Unshackled

The story of the Iranian economy in recent years has been the imposition of sanctions linked to the country’s nuclear program. Long at odds with Western leaders, 2012 saw the arrival of the most severe sanctions yet; the US and European embargoed Iranian oil exports and froze Iranian access to foreign assets, shutting it off from the global financial system. At the same time, oil prices started to drop sharply due to oversupply and diminishing demand from developing markets, depriving the Iranian economy of its primary revenue source at the moment it was needed most. As a result, the economy took a predictable hit; after a decade of growth, GDP per capita fell for four consecutive years. 2015’s figure of just under USD4,957 per person was down from USD7,842 in 2011 and well below the MENA average of USD7,350. Inflation rose, the deficit increased, and development stagnated due to the lack of access to foreign investment.

The good news, though, is that the worst appears to be past. In 2015, Iran came to a deal to dismantle major parts of its nuclear program in exchange for the lifting of most sanctions. Implemented in early 2016, the agreement let the Islamic Republic re-enter the global economy, allowing for oil exports, access to foreign currency reserves, and new deals with Western firms. The benefits of the deal have already been felt. The economy rebounded to post growth of 6.4% after contracting by almost 2% in 2015. Most of this came from the oil sector, which, as a fully mature industry, was able to rebound quickly the moment sanctions were lifted. The non-oil sector of the economy, in contrast, is expected to post moderate growth in the upcoming years as it continues to rejoin the global economy and reach fuller levels of foreign investment. The balance between curbing inflation and increasing liquidity to spur the economy will be a challenge moving forward, but the general mood is one of optimism for the future; the IMF’s projections expect growth to stabilize at 4.5% over the medium term.

OIL

As the country’s primary source of revenues and most developed industry, Iran’s petroleum industry is at the heart of the nation’s economy. As OPEC’s second-largest exporter before the imposition of sanctions, the loss of access to the European and American markets in 2012 led to a drop in oil revenues. Crude oil exports dropped to just 1.4 million bpd in 2014. Exports to Asian markets such as China and India kept the industry afloat, but volumes dropped too as those countries increased their imports from alternate sources in order to comply with the sanctions. When sanctions were lifted, the industry wasted no time in returning to pre-sanction output levels. By May 2016, Iran was pumping more than 3.64 million bpd, its highest rate since 2011, and exports had risen from 1.1 million bpd in December 2015 to 2.6 million bpd. While the rest of OPEC cut production in November 2016 to counteract the oversupply that has brought oil prices down, Iran was allowed to continue ramping up production to 3.8 million bpd. 2017 saw the sector continue to grow, reaching heights that it had not attained in years. In late February, Iran briefly reached 3 million bpd of crude exports, a figure that had not been seen in over 30 years. Exports to the EU have risen to pre-sanctions levels, and Iran has additional plans to continue ramping up production; government officials have said that the goal is to have total capacity of 4.7 million bpd by 2021. Infrastructure improvements to loading terminals and partnerships with foreign firms to develop new oil fields are the key to the government’s plans for expansion, and all indications are that it will be able to reach these goals.

NON-OIL

Elsewhere, the non-oil industry is working to meet its full potential. Non-oil growth was at just 0.9% in the 2016/17 Iranian year, as the sector struggled with high levels of unemployment and inflation and low access to credit. Diversifying the Islamic Republic’s economy and making non-oil industry a more robust part of the export profile has long been one of the Iranian government’s main goals, but the loss of oil export revenue and the barriers to international investment placed upon the industry by sanctions have made this difficult in recent years. Now, however, there are promising signs that non-oil trade could be on the way up. Non-oil exports rose by 3.58% YoY in the 2016/17 Islamic year; natural gas and gas byproducts made up the majority of these exports, but the industrial sector also saw signs of new growth with increase in mineral exports, textiles, and metals. Moving forward, major road and housing infrastructure projects are expected to be a driver of growth, producing new development and employment via investment agreements with foreign governments.

There has been strong interest from western investors eager to invest in the Middle East’s second-largest economy, and Iran’s government has no shortage of opportunities for growth. Iran’s housing market, for example, has dealt with undersupply issues since the end of the most recent oil boom, and the government sees increasing the stock of affordable housing as one of the most fundamental issues facing the economy. Acquiring foreign investment to fund new construction projects would lower the cost of housing, create a major new source of employment, and improve the government’s fiscal position by allowing it to move away from the costly state-funded housing projects it has been using as a development model. Transport, too, looks to be one of the main pillars of Iran’s revitalization. The country’s Central Asian location and longstanding transport routes make it a key part of intercontinental rail transport routes, and major economic powers have wasted no time in signing deals to upgrade existing railways and construct new ones. China, for example, considers Iran one of the centerpieces of its plans to form new economic transport routes throughout Asia and the Middle East. In July 2017, China’s Export-Import Bank signed a USD1.5 billion deal to electrify a high-speed Iranian rail, adding to a list of more than USD9 billion in rail and industrial projects that it is currently funding. Similar deals are already in place with Russia and Turkey, a sign of how the region is betting on Iran’s recovery.