Iran’s economy could grow substantially if sanctions are lifted, as a result of a possible breakthrough in nuclear talks, which is expected to help oil exports rebound to pre-sanctions levels by 2017, a new report by the World Bank predicted.
For the time being, “cheap oil could mean a 60% drop in fiscal revenues, down to $23.7 billion in 2015 from its peak of $120 billion in 2011/12,” the report added. A loss of about 20% of GDP would be expected, bringing GDP growth down to zero (from the previous year’s 1.5%), and the economy would continue to shrink, the World Bank report stated, adding that “this will put tremendous pressure on inflation, unemployment, the fiscal deficit and the currency.”
The government has used an average oil price of $72 in next year’s budget but the break even oil price for the budget is over $110. In a recent move the government is revising the budget to reflect the newly adopted price of $40. To counter the impact of lower oil prices, current and capital spending are being cut in the next fiscal year, while some of the capital projects will be put on hold. If a nuclear agreement is not reached, the economy will suffer dramatically, with negative consequences for both fiscal and external accounts, inflation, and the exchange rate.
According to the World Bank’s MENA Quarterly Economic Brief, for Iran, the major impact of falling oil prices will be through fiscal and external balances and also the status of nuclear talks with the P5+1. In the event of a nuclear deal that leads to the lifting of sanctions over its nuclear energy program, oil exports are expected to rebound to pre-sanction levels by 2017. An extra 1 million b/d could hit the international market. The economy could grow substantially since exports and fiscal revenues are dominated by oil (On average oil makes up about 80 percent of total export earnings and 50-60 percent of government revenues.)
In February 2010/11, prior to the sanctions, oil production was close to 3.7 mb/d of which 2 mb/d were exported. In 2012/13, soon after the sanctions were tightened, crude oil production and exports dropped by 1 mb/d. The World Bank’s estimates show that under a “no-deal” scenario and with oil prices remaining at an average level of $65 p/b, fiscal revenues would drop by 60 percent, reaching $23.7 billion in 2014/15 from its peak of $120 billion in 2011/12, a reduction equivalent to 20 percent of GDP. The real GDP growth rate is estimated to turn zero in 2015/16 from 1.5 percent in the previous year and the economy will continue to contract for the rest of the forecasting period. In a case where oil prices fall further (which could likely happen), government oil revenues will dip even more, reaching the levels of 2004 (Figure 8), leading to a larger fiscal deficit.
The situation could turn worse because the government can only access a third (about $700 million out of $2 billion) of its monthly oil revenues under the current sanction relief, the report concluded.
