Tyranny of numbers

Is Iran’s economic slide bottoming out?

Posted in General by Djavad on June 26, 2019

Last year, Iran’s economy was hit hard by sanctions.  The US withdrawal from the nuclear deal and the return of unilateral US sanctions turned 10 quarters of economic growth into (so far) four quarters of negative growth (see graph below).  During the year that ended on March 20, 2019, the economy shrank by nearly 5%, and further contraction is very likely this year.  The 5% decline was led by manufacturing, which fell by 12% in the last quarter of 1397 (winter 2019) relative to the same quarter a year ago.  Non-oil GDP fell by less since agriculture and services, which account for 3/4 of the GDP are less dependent on trade (services actually grew slightly).

Figure.  Growth rate of GDP, quarter on the same quarter a year ago.
gdp_quarterly_2012-2018
Source: Statistical Center of Iran.

Will the downward trend end sometime soon?  The IMF has predicted a 6 percent decline for 2019, but its prediction may turn out to be too pessimistic.  There are a few signs that the economy is adjusting to a new lower equilibrium, from which it may start growing by 1-2 percent in 2020.

The high price of foreign currencies is the main reason why we should expect local production to start recovering soon.  Donyaye Eghtesad sees a “resurgence of production” in an increase in the Managers’ Purchasing Index (PMI) collected by Iran’s Chamber of Commerce. This is consistent with recent data for non-oil exports.  For the first two months of the current Iranian year (roughly, April and May 2019), they increased by 8.1% compared to the same period a year ago.

However, both non-oil exports and import competing sectors face two important challenges: sanctions on trade and banking and Iran’s own self-made banking crisis.  Most of Iran’s major banks are insolvent and therefore are in a weak position to support the expansion of local production.

Second, after experiencing the huge shock of the US withdrawal from the nuclear deal, which caused the US dollar and local prices spike, inflation is slowing down.   Consumer prices rose by about 40 percent last year, and as late as March were rising at 60 percent annual rate, in the last two months have declined to 19 and 10 percent annual rates.  As a result, the dollar has stabilized at around 130000 rials per USD, which is 20 percent below its peak a few months ago.  Fears of “Venezuelaization” of the Iranian economy (collapse) have subsided, allowing the government to revive its long neglected public investment program, which could boost employment and production.

 

2 Responses

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  1. Benjamin said, on July 30, 2019 at 7:01 pm

    First of all, thanks for your hard work, I would like to know if you think that Iran’s economy might grow moderatly in the coming years and how about the support of China und Russia? Especially China’s new silk root

  2. […] vi sia qualche segnale di stabilizzazione dell’economia, che potrebbe far ritenere scongiurato uno “scenario venezuelano” per il paese […]


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