Iran’s H1 Economic Performance

On the basis of statistics released by domestic sources and international organizations, Iran’s economy has performed well during the first half of the current Iranian year (1395), spanning from March 20 to September 21, 2016.

Central Bank of Iran Governor Valiollah Seif has announced that compared with the corresponding period of last year, the economy has grown by 7.4% during H1, consisting of 5.4% in Q1 (the first quarter) and 9.2% in Q2.

The Statistical Center of Iran had previously put the growth rate in Q1 at 4.4%.

Although the CBI governor did not give the breakdown of GDP growth across all sectors, his economic deputy said that except for construction, all economic sectors had registered positive growth rates and that the high growth was mostly due to the expansion of oil production and exports after the nuclear deal, formally known as the Joint Comprehensive Plan of Action, reads the Middle East Bank’s latest quarterly report on Iran’s economy. Excerpts follow:

  Labor Force

In the summer of the current Iranian year, the number of employed individuals rose by 628,000 from last summer, which is a significant achievement.

Nevertheless, during the same period, the unemployment rate also increased from 10.9% in Q2 of 1394 to 12.7%. This has been caused by active population growing faster than employment.

In other words, the participation rate has grown a lot more than the trend, as a result of the movement of some who were previously categorized as inactive compared to the active category. They included people who had given up on finding employment or had gone to college as a refuge from unemployment and now were returning to the job market.

Besides the rise in unemployment rate, the share of the underemployed also increased in the first two quarters of the year to 8.5% in Q1 and 9.5% in Q2. This indicates that underemployment accounted for a large share of job opportunities in the past year.

Table 1 presents quarterly statistics on the main labor market indices in 1394 and 1395.

The economic participation rate in summer of this year was 64.9% among men and 15.9% among women.

Unemployment rate was 10.3% among men and as high as 20.3% among women.

An examination of the unemployment by age groups reveals the very high unemployment rate of 30.2% in the population between the ages of 15-24 in Q2, which is the highest rate registered for this quarter in the past 15 years.

As for the economic sector of employment, services accounted for 49.1% of employment, industry for 31.5% and agriculture for the remaining 19.4%.

  Prices and Inflation

The point-to-point consumer price index inflation continued its decreasing trend up to 6.8% in 3/1395 but then reversed course and increased to 9.5% in 6/1395. From then on, this rate started a moderate decreasing trend and eventually registered 9.2% in 9/1395 (i.e., 12/2016).

The average annual CPI inflation rate also continued its declining trend to reach 8.6% in 9/1395. An examination of the monetary aggregates reveals that the quasi-money share of liquidity during the four quarters to 6/1395 has changed little.

In contrast, the growth rate of monetary base has dropped from 11.5% in the second half of 1394 to 7.9% in the first half of 1395. In the same vein, the growth rate of liquidity dropped by 6.6% in the same period to reach 10.4%. As such, the drop in CPI inflation may be partly attributed to the fall in the growth rates of monetary aggregates.

In contrast to the decreasing trend of the point-to-point CPI inflation, the point-to-point PPI inflation as the precursor to developments in consumer prices started to increase in 6/1395 and rose at a faster pace in 8/1395 and eventually reached 6.8% in 9/1395.

In light of the lagged effect of PPI on CPI, an increase in the point-to-point CPI inflation is expected for the coming months. The difference between the point-to-point CPI and PPI inflation rates reversed course and decreased from its lowest of 6.8 percentage points in the fifth month of the year to 2.4 in the ninth month. This implies the fact that the growth rate of cost of inputs is approaching the growth rate of PPI, hence the rise in production costs should reach retail prices at a faster pace.

Figure 1 shows monthly CPI and PPI inflation rates in the first nine months of the year.

The degree to which PPI influences CPI is also dependent on the domestic/import composition of the consumption basket. The more domestically produced goods and services in the consumption basket, the more will be the effect of PPI on CPI inflation. It is thus important to investigate the price changes in the two categories of tradable and non-tradable goods.

The point-to-point inflation rate of tradable goods started to increase from 4/1395 and reached 7.7% in 7/1395, mostly as a result of the strengthening of the US dollar against the rial.

In contrast, the point-to-point inflation rate of non-tradable goods started a decreasing trend from the mid-Q2 and reached 11% by the end of the first month of Q3.

Latest data on the consumption basket of goods and services reveal that compared to the preceding month, the price index of all major groups increased in 9/1395 with the exception of “tobacco”.

In the same period, the point-to-point inflation rate in “housing, water, electricity, gas and other fuels” with highest weight in the basket, increased to 9.3%.

This rate in “food and beverages”, that has the second highest weight in the basket, reversed course and increased to 9% in 9/1395. Among major groups of the basket, “health” and “communication” had the highest and lowest point-to-point inflation rates, respectively, registering 17.1% and 0.4%.

This rate is higher in “services” than in “goods”, according to the data on special groups of the basket.

Hence, the rise in the overall point-to-point inflation rate has been mainly due to prices rises in items with higher weights in the consumption basket.

Table 2 presents the CPI inflation rates in 12 main groups of the consumption basket.

  Balance of Payments

According to the CBI data, compared with the similar period of last year, in Q1 of 1395 production and exports of oil (including crude oil and net exports of petroleum products) increased by 14.6% and 41.2%, respectively, to 3.5 and 2 million bpd.

The value of oil exports (including crude oil, petroleum products, natural gas and natural gas condensates and liquids) increased by 9.5% despite the fall in oil prices in the first quarter of the year. This rise, in conjunction with the fall in the import of gas and petroleum products, led to a 13.4% increase in oil trade balance surplus.

In the same quarter, the 3% increase in non-oil exports along with the 1.5% decrease in non-oil imports resulted in a 7.7% drop in non-oil trade balance. Therefore, the net goods account rose by 36.5% in Q1 of 1395. This rise, in conjunction with the 33.5% increase in services account deficit and the small drop in both net income and current transfers accounts, resulted in a 32.5% rise in current account surplus in Q1.

In the same period, net capital outflow reached $5 billion, indicating a 19% increase from the 4.2 billion in Q1 of 1394. Considering errors and omissions worth $6.4 billion, foreign reserves fell by $6.2 billion in that quarter.

According to customs data, in Q2 of 1395 the value of non-oil exports (excluding natural gas condensates) and imports increased by 6.8 and 25.6%, respectively, from Q1 of 1395, and by 17.2% and 7.5% from Q2 of 1394.

Comparing the first half of the year to the same period of last year, there has been a 10.5% increase in the value of non-oil exports and a 2.6% decrease in the value of imports.

Figure 2 exhibits data on imports and exports from Q1 of 1394 to Q2 of 1395.

  First Half Statistics

The value of non-oil exports (including natural gas condensates but excluding crude oil, mazut, kerosene and suitcase trade) in the first half of the year reached $21.7 billion. Hence, non-oil trade balance experienced a surplus of $1.4 billion in that period, in contrast to a deficit of $0.4 billion in the first half of 1394.

Table 3 presents data on non-oil exports in the first halves of 1394 and 1395. As shown there, the value share of petrochemicals has increased while the value shares of natural gas condensates and other goods have decreased in the first six months of this year compared to the same period of last year.

It seems that in post-JCPOA, the positive effects of the easing of international trade sanctions were stronger than the negative effect of oil price falls in the three aforementioned export items, resulting in an increase in the volume and total value of those exports.

During the first half of this year, the main export items were natural gas condensates with a value share of 16.1%, liquefied natural gas with 8.9% and liquefied petroleum gas with 3.8%.

China, the UAE, Iraq, Turkey and South Korea were the main export destinations in this period, in that order.

In the same period, the value share of exports to South Korea experienced a considerable rise at the expense of other destinations. Cattle-feed corn with a value share of 2.7%, soybean with 2.5% and rice with 2.3% were the main import items in the same period, and China, the UAE, South Korea, Turkey, and Germany were the main sources of imports, in this order.

The latest statistical report by the Islamic Republic of Iran Customs Administration indicates that in the first eight months of the year the value of exports (including natural gas condensates) and imports increased by 5.7% and 0.9%, and reached $28.1 billion and $27.4 billion, respectively, compared with the same period of the previous year.

The export value of natural gas condensates in the same period has increased by 46.7%. In this eight-month period, the value share of consumer, capital and intermediate goods accounted for 10%, 68% and 22% of the total value of imports, respectively, indicating that domestic production is still highly dependent on the import of machinery and raw materials.