Domestic Economy

EIU Forecasts 1.7% Growth for Iran

EIU Forecasts 1.7% Growth for Iran EIU Forecasts 1.7% Growth for Iran

A new report from the London-based Economist Intelligence Unit (EIU) has forecast Iran's gross domestic product (GDP) at 1.7% in fiscal year 2014/15 (March 21-March 20th), up from -1.9% last year.

The report, which was released on Sept. 22, said growth will be weak but it could rebound "much faster" if western sanctions against Tehran are lifted in the next few months.

Iran and the P5+1 group have a November 24 deadline to reach a comprehensive deal over Tehran's nuclear energy program. The deal is expected to help lift the sanctions in exchange for Iran limiting parts of its nuclear activities.

Real GDP has contracted for a second year ending March 20 2014, declining by 1.9% according to a statement from the Central Bank of Iran (CBI). This followed a 6.8% contraction in real GDP in the year prior.

The British publisher of information on business developments and economic trends said it forecast "the economy will recover slightly during the remainder of the forecast period, growing by an average of around 2.3%, with oil export volumes edging up".

Such levels of GDP growth are substantially below the country's historical trend and potential, the report said, "given the country's hydrocarbons wealth and economic diversity."

The publisher underlined that the diplomatic progress increased "the upside risk" to the forecasts, adding, "If a further nuclear deal in 2014/15 prompted the lifting of sanctions on oil exports and the financial sector, the economy would be able to grow much faster."

Between March 2001 and March 2012, real GDP growth averaged 5.3% a year, the report said, forecasting that although investors will have to contend with a challenging business environment in the coming year, a comprehensive nuclear deal can make the real GDP growth rate reasonable at the same level," possibly with a lag of 12 to 18 months."

The Rouhani administration will continue to try to improve economic management, such as inflation and interest-rate policy, which could improve the fundamentals, the report noted.

It went on to say the administration sees sanctions as "the key determinant of the course of the Iranian economy," adding, "we expect oil production to make only marginal gains in 2014-18 (and to remain well below pre-2012 levels) as long as sanctions remain in place."

More technologically advanced foreign companies are likely to invest in the oil sector, following a greater easing of sanctions; so that way production of hydrocarbons, particularly its relatively under-exploited natural gas reserves could increase dramatically.

> Inflation Forecast

Inflation will ease back in 2014, as a result of a high base effect and a more stable exchange rate, but it will remain high over the forecast period, the report said.

Iran has experienced high inflation in recent years, owing to both domestic policy – including a subsidy reform plan, related cash handouts and expansionary funding of housing schemes – and the impact of western sanctions.

It accelerated in 2013 as both the official and unofficial exchange rates weakened sharply and trade restrictions prompted shortages.

"Inflation averaged 39% in 2013 (calendar year). However, the new government has focused on taming inflation, which has trended down from a peak of 45.1% year on year in June 2013 to 14.6% in July 2014; in the January-July period inflation has averaged 18.9% year on year. A sharp downward trend in food price inflation, helped by weak global prices, has also contributed significantly to lower inflation.

Food prices have a 26% weighting in the consumer price index.

The government said a single-digit rate of inflation will be achieved by 2016/17. But the report said it expects "inflation to remain high, to moderate from an average of 17.8% in 2014 to 10% in 2018, helped by greater exchange-rate stability and tighter monetary and fiscal policies."

Ongoing shortages and further price rises related to the Subsidy Reform Plan will keep inflation at high levels, it added.

> Exchange Rates

The central bank introduced a new official exchange rate of around 25,000 rials against the dollar in July 2013. This was a significant devaluation from the previous reference rate of 12,260 rials against the dollar introduced at the start of 2012. Although the new official rate is closer to the market rate to which most Iranians have access, there is still a substantial divergence, the report noted.

The market rate is now around 32,000 rials against the dollar,  while the rial fell to around 39,000 against the dollar just before the June 2013 presidential election and appreciated to a level under 30,000 rials against the dollar in January 2014.

"If Iran manages to win greater concessions on sanctions, we would expect the gap between the two rates to narrow, improving confidence in the official value of the rial", the report said.

The EIU is an independent business within The Economist Group providing forecasting and advisory services through research and analysis.