Global Investor

Set to bounce back from oil sanctions

Meera Siva | Updated on January 23, 2018


Iran’s economy is likely to get a major boost once it signs a deal with Western powers to curtail its nuclear ambitions

Among the oil producing nations of West Asia, Iran is in a unique situation. While most of the oil producers are hit hard by the oil price rout, Iran’s economy is expected to reverse from a slump this year if sanctions placed on its oil exports are lifted. The country’s stock exchange has been buoyant on this optimism, zooming over 10 per cent in the last month.

Sanctions on oil exports were imposed in January 2012 due to the country’s insistence on continuing its nuclear programme. But its stock market did admirably well post the sanctions.

The Tehran Stock Exchange Index climbed 43 per cent between January 25, 2012 and a year later. But last year, the index lost 20 per cent — the first yearly decline since 2008 — even as others such as Egypt’s EGX30 index surged 30 per cent.

Oil exports to help

An agreement on the nuclear issue, whereby Iran agrees to restrict its nuclear programme for a decade or more and agree to international inspections in return for lifting of sanctions on oil exports, will help the prospects of the second-largest economy in the Middle East and North Africa (MENA) region. Oil exports, which made up nearly 80 per cent of total export earnings for the country, could ramp up to pre-sanction levels of 2.2 million barrels a day by 2017 from half that level currently.

If the export ban is lifted, oil prices may drop further globally by an estimated $5-$15/barrel due to additional supply from Iran. The country has the world’s fourth-largest crude oil reserves and the second-largest natural gas reserves. The country’s $366-billion economy is oil-dependent and the role of the government is large in sectors such as manufacturing and financial services. Other sectors such as agriculture are not sizeable and in the last few years, there has also been a thrust on privatisation.

Policy changes

Thanks to oil revenue, the government has subsidised nearly all the staples — petroleum products, water, electricity and bread — in the past. Indirect subsidies were estimated to be over 25 per cent of GDP. Not that the people were poor — data from the World Bank showed that as of 2010, only 0.7 per cent of the population lived under the poverty line ($1.25 a day).

Post-sanctions, real GDP contracted by 5.8 per cent in 2012-13 as industries such as automobile and banking were hit due to the sudden drop in oil exports. Government revenue was cut to half and the subsidy system was then changed to a direct cash transfer programme.

Besides subsidy cuts, the government has also taken other measures, such as improving the capacity of the non-oil segment, broadening the tax base, opening up the oil sector to foreign companies and giving greater autonomy to the central bank. Also, the steep depreciation of the country’s currency — from 10,000 Iranian Rials to a dollar to nearly 28,000 currently — has improved the competitiveness of its exports.

These steps, along with the gradual easing of sanctions and an increase in exports to China, have helped. The country’s GDP de-growth slowed to an estimated 1.7 per cent in 2013-14 and recent projections for 2014-15 suggest that the economy will expand by 1.5 per cent.

Unemployment issue

Still, the economy may not be out of the woods. Inflation is estimated to be 23 per cent in 2014-15, albeit down from the peak of 45 per cent in July 2013. Unemployment is high — an estimated 10.4 per cent in 2013-14 officially, but unofficial sources peg it at double that rate.

The country’s population of 77 million in 2013 is the second-largest in the region and only over a third of the population is economically active. But the labour force dynamics are changing as over 60 per cent of the population is estimated to be under the age of 30.

Nearly 750,000 youth are set to enter the labour market every year. And unless 8.5 million jobs are created over two years, the unemployment rate may not come down to the country’s stated goal of 7 per cent. Currently, with jobs rare to come by, the country faces a brain drain, as educated youth leave the country in search of greener pastures.

Published on April 12, 2015

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