Middle East Bank Presents 9-Month Economic Overview

Official statistics indicate that Iran’s economy performed exceptionally well during the three quarters of the last Iranian year (March 20-December 20, 2016).

The surge in oil production resulting from the implementation of the Joint Comprehensive Plan of Action and the firming up of global oil prices were the main reasons for this high growth.

The implementation of JCPOA also meant lower uncertainties and fewer trade sanctions that in turn helped boost non-oil exports, especially petrochemicals. Other sectors experienced positive growth rates as well.

As the exceptional GDP growth during the three quarters was primarily due to the utilization of unused production capacity in the oil and gas sector, but in the absence of a massive investment drive, a comparable performance is not expected in the current Iranian year (started March 21), reads the Middle East Bank’s recently published quarterly report on Iran’s economic performance.

Data released by the Statistical Center of Iran indicate that on the basis of constant prices in the fiscal March 1997-8, GDP grew by 7.2% during the three quarters under review.

Value-added in the “Oil and Gas” sector grew by 85.4%, giving rise to 10.5% growth in the “Industries and Mining” sector, despite an 11% contraction of the “Construction” sector.

As shown in Table 1, during the three quarters, “Agriculture” grew by 5.7%, “Services” by 5.4% and “Non-Oil GDP” by 5%.

After a long delay, the Central Bank of Iran also released its official GDP statistics in terms of constant prices in the fiscal March 2011-12 during the last days of the year ending March 20, 2017.

As CBI’s base year is more recent than SCI’s, the central bank statistics present a more “realistic” picture of the current economic conditions.

Table 2 presents the main CBI statistics that indicate GDP growth rates with and without oil of 11.6% and 1.9%, respectively, during the three quarters to December 20, 2016.

The value added in the “Oil” sector grew by 65.4% while “Industries and Mining” sector (excluding oil and gas) grew by only 0.3%, pulled down by a 17.1% contraction of the “Construction” sector. “Agriculture and Services” sectors grew by 4.2% and 2.4%, respectively.

With regard to the different SCI and CBI growth rates, apart from differences in base years and definitions of “Manufacturing and Mining”, the “Oil” sector in CBI classifications includes a wider range of subgroups (such as refineries) and also takes into account oil-related industries not included in SCI’s “Natural Oil and Gas Extraction” group. Accordingly, “Non-Oil GDP” in CBI classifications is closer to the common understanding of the term and therefore, the growth rates of this variable given by the CBI present a more realistic picture.

On the other hand, as oil prices in the fiscal March 2011-12 were about twice those in March 2016-17, CBI’s GDP growth rates, inclusive of oil, overestimates the reality.

By the same token, since oil prices in March 1997-98 were about half of those in March 2016017, SCI’s GDP growth rates in recent quarters underestimate the reality.

An examination of the GDP from the expenditures side reveals a considerable rise in the net export of goods and services in the nine-month period under review.

According to SCI, the export of goods and services rose by 52.8% while their imports rose slightly, bringing about an 81.2% rise in net exports. In the same period, private consumption and government consumption expenditures grew by 2.4 %and 6.8%, respectively.

As shown in Table 3, gross fixed capital formation contracted by 3.7%, indicating that the growth in “Oil and Gas” has not yet stimulated consumption and investment.

The fall in gross fixed capital formation in “Construction” is not surprising, given the continuing recession in this sector, but the persistent fall of gross fixed capital formation in machinery from the beginning of 2015-16 up to the end of the first half of the Iranian year starting March 20, 2016 does not augur well for future GDP growths.

According to CBI, private consumption and government consumption expenditures grew, respectively, by 2.4% and 5.5% at constant prices of March 2011-12.

As shown in Table 4, net gross fixed capital formation contracted by 8.9% as a result of a 14.4% drop of capital formation in “Construction” and 5.3% rise in capital formation in “Machinery”. Exports and imports of goods and services experienced a 45.1% and 7.5% growth in value, respectively.