IMF sees ‘significant improvement’ in Iran’s economy

The recent agreement between the P5+1 and Iran allows for the removal of most economic sanctions and for a significant improvement in Iran’s economic outlook, the International Monetary Fund said in its October report on regional economic outlook for Middle East and Central Asia.

The interim agreement reached with the P5+1 in November 2013, along with prudent domestic macroeconomic policies, provided considerable impetus to several sectors, most notably oil, transportation, and manufacturing.

Real GDP grew by 3 percent in 2014/15 and 12-month inflation declined markedly, stabilizing at about 15 percent, Tehran Times reported.

However, economic spillovers to the rest of the world are uncertain but are likely to be a net positive, for two reasons. Iran’s return to the global oil market is expected to increase global supply of oil, and the removal of sanctions is likely to open new trade and investment opportunities.

Iran and the 5+1 group – the United States, Britain, France, China and Russia plus Germany – finalized the text of the Joint Comprehensive Plan of Action (JCPOA) in Vienna on July 14.

Once approved and implemented, the JCPOA is expected to provide relief from sanctions in four broad areas: export and transportation of hydrocarbon and hydrocarbon-related products; banking and other financial services and transactions, including restored access to the international payment system (SWIFT); access to foreign financial assets; and the sale, supply of parts, and transfer of goods and services to the automotive and air-transportation sectors, and associated foreign investment.

The sanctions relief will bring three key benefits for Iran. First and foremost will be a positive external demand shock, both for oil and non-oil exports. In addition, the decline in the cost of external trade and financial transactions will act as a positive terms-of-trade shock (lowering the price of imports and raising the price of exports).

Finally, restored access to foreign assets and higher oil exports should also result in a positive wealth effect. Taken together, these three shocks are likely to create a significant improvement in the outlook for the Iranian economy in the years ahead, outweighing the adverse effects from the sharp decline in global oil prices over the past year.

Estimates of the growth impact, based on analysis of the Iranian economy, suggest that domestic economic activity could accelerate markedly following sanctions relief. Real GDP growth could rise up to 5½ percent in 2016/17 and 2017/18, while hovering around 3½–4 percent annually in the years after.

The most important driver of growth in the short term would be a recovery in oil production and exports, projected to increase by about 0.6 million barrels per day (mbpd) in 2016 and by about 1.2 mbpd over the medium term. Higher oil output would contribute about three quarters and two-thirds of the estimated economic growth in 2016/17 and 2017/18, respectively.