Iran growth hovering near zero as IMF says economy stuck in stagflation

The end of sanctions cannot come soon enough for an Iranian economy crippled by trade restrictions and the low oil price.

Growth in Iran this year is set to hover somewhere between 0.5 per cent and -0.5 per cent, the IMF said.

When population growth is included, that means per capita growth is negative, and living standards are falling.

The P5+1 negotiations between Iran and members of the UN Security Council plus Germany, reached an agreement in July this year to end financial and trade sanctions on Iran, in exchange for a slowdown in Iran’s nuclear programme.

Sanctions relief is set to kick in within the first three months of 2016 – when the P5+1 states confirm that Iran is complying with the terms of the Joint Comprehensive Plan of Action, the agreement to curtail Iran’s nuclear programme.

Sanctions have brought stagflation – a mix of high inflation and low growth – to Iran’s economy. They have severely hurt the non-oil economy, by limiting domestic firms’ ability to conduct business with the outside world.

Iran has been looking forward to the relaxation of restrictions on its oil trade as a chance to power up its economy following a major recession in 2013.

But with the oil price falling to an 11-year low on Monday, Iran’s return to the oil market looks to be a case of very poor timing.

Brent crude has fallen from near to US$110 per barrel in July last year to just above $36 per barrel this week.

Iran is expected to add between 600,000 to 900,000 barrels per day to global supply in 2016, according to the IMF.

Nonetheless, higher oil production is expected to increase Iranian economic growth to between 4 and 5.5 per cent next year and 2017, the IMF said. That assumes an oil price of $52.9 per barrel in these years, which some analysts may worry is overly optimistic.

Iran’s 2016 budget will be trimmed by 2.6 per cent against this year’s spending plans, the Iranian state news agency said yesterday.

“Iran, which is yet to benefit from the [nuclear deal], will only see that benefit next year, and this year the economy of Iran is not expected to show any economic growth,” said Masood Ahmed, the IMF’s director for the Middle East and Central Asia, in October.

New oil production, plus “a reduction in the financial costs of doing business” because of the easing of sanctions “will improve economic growth in the economy as a whole”, Mr Ahmed said.