January 16, 2016, will forever be viewed as a watershed for Iran.
On that day, the International Atomic Energy Agency judged that Iran was fully compliant with its internationally agreed nuclear obligations—a ruling that in effect restored the Islamic Republic to the global community of nations and removed a mass of international sanctions that had been piled on the country since 2006.
Keen to make up for lost time, Iran’s President Hassan Rouhani has been urgently seeking to drum up new business. On Jan. 23, he hosted a summit for his Chinese counterpart, Xi Jinping, in Tehran, at which the two sides agreed to boost bilateral trade to $600 billion within a decade. This was swiftly followed by a trip to Italy and France, where contracts worth €50 billion ($55 billion) were signed.
Iran’s economy boasts the largest natural gas reserves in the world and the fourth-biggest oil reserves, and yet it has a diversified economy (including a significant manufacturing sector), all backed up by a large, youthful, well-educated and welcoming population.
But the business climate poses challenges. And the finger of blame for the tricky trading environment should not be pointed solely at Iran; an array of residual US sanctions can snare the more unwitting investor and Iran’s economic momentum is still too dependent on the vagaries of the global oil market.
In a white paper, the Economist Intelligence Unit has sketched out an economic roadmap of Iran’s future, outlining the most promising economic sectors within the world’s most exciting emerging market, but also detailing the country’s regulatory impediments to business.
Parts of the report are presented below:
Real GDP Growth
After five years of sanctions-driven stagnation—during which the Iranian economy shrank by an aggregate 4%—the Economist Intelligence Unit expects Iran to witness a major turnaround in 2016-20, as the lifting of nuclear-related US and EU sanctions propels the country to the top of the regional growth rankings.
The most immediate driver of this growth will be a rapid recovery in oil exports (including oil long stored in tankers offshore) which, having been roughly halved by sanctions, are set to rise by around 700,000 barrels/day by the end of 2016.
There will be further increases in 2017-20, but the size of these will depend in part on whether Iran can persuade technologically advanced international companies to invest in the sector.
(Based on an agreement with Total in January, the French energy giant will look into development and exploration opportunities in Iran.) Investment in Iran’s underexploited natural gas reserves, in particular, could increase dramatically.
The lifting of sanctions on the financial sector, which will see Iran’s reincorporation into the Society for Worldwide Interbank Financial Telecommunication network, will help ease general trading and investment conditions, and therefore provide a big boost to Iran’s sizable non-oil sectors.
With rising inward investment and an improvement in the public finances, private consumption will also strengthen (as will import growth).
Overall, given Iran’s hydrocarbons wealth, demographics and economic diversity, the comprehensive nuclear deal could herald a return to trend real GDP growth rates of around 5%.
However, growth will remain below potential, given the challenging business environment and the ongoing slump in oil prices (which will prevent any post-sanctions budget giveaways).
Exchange Rate, Inflation
Years of fiscal incontinence during the presidency of Mahmoud Ahmadinejad (2005-13), followed by the 50% devaluation of the Iranian rial in 2013, drove a surge in Iranian inflation, which peaked at 45% in mid-2013. However, with the administration of President Hassan Rouhani restoring fiscal prudence and global commodity prices slumping, consumer price growth fell to a five-year low in 2015.
The Economist Intelligence Unit expects consumer price inflation to fall further to 12.5% in 2016, as the onset of sanctions relief eases bottlenecks and services costs (insurance) on imports moderate—a trend that will allow average consumer price inflation to drop below 12% in the latter part of our 2016-20 forecast period.
Falling inflationary pressures will be supported by a more stable exchange rate, including a narrowing of the gap between the official and the black-market rates (the latter of which is currently about 35,000-37,000 rials:$1), as the lifting of sanctions and the subsequent uptick in inward investment boost confidence in the rial.
The ability of the Central Bank of Iran to manage the exchange rate should improve, as it gains access to foreign reserves currently frozen abroad.
