.

Currency Market Volatility

Another point again emphasized by CBI in its recent report is stability in the foreign exchange market in the past few years, despite the occasional volatility. The bank said providing hard currency to importers and reducing the waiting period for it have been among its achievements.

It notes that the foreign exchange rate has had had little fluctuations in the open market, evidenced by the fact that the rial was quoted at 36,440 in 2016 to the dollar having weakened by 5.6% compared with the previous year while it averaged at 39,275 rials in the 10 month to Jan. 20–down by 8.8% at an annualized rate.

The rial is now hovering above the psychological barrier of 46,000 to the USD, having weakened to record lows repeatedly in the past few weeks before gaining some ground after the CBI launched a large-scale intervention.

In late January, the rial dropped to around 46,500 against the dollar in the open market from 37,700 in mid-2017. This was particularly shocking, considering the Rouhani administration's policy of keeping the rial strong.

In 2012, the rial lost around 70% of its value against the US dollar at a time of unprecedented volatility, which has made later administrations keen on not repeating the snafu.

CBI also sees the stability of the currency market as going hand in hand with low inflation rate that dropped to single digits after quite a long time in 2016. It announced in the summer of 2016 that the country’s inflation rate had dropped to 9.7% in the 12-month period ending June 20.

Iran’s inflation rate eased into single digits for the first time in a quarter century following the lifting of sanctions against Tehran after the implementation of the landmark nuclear agreement, known as the Joint Comprehensive Plan of Action, in January of that year.

Although the inflation rate climbed back into the double-digit territory in January–a factor the CBI mainly traces to the boom in the housing sector, a weakening rial and the surge in liquidity–the banks hopes that with continued monetary and fiscal discipline, achieving single-digit inflation will again become a possibility.