World Bank Confirms Huge Increase in Iran Trade Surplus

Iran has registered a huge increase in its current account surplus from 2.7% of GDP in 2015 to 6.5% of GDP in 2017, the World Bank has said.

According to WB's Economic Monitor report for the MENA region published on Tuesday, Iran is one of two countries in the Middle East and North Africa that are expected to register a high current account surplus in 2017 and the only country with a fiscal deficit of less than 1 % of GDP in that year.

The global institution indicated that Iran's growth in 2016 is estimated to have reached 6.4%, following a 1.8% contraction in the previous year, resulting from higher growth in the mining, manufacturing, services and agriculture sectors.

Oil exports have increased significantly due to an increase in production from 3.2 million barrels per day in 2015 to 3.7 million in 2016, which is expected to reach 4.2 million barrels in 2017.

It adds that the country's fiscal deficit is expected to turn into surplus in 2018. Putting all this together, the Washington-based lender expects growth to stay above 4 % by 2019, higher than other oil exporters in the region.

"Iran is back in the spotlight after the implementation of the Joint Comprehensive Plan of Action last year, attracting more foreign direct investment mostly in the oil sector," the report said.

It says, however, that growth prospects in the medium term are expected to be modest due to near capacity oil production and weak non-oil sector activity.

"The latter will not pick up unless FDI recovers, the economy reconnects with the international banking system and more progress is made in implementing domestic reforms," it said.

Among other warning signs, unemployment has "ratcheted up" and "inflationary pressures" have started to increase.

Outlook

GDP growth in the first half of the last Iranian year (ended March 20, 2017) reached 7.4 % YOY. The boost in growth was largely a result of the oil sector’s rebound both in production and exports, following the removal of sanctions in January 2016 through JCPOA.

However, economic activity seems muted in non-oil sectors (0.9% YOY growth in the first half of 2016) as the delay in the Iranian banking sectors’ integration with the global banking system continued to impede FDI and trade.

Gross capital formation continued to contract in the first half of 2016, raising concerns for the medium-term outlook. Higher-frequency economic activity data suggest some signs of growth in the non-oil sectors, albeit not widespread. Contraction in the construction sector slowed down as private investment in new construction projects grew rapidly after five consecutive quarters of decline.

Inflation appears to be stabilizing at around 10% after a declining trend over the past three years. This signals that the output gap is closing. The Central Bank of Iran has actively pursued tight controls on keeping the nominal exchange rate stable and resisted depreciation primarily relying on oil-based foreign exchange reserves.

As a result, the real exchange rate has appreciated, which undermines the competitiveness of non-oil exports.

By allowing a higher number of transactions to take place at the market rate, the government managed to reduce the gap between the official and market exchange rates from 112% in 2012 to 14% in September 2016, which increased to 20% in December. Yet, the planned unification of the two rates has been delayed to the next fiscal year.

The unemployment rate increased significantly to 12.7% in the second quarter of 2016 and remains particularly high among women and youth.

In the medium term, with some recovery in investment growth, Iran’s economy is expected to experience moderate growth rates, at slightly over 4%.

The contribution of exports will diminish, as spare capacity in the oil sector is utilized and the rise in oil production decelerates. On the production side, the revival of non-oil industrial production is expected to be the main contributor to overall growth. Agriculture and services sectors are projected to grow by around 4% and 3%, respectively.

The gradual change in the composition of growth could also help increase employment due to higher job elasticity in these sectors.

While fiscal balances in the last few years suffered from low oil revenues, in the medium term, spending pressures will dominate, given the expected rise in interest payments from securitization of government arrears and the continued pressures from the pension system. Improved tax collection and prudent management of spending will help achieve a budget surplus in 2018-19.

Risks and Challenges

According to WB, the major risk in the near future is the political uncertainty around the full implementation of JCPOA. In addition, the Iranian presidential elections are scheduled for May. These are likely to continue influencing consumer/investor confidence and may lead to a further weakening in private consumption and investment.

Under this scenario, GDP growth will remain below 3%. Furthermore, lower than projected oil prices will put pressure on government revenues and undermine growth.

"Going forward, the main challenge still facing the economy is channeling the ‘oil boom’ in a direction that will benefit the broader population," the report said.

This would call for pursuing the structural reform agenda that will boost non-oil sector growth, connect the Iranian banking sector with the rest of the world and improve trade linkages. Most importantly, reforms facilitate much needed job creation, especially for the country’s young and highly educated population.

IMF Assessment

The International Monetary Fund has also published its latest World Economic Outlook, predicting GDP, consumer price, current account balance and unemployment rates for the Iranian economy for the immediate future.

According to the IMF report, titled "Gaining Momentum", Iran growth is projected at 3.3% for 2017, which will rise to 4.3% in 2018. The fund put the country's growth for 2016 at 6.5%.

IMF then makes projections about consumer prices, noting that Iran's inflation will be at 11.2% and 11% registered for 2017 and 2018 respectively. This is while the international organization confirms the single digit inflation of 8.9% for 2016, achieved for the first time after 26 years.

IMF's predictions on the rate of unemployment underscore what has been commonly referred to as one of the main challenges facing the Iranian economy and what will be a hot-button subject in the upcoming presidential elections on May 19.

As pointed out by the fund, Iran grappled with a 12.5% unemployment rate in 2016, which will remain unchanged for 2017 and 2018.