Iran economy set for deeper contraction amid US sanctions, pandemic

Author: Pearl Bantillo

2020/10/09

SINGAPORE (ICIS)--Iran’s economy is being battered by heightened US sanctions that constrain oil production and exports, and rising levels of coronavirus infections in the country, with GDP expected to shrink for the third consecutive year.

For the fiscal year ending 20 March 2021, the forecast GDP decline could be as steep as 8.5%, before reversing to a 2.7% growth in the following year, according to Spain-based research firm FocusEconomics.

The International Monetary Fund (IMF), in its June World Economic Outlook (WEO), projects a 6.0% contraction for the economy.

“The economic activity remained bleak in recent months, with the dual impact of US sanctions and a rising rate of coronavirus infectons in the country dragging on activity,” said Stephen Vogado, economist at FocusEconomics, in a research note.

Iran’s inflation jumped to 34.4% in September, up from 30.4% in August, due to supply chain disruptions and a tumbling currency, the rial.

For imports of essential goods, the rial is set at 42,000 to $1.

In view of the sharp depreciation of the rial since the US sanctions were imposed in 2018, Iran's parliament passed a bill in May 2020 to change its basic currency unit to the toman, which is equivalent to 10,000 rials.

The shift is expected to be made in two years, according to media reports.

Iran's oil production in August remained at the previous month’s record low levels, while gasoline output was supported by shipments to Venezuela, FocusEconomics said.

Oil production in the current year is estimated to shrink to 1.9m bbl/day, half its level three years ago.

EXPORTS MUST DOUBLE TO FEND OFF FX CRISIS
The country could face a foreign currency crisis if it fails to double current export levels in the coming years, Iran-China Joint Chamber of Commerce chairman Majid Reza Hariri told state news organization Iran Labor News Agency (ILNA).

Oil export revenues in the current fiscal year will be around $5bn, at best, due to a combination of low prices and the US sanctions, Hariri said.

It is a significant whittling down of what used to be a $120bn industry in the past years.

Iran is a member of oil cartel OPEC. Based on OPEC data, the country's total crude exports in 2019 stood at 651,100 bbl/day, with total production at 2.36m bbl/day.

“Faltering investment will hit the non-oil private sector, while the oil economy will suffer from falling demand,” FocusEconomics’ Vogado said.

Iran’s non-oil exports are projected to fall to $30bn, down by a quarter from the previous fiscal year, Iran-China Joint Chamber of Commerce chairman Hariri said.

Based on data from FocusEconomics, the country's total exports in the current fiscal year are projected to contract by 16.7%, moderating from the 28.4% slump in the previous year.

The US sanctions have been hurting Iran’s overall trade, with Germany and other EU countries accounting for about two-thirds or 64% of total exports.

In the six months to 20 September this year, Iran’s total trades were at more than $30bn, according to state media - the Islamic Republic News Agency (IRNA) - citing customs data.

China is its biggest market, with a 27.3% share to Iran’s total exports; while imports from the Asian giant for the six-month period stood at about $4.3bn, IRNA reported.

In late September 2020, the US unilaterally proclaimed that the United Nations (UN) sanctions on Iran, which were lifted under the 2015 nuclear pact, have been re-imposed.

Thirteen of the 15 UN Security Council members deemed the US void, with very few countries likely to re-impose the measures, according to news agency Reuters.

The US withdrew in May 2018 from the nuclear deal called Joint Plan of Action forged in 2015 between Iran and the six world powers (Russia, China, Germany, Britain, France and the US).

CORONAVIRUS CASES STILL RISING
“A renewed increase in Covid-19 (coronavirus disease 2019) cases in the country bodes ill for activity in the final months of the year, with localized restrictions and week-long lockdowns being considered in response,” said Vogado.

As of 8 October, Iran has a total confirmed coronavirus cases of 483,844, with 27,658 deaths, according to data from the World Health Organization (WHO).

“The prolonged nature of the ongoing heath crisis is a particularly large cloud on the economic horizon,” said Vogado of FocusEconomics.

This echoed the World Bank’s assessment in April 2020 that a protracted impact of the pandemic outbreak on commerce, tourism and trade, as well as higher production costs, is the “most significant risk” for Iran.

“Persistence of lower oil prices and export volumes (e.g., due to a significant decline in China’s oil demand) would result in a substantially larger overall shock and fiscal deficit [for Iran] in 2020/21,” the World Bank said.

Focus article by Pearl Bantillo

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Image: Oil production in Iran. (Source: AY-COLLECTION/SIPA/REX/Shutterstock)