Iran to face recession as US sanctions bite

Economic activity in Iran is forecast to contract by 1.5 per cent and 3.6 per cent in 2018-19, World Bank says

An Iranian woman shops at a drugstore at the Nikan hospital in Tehran. The Iranian economy is expected to go into recession next year. AFP

Iran’s economy is likely to contract this year and next, heading into a recession on the back of sharp declines in oil exports and a further slump in already-low foreign investment inflows as the US reimposes sanctions on Tehran.

After steadily growing in 2017, economic activity in Iran is forecast to contract by 1.5 per cent and 3.6 per cent in 2018-19, the World Bank said in its World Economic Outlook released on Thursday. Fitch Solutions, a part of Fitch Group, estimates Iranian gross domestic product to contract by 4.3 per cent in 2019 and expand beyond that time frame - albeit at a modest rate.

“Our core view is for the re-imposition of US nuclear-related sanctions to cause a sharp slowdown in the Iranian economy in 2018 and trigger a recession in 2019, as exports and investment inflows decline, and rising inflation and high unemployment weigh on consumption,” the Fitch report said.

Weakness of the Iranian rial and fast-rising inflation will also weigh on domestic investment and consumption, both the World bank and Fitch Solutions’ reports noted.

The World Bank expects the annual inflation rate to exceed 30 per cent on average in 2019, up from 9.6 per cent last year. Although the depreciation of the currency could help improve non-oil exports, it will not be enough to offset the loss of oil exports, which still account for 40 per cent of the government’s revenues and export receipts.

Earlier this week Fitch estimated inflation in Iran to average 33.2 per cent in the 2018-2019 financial year that started in April, nearly double its previous forecast of 17 per cent. It expects the rial to continue to weaken further on the back of continued expansion of Iran’s monetary base.

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The rising cost of living led to public dissent and mass protests in several Iranian cities earlier this year.

US sanctions on Iranian oil imports will come into force in early November, however, crude exports dropped off sharply over August and September in the lead-up to sanctions, Fitch Solutions noted, citing tanker tracking data.

“This trend is already playing out even before the [sanctions] activation date, as importers of Iranian oil attempt to either comply or qualify for limited sanctions waivers,” Fitch Solutions noted.

The state of Iran’s economy is worsening as the deadline of re-imposition of sanctions by US over its nuclear programme nears. The sharp fall in the value of the Iranian currency in the unofficial market, inflationary pressures, and high unemployment rates, especially among youth - estimated at 30 percent in 2018 by the World Bank and International Labor Organization - could lead to stagflation. The financial woes are compounded by the structural weaknesses and deteriorating asset quality of Iran’s financial institutions, which are unable to access the international financial system.

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Iran's rial has hit multiple record lows this year against the US dollar. The demand for the dollar is stoked by concerns that the impact of US sanctions would be felt beyond the country’s crude shipments and will affect Iran’s broader export sector.

Last month, Iran authorised the central bank to intervene in the foreign exchange market in defence of its currency. A top government body, headed by President Hassan Rouhani and the heads of parliament and the judiciary, "gave the central bank governor the necessary authority to intervene in the foreign exchange market and to manage it", Reuters cited state TV as saying at the time.

“Declining foreign exchange inflows and rising money supply growth will fuel depreciation of the rial - which has already suffered severe losses in the ‘free market’ over the year-to-date and send inflation higher,” the Fitch report said. “Coupled with very limited credit availability this will constrain private domestic investment and consumption.”