Monumental impact: nuclear deal to double Iran's growth next year

Published April 16th, 2015 - 06:51 GMT
Even assuming a conclusion of a nuclear agreement in June, it would take a while for its economic impact to be felt on the ground.
Even assuming a conclusion of a nuclear agreement in June, it would take a while for its economic impact to be felt on the ground.

The economic implications of lifting the sanctions would be enormous for Iran but it would take about a year to be felt in full and growth could accelerate from around 3 per cent in fiscal year 2015-16 to 6 per cent in fiscal years 2016 -17 and 2017 — 18, according to the Institute of International Finance (IIF).

The Washington-based association of more than 400 global financial institutions said the nuclear deal between Iran and the six world powers (the US, China, Russia, France, Germany, and Britain) has the potential for a big surge in Iranian exports, private investments, narrowing of fiscal deficit and decreasing the large spread between the official and the black market rates.

Even assuming a conclusion of a nuclear agreement in June, it would take a while for its economic impact to be felt on the ground. Growth could remain at around 3 per cent in 2015-16, driven by investment and consumption.

“Lifting the sanctions will allow the Iranian authorities to use more of their foreign exchange reserves (estimated at $90 billion (Dh330.3 billion)), half of which have been frozen abroad. Business opportunities in Iran following a comprehensive agreement would be enormous. Iran has a population of 78 million, the labour force is relatively well educated, and the economy is more diversified than other oil exporters in the region,” said Garbis Iradian, Chief Economist, Africa/Middle East of IIF.

The agreement could restore Iran’s oil production and exports before mid-2017, adding to pressure for continued low oil prices beyond 2015. There are risks that the deal will fall apart. The Supreme Leader, Ali Khamenei, or the hardliners in Iran could reject the deal. Also, the US Senate Foreign Relations Committee has now voted unanimously in favour of legislation providing for congressional review of any final deal, raising one other potential barrier to a final agreement.

Improvement in economic policymaking since President Hassan Rouhani took office in August 2013, combined with some relief from the previous two interim nuclear agreements, has helped the economy to grow by an estimated 3.5 per cent 2014 -15, after contracting for two successive years. The recovery was driven by a rebound in public investment and modest growth in exports.

Nonoil revenues

Despite the significant depreciation of the official exchange rate, the 12-month inflation rate was down to 15.5 per cent in February 2015 from 22.8 per cent in February 2014, and the spread between the official and the parallel rates has narrowed to 16 per cent in April 2015 from 24 per cent a year earlier.

According to IIF Iran’s nonoil revenues are estimated to have surged by 47 per cent in 2014-15, helped by tax reforms, improvement in tax administration and modest economic recovery. Dependence on oil revenues has been reduced from an average of 51 per cent of total revenues in 2008-2013 to 30 per cent in 2014, the lowest among oil exporters in the Mena region.

A substantial increase in public spending, particularly on infrastructure, combined with global lower oil revenues has more than offset the increase in tax revenues, leading to a wider fiscal deficit of 4 per cent of GDP. The fiscal deficit would have been much larger if the official exchange rate had not been devalued sharply in July 2013. Exchange rate flexibility since then has also helped to smooth the transition to an environment with lower oil prices.

Exports and imports of goods have increased significantly in volume terms despite the sanctions (7 per cent and 8 per cent, respectively). Given the sanctions, barter trade has flourished between Iran and its main trading partners, particularly China, which accounted for about 30 per cent of Iran’s exports in 2014.

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