Iran's Economy to Shrink, Before Ascending in 2020: World Bank

EghtesadOnline: Latest World Bank projections show Iran's gross domestic product will continue to contract in 2019, before reversing gear in 2020.

News ID: ۷۴۶۴۶۶

12 January 2019

According to WB's latest "World Economic Prospects" report published after the New Year, Iran's GDP is bracing for further contraction in 2019 to reach -3.6% after experiencing an estimated -1.5% in 2018 before stabilizing in the positive territory at 1.1% in 2020 and 2021.

The estimates for 2018, 2019 and 2020 show -5.6%, -7.7% and -3.1% changes compared to World Bank's June 2018 projections.

US Sanctions Impact

The main contributing factor to contraction of Iran's economic growth goes back to US sanctions imposed against the Islamic Republic last year, according to Financial Tribune.

US President Donald Trump announced on May 8 his withdrawal from the nuclear deal Iran had signed with world powers in 2015 and rolled out a new sanctions regime against Tehran, described as "toughest ever" in the following months.

The first round of renewed US sanctions reimposed on Aug. 7 prohibits Iran's purchase of US dollars and precious metals, part of a larger move that attempts to cut the country off from the international financial system. A second tranche of sanctions on Iran's oil and gas sector took effect on Nov. 4.

Oil Factor

Iran will see its crude exports severely curtailed for a third month in January, as it is struggling to find new buyers amid fresh US sanctions even though its traditional customers secured waivers, according to tanker data and industry sources.

Iran’s crude exports in November plummeted to below 1 million barrels per day, from regular sales of 2.5 million bpd before sanctions were imposed in May, and taking them back to where they stood during the previous round of sanctions in 2012-16, Reuter reported.

Buyers said plunging exports in November, which will severely hit the Islamic Republic’s budget revenues, were caused by a total lack of clarity of what volumes they were allowed to purchase under the new US sanctions.

Washington later granted a set of waivers to eight traditional Iranian oil buyers, including China, India, Japan and South Korea, to avoid a rally in oil prices, but the measure has failed to give a meaningful boost to exports.

According to tanker data and industry sources, Iran’s crude shipments remained below 1 million bpd in December and are unlikely to exceed that level in January despite rising month-on-month.

Iran has said its exports have not declined as was estimated by the industry because it was selling oil to new buyers. But it declined to disclose them because of fear of new sanctions.

The oil sector was the main propeller of growth in Iran following the lifting of international sanctions against the Islamic Republic in early 2016 after the nuclear deal came into effect.

Later, however, as crude output was ramped up and the production capacity neared pre-sanctions levels, growth in the key sector slowed down.

With the US reimposing sanctions against Tehran and forcing other countries to stop importing oil from Iran, growth in this sector is expected to decline further.

Obviously, a decline in oil production, the main driving force behind Iran's economic growth, will translate into a sharp fall in overall GDP growth.

IMF Estimates

The International Monetary Fund, in its latest World Economic Outlook, has said it expected Iran's economy to have contracted in 2018 and further more in 2019 as a result of the reimposition of US sanctions against the Islamic Republic.

"Prospects for 2018–19 were marked down sharply for Iran, reflecting the impact of the reinstatement of US sanctions," read the IMF report.

"The downward revisions reflect to an important extent the worsening of growth prospects for Iran, following the reimposition of US sanctions. The economy is now forecast to contract in 2018 (-1.5 percent) and especially in 2019 (-3.6 percent) on account of reduced oil production, before returning to modest positive growth in 2020–23."

Growth in Recent Years

Latest data concerning Iran's economic growth show gross domestic product hit 3,738 trillion rials ($34.35 billion at the exchange rate of 108,800 rials per dollar) during the first half of the current fiscal year (March 21-Sept. 22) to register a 0.4% growth compared with last year's corresponding period.

According to SCI, excluding the share of oil sector from GDP, the figure stood at 2,899 trillion rials ($26.64 billion), which indicates a 0.3% growth year-on-year.

The breakdown of GDP for the three economic sectors under SCI review shows only the services sector experienced 2.3% growth, while the sectors of agriculture and industry saw contractions of 2.5% and 1.2% respectively.

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.

SCI and CBI both release periodic reports on Iran's macroeconomic data. The results, however, often differ due to different methods used in calculations.

Growth in 2015-16 has been put at -1.6% by CBI 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 World Bank says the GDP grew by 13.4% and 3.8% respectively in 2016 and 2017.