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5.1% GDP Growth, $3b FDI in 2016
Domestic Economy

5.1% GDP Growth, $3b FDI in 2016

The World Bank's latest quarterly economic brief of the Middle East and North Africa Region investigates the economic implications of lifting sanctions on Iran as part of the nuclear deal reached between the country and the P5+1 (the permanent members of the UN Security Council plus Germany) on July 14.

> National Effects

The World Bank expects the Iranian economy, which was in recession for two years, to receive a major boost with the removal of sanctions in 2016 and the following year, through increased oil production and exports, auto production, and expansion of trade.

Its estimates show that after sanctions are fully lifted, real GDP growth could reach 5.1% and 5.5% in 2016-17 and 2017-18 respectively, approaching that of the pre-sanctions period.

Moreover, there are estimates that Iran holds about $107 billion worth of frozen assets (including LCs and oil export earnings) overseas, of which an estimated $29 billion will be released immediately after sanctions removal.

> Foreign Direct Investment

Prior to 2011, foreign direct investment to the Iranian economy averaged about $4 billion a year in the form of greenfield investment. Oil and gas industries attracted more than half of total FDI inflows, followed by metal and manufacturing sectors. But greenfield FDI inflows to Iran came to a complete halt with the tightening of sanctions in 2012, and only resumed slowly in 2015.

The World Bank estimates that FDI inflows could range between about $3-3.2 billion in 2016 and 2017 respectively, if sanctions are lifted and economic growth rebounds to 5.5% in 2017. This is twice as much FDI inflows as in 2015 but one-third of the peak in 2003. India, China and Russia, which were the top 3 investors in the 2000s, are expected to be joined by the US and some European countries, particularly Italy, and the UAE. Most of the FDI inflows are expected to go into the oil and energy sector, followed by the automobile and pharmaceutical industries.

> Bilateral Trade

During the first half of the 2000s, European countries including Germany, France, Italy and Greece were Iran’s major trading partners, accounting for more than one third of Iran’s total exports and imports. This share declined significantly after 2005 under former president Mahmoud Ahmadinejad’s foreign policy of “looking to the East”.

In 2011, China followed by India and South Korea were Iran’s major trading partners, while shares of Italy, Greece and Spain in total trade declined sharply. The tightening of sanctions in 2012 shifted the direction of Iran’s trade further towards Asia, particularly China and India, as well as Turkey and the United Arab Emirates.

The World Bank estimates that sanctions reduced Iranian exports by $17.1 billion during 2012-14, equivalent to 13.5% of total exports in that period. The report suggests that the countries that will see the largest increase in trade with Iran after the removal of sanctions include Britain, China, India, Turkey, and Saudi Arabia.

> Economic Sectors

While all sectors could benefit from an opening up of the economy, the automotive and pharmaceutical industries are expected to get the maximum boost. Iran’s car industry is one of the largest industrial sectors, accounting for more than 10% of GDP. After the tightening of sanctions in 2012, the production of cars declined sharply and reached 700,000 annually compared to 1.6 million prior to sanctions.

When sanctions are lifted and international companies resume cooperation with Iran, the expectation is that automobile production will get a boost and reach somewhere close to its pre-sanctions level within the next two years. Production in the pharmaceutical industries will also rise, as these firms will be able to import parts and machinery that have been subject to sanctions. It is expected that pharmaceutical exports to Europe, which were worth $2.5 billion prior to 2012, will resume after sanctions are removed. Exports to Asia and Africa have not suffered a substantial decline as a result of sanctions, but even exports to these continents are expected to increase with the reduction of restrictions on sea cargo transportation and cargo insurance.

 

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