Iran’s H1 Growth Positive Territory

EghtesadOnline: The gross domestic product, excluding oil, has been positive during the first six months of [the Iranian year] 1398 [March 21-Sept. 22], the governor of the Central Bank of Iran said in his Instagram post.

News ID: ۷۴۹۲۲۰

18 December 2019

Abdolnasser Hemmati added that in the second quarter of the current fiscal year (June 22-Sept. 22), the sectors of "agriculture", "industry & mines", and "services" saw respective growth rates of +9.5%, +0.4%, and -1.4%, leading to an overall economic growth of +0.6% in Q2.

"All in all, we’ve experienced a +0.5% in [non-oil] economic growth during the first half of the year," Financial Tribune quoted him as saying.

Referring to growth in the oil sector, the CBI chief said, "The oil sector is facing its own special circumstances."

Iran has been selling significantly lower volumes of oil due to US sanctions, so the sector is expected to have contracted considerably.

In a piece published on the central bank's website, Hemmati first announced the comeback of growth to Iran's economy in September: "The first three months of the year [13]98 [current Iranian year that started March 21], saw the non-oil sector, which is the productive sector of the economy, grow 0.4% compared with the corresponding period of [13]97 [last Iranian year]."

"Although this growth is below the potential capacity, considering the negative growth rates of the three preceding quarters and the beginning of decline in inflation, it's a cause for hope," he added.

The CBI chief attributed the Q1 growth to the return of relative stability in the value of national currency against foreign currencies and the die-down of external shocks from sanctions and the United States’ "maximum pressure" campaign against Iran.

The rial lost about two-thirds of its value against the dollar in the last Iranian year (ended March 20, 2019). The national currency has regained part of the lost ground this year, albeit with fluctuations in recent months.

Iran's gross domestic product shrank by 4.9% in the fiscal 2018-19 compared to the year before, according to the Statistical Center of Iran.

Economic growth, excluding oil production, stood at -2.4%.

Production in the two groups of "industry" and "agriculture" contracted by 9.6% and 1.5% respectively. "Services" posted a meager 0.02% growth.

The weak performance of the economy should be traced back to last year's reimposition of US sanctions described as "toughest ever" after it unilaterally quit the nuclear deal Iran had signed with six world powers, including the US, in 2015.

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 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, Iran's main source of revenue, has taken the brunt of sanctions.

Agricultural Boost

The solid increase in agricultural production this year has been the main driver of economic growth.

As mentioned above, the sector saw the highest growth rate of +9.5% in H1. With 6.5%, the agriculture sector also saw the highest growth among Iran's economic sectors in Q1. The rate for last year's corresponding period stood at 0.3%.

The significant boost in agricultural production owes largely to abundant rainfall at the beginning of the year, which led to increased yields of crops.

"Growth in the agriculture sector has saved the Iranian economy over the past two years," says the caretaker of Agriculture Ministry, Abbas Keshavarz.

According to former agriculture minister, Mahmoud Hojjati, Iran meets 85% of its demand for agricultural products domestically and the remaining 15% are procured through imports.

Iran annually produces $80 billion worth of agricultural products, $75 billion of which are consumed inside the country.

Director General of the Ministry of Industries, Mining and Trade's Food, Medicine and Toiletries Industries Department Mehdi Sadeqi Niyaraki said 95% of Iran’s food industry are owned by the private sector, noting that the sector accounts for 15% of the country’s industrial employment.

14 Years Before Reverting to Fiscal 2017-18

President of Tehran Chamber of Commerce, Industry, Mines and Agriculture Masoud Khansari said Iran's economy will experience a growth of only up to 4% over the next five years.

"If we go on like this, we will only be able to make up for 30% of regressions experienced in [13]96 [March 2017-18] and it will take 14 years to revert back to the economic conditions in that year," he said in an address to a meeting of representatives of TCCIM on Tuesday.

The growth in the fiscal 2017-18 has been put at 3.7% by both CBI and SCI.

IMF, World Bank Forecasts

The International Monetary Fund expects Iran's economy to further shrink to -9.5% in 2019 from an estimated -4.8% in 2018.

IMF's latest World Economic Outlook report shows the country will experience zero economic growth in 2020. It had previously forecast Iran’s economy to shrink by 6% this year, but that estimate preceded Washington’s decision in April to end six months of waivers that had allowed Iran’s eight biggest oil buyers to continue importing limited volumes, Reuters reported.

"Iran, a large oil producer, saw its oil revenues surge after a 2015 nuclear pact agreed with six major powers that ended a sanctions regime imposed three years earlier over its disputed nuclear program,” Reuters wrote.

However, after last year's reimposition of US sanctions, Iran, along with other emerging market economies, continues to experience “very severe macroeconomic distress”.

The report came after the World Bank said in an autumn economic update that Iran’s economy is expected to contract further by 8.7% in 2019-20 due to external shocks to oil and gas output.

The plummeting exports come after the expiration of US waivers to major importers of Iranian oil and tightening of banking restrictions, in addition to new sanctions being imposed on the country’s petrochemical, metals, mining and maritime sectors, the World Bank report reads.

"The expected deterioration in economic growth would mean that by the end of 2019-20, the economy would be 90% of its previous size compared to just two years earlier. The oil sector decline, coupled with international trade and capital flow restrictions, has negatively influenced economic activity in key non-oil sectors, including automotive, machinery and construction, which have faced supply chain challenges and higher operational costs. Similarly, the GDP expenditure components are to be strongly influenced by the shock to exports.”

The World Bank noted that the simultaneous reduction in imports is expected to moderate part of the downward pressure on trade balance and the current account.