WHAT A YEAR

Iran 2016 | DIPLOMACY | YEAR IN REVIEW

Iran awoke to a world of opportunity in early 2016, the lifting of sanctions allowing banks to reconnect to SWIFT, the country's industrial matrix to switch back into top gear, and oil to once again leave Iranian shores. The challenge now is making a success of the brightened prospects.

The Joint Comprehensive Plan of Action (JCPOA), which entered into effect in January 2016, brought all nuclear-related sanctions to an end, signaling huge reconciliations between Iran and the West and standing, for many, as a superb example of the merits of diplomacy. Success for parliamentary supporters of President Rouhani in February and April in legislative elections only further highlighted the popular support the government's course of rapprochement has had, as Iranian reformists continue to dominate the domestic agenda.

To appreciate the impact sanctions had, it is vital to take a quick look at the implications they had on GDP. Iran's economy was a sizable USD587.2 billion back in 2012, a figure that fell sharply to USD425.326 in 2014. GDP came in at USD393.7 billion in 2015, down 7.44% YoY. This still set Iran as the second-largest economy in the MENA region, behind only Saudi Arabia. According to IMF data from 2015, Iranian GDP per capita on a PPP basis was USD17,346, placing it 68th in the world between Belarus and Venezuela.

Sanctions arguably hit the oil sector hardest, with oil and gas export revenues plummeting by 47% from USD118 billion in the 2011-12 fiscal year to USD63 billion in 2012-13. Post-sanctions, Iran has indicated it is ready to boost production back to former levels of around 4 million bpd and is looking to attract foreign investment to 18 E&P blocks and 50 oil and gas projects to be completed before 2020. It would be wrong to assume the Iranian economy is based on oil alone, however. Iran differs from many of its regional peers in that its economy is roundly diverse, with services, agriculture, manufacturing, and mining all accounting for significant portions of the country's economic output.

On the fiscal front, Iran's deficit grew from 1.2% of GDP in 2014 to 2.7% in 2015, with the current account surplus narrowing to just 0.6% of GDP in 2015 from 3.8% in 2014 due in large part to declining oil prices. The effects of lower oil prices, however, were somewhat mitigated in Iran due to structural reforms brought in to lessen the effects of lower oil revenues during the sanctions period. Indeed, Iran's strong regulatory environment helped to keep the economy above water in rough seas, with GDP growing 0.5% in 2015 after contraction in previous years. The Central Bank of Iran is also credited, thanks to its steadfastness in monetary policy, with reining in runaway inflation in 2015. The inflation rate began the year at 12.6%, down from a peak of 45.1% in October 2012. “The Central Bank managed to control the inflation rate by supporting monetary discipline and stabilizing the foreign exchange market," Governor Dr. Valiollah Seif told TBY.

But nobody could be happier about the removal of sanctions than Iran's exporters. Exports measured just 18.7% of GDP in 2015, one of the lowest rates worldwide. The news that, since JCPOA, trade between the EU and Iran has shot up by 43% was widely received as a sign of things to come.

Indeed, the EU has been one of Iran's strongest backers in recent months, with EU High Commissioner Federica Mogherini meeting with Foreign Minister Mohammad Zarif in Tehran in April to discuss potential areas for cooperation. Mogherini also reiterated the EU's support for Iran's bid to join the WTO. “We used to be Iran's main trading partner and we are determined to take that position again," said Mogherini, who also spoke of the significance of Iranian oil and gas in Europe's energy mix. A few tensions remain, however, including a perceived lack of enthusiasm from European banks to begin lending again in Iran. Ségolène Royal, French Minister of Ecology, expressed her frustration after a visit to the country with French environmental and renewable energy firms that Iran is still unable to access the financing it requires to complete projects in line with the Paris Climate Agreement, to which the country is a signatory. The reluctance could stem from a USD8.9 billion fine levied on BNP Paribas by the US for doing business with Iran.

Arguably the largest development since the lifting of sanctions, however, was a US Treasury announcement granting licenses to Boeing and Airbus to sell passenger aircraft to Iran, the largest ever deal between the two countries since the Islamic Revolution.

Challenges for the government going forward include navigating tense political developments in the region and convincing Iran's hardline political factions that the country, and its economy, are on the right course. Investors will certainly be watching with interest as Iran carves a new path for itself on the global stage.