Parliamentary Think Tank: Iran’s Economy to Contract

EghtesadOnline: The research arm of the Iranian Parliament expects the economy, as measured by the gross domestic product, to contract between 0.5% and 2.8% by the end of the current fiscal year (March 2018-19).

News ID: ۷۴۵۹۴۵

01 September 2018

According to the Central Bank of Iran and the Statistical Center of Iran, Iran's economy grew 3.7% during the last fiscal year (March 2017-18).

According to Majlis Research Center, the performance of the Iranian economy will be impacted by US sanctions more than anything else this year.

On May 8, US President Donald Trump withdrew from the 2015 Iran nuclear deal and unilaterally reimposed sanctions on the country, in defiance of the deal’s five co-sponsors—Britain, China, France, Germany and Russia, according to Financial Tribune.

The first wave of the sanctions went into effect in August and the second will be implemented in November. The US has announced it will punish foreign companies and banks that continue to do business with Iran. The five other major powers have decided to resist US pressure.

The US administration’s goal is to cut off the Islamic Republic’s ability to export oil, its prime source of revenue and foreign exchange.

According to two scenarios outlined by the parliamentary think tank, Iran’s economy is projected to contract 0.5% (with the cooperation of European countries) or 2.8% (without the cooperation of European countries). The GDP growth, excluding oil, is predicted to be between 1.9% and 0.8% respectively.

The think tank also projects that Iran’s economic growth should see a contraction of between -3.8 and -5.5 in the fiscal 2019-20, provided the government takes no action to counter and neutralize the impacts of sanctions.

Iran’s economy emerged from recession in the fiscal 2014-15 with a 3% growth after two years of recession when the economy contracted 5.8% and 1.9% back to back, according to the Central Bank of Iran.

Growth in 2015-16 has been put at -1.6% by the Central Bank of Iran and 0.9% by SCI.

CBI has put 2016-17 growth at 12.5% while SCI says it was much lower and near 8.3%.

The astronomic growth experienced in Iran after the removal of international trade restrictions on the economy following the nuclear deal Iran signed with world powers in 2015 (that came into force in Jan. 2016), owed to a great extent to Iran's ability to increase its oil sales.

Later, however, as crude output ramped up and production capacity neared pre-sanctions levels, growth in the key sector slowed down and improved performance in other sectors of the economy.

> Risks of 2nd Phase of Sanctions

The second and heavier phase of US sanctions aimed at Tehran is expected to tip the Iranian economy back into recession with its GDP set to contract by 3.7% in 2019, global forecasting and quantitative analysis consultancy Oxford Economics said on August 28.

The sanctions, due to take effect on November 6, target “Iran’s oil industry and crude exports that form the backbone of the economy and the primary source of revenue and foreign currency for the government [and they] will cripple the economy”, Mohamed Bardastani at Oxford Economics said in a note, bne IntelliNews reported.

Bardastani noted that a GDP contraction of 3.7% in 2019 would be the worst economic performance by Iran in six years.

“For 2020, we see growth of 0.5%, driven by a modest recovery in private consumption and net exports,” he said.

Oxford Economics previously argued that sanctions introduced against Iran by the US this year would prove less severe than the sanctions of 2011.

“However,” said Bardastani, “it now looks like the impact will be worse than we initially thought as the other signatories to the original [Iran nuclear] deal have yet to spell out a clear strategy that would allow them to circumvent US sanctions and continue importing Iranian oil.”

China, the number one importer of Iranian crude, in early August rebuffed a request from the US to stop purchasing oil from Iran, although the details of its commitment remain scarce.

Europe, meanwhile, this week came under pressure from Tehran to accelerate efforts toward the provision of guarantees on accepting Iranian oil and preserving banking relations.

India, the second largest purchaser of Iranian oil, is pressing Washington to give it a waiver that will allow it to keep importing around half the volume of Iranian oil that it usually accepts.

South Korea, another significant importer of Iranian oil but also much dependent on the US in terms of security, looks to be bowing to the Trump administration in a move that may reduce its purchases of crude from Iran to nil.