Major differences between sanction and Post sanction Iran’s Economy

Posted on Posted in Business Guidelines

Sanctions, and Post Sanctions Opportunities

Iran’s economy is a mixed economy type with a very large public sector. Some economists believe that the public and semi-state sector contributes to over 80% of total economic activity, it has a GDP of about USD1 trillion by purchasing power parity (PPP). However, growth slowed after the global economic crisis of 2009–2010. A severe recession occurred after the onset of international sanctions in 2011. Real GDP fell 5.6% in 2012 and a further 1.7% in 2013.The coming to office of the current President Hassan Rouhani in 2013 led to an adoption of more disciplined economic policies and the relaxing of some sanctions. Iran’s inflation rate dropped from a staggering 45% in 2013 to about 15% in 2015 and is still decreasing to below 10 percent in 2016. The Central Bank of Iran’s data show a year-on-year PPI growth of 8.9% in April 2015. This is the lowest annual increase of PPI since 2009. Moreover, Iran’s economy rebounded out of recession in 2014 with a growth rate of 2.8%. The International Monetary Fund also projects the Iranian economy to grow in 2015 and beyond.

Even though oil accounts for about 35% of the governmental revenues, Iran has a considerable and diversified non-oil sector. Leading contributors to Iran’s GDP are its large service and industrial sectors.

In recent years, as oil prices crashed, Iran’s non-oil exports have increased slowly. After international sanctions which led Iranian currency loose its value, Iran’s exports to regional countries have surged as Iranian products have become more competitive in global markets. As a result of sanctions imposed on the purchase of Iranian crude oil, as well as an increase in Iran’s non-oil exports, the country’s reliance on oil revenues has decreased in recent years. As a result, Iran has managed to partially diversify its economy away from a dependence on oil. In recent years, Iran’s trade with the world has shifted more from the West to East. Currently Iran’s main export partners are China (25.6%), Iraq (17.3%), and United Arab Emirates (11.0%). Its main import partners are China (23.9%), United Arab Emirates (23.2%), and South Korea (8.2%). In recent years, traditional trading partners like Germany and France have taken steps to reestablish strong economic ties with Iran.

In the last two years, business interest from around the world in various sectors of Iran’s economy has been growing exponentially. Global business leaders have shifted their attention to the largest closed market on the verge of opening up. Sir Martyn Sorrel, CEO of WPP Group, a global media giant, after removing sanctions officially tweeted “apart from Mars and the Moon there are not many untapped opportunities left on that scale”.

In an August 2014 Bloomberg Article titled ‘Iran Lures Investors seeing Nuclear Deal Ending Sanctions’, Charles Robertson, chief economist at Renaissance Capital Ltd. Has quoted as saying “Iran, one of the world’s largest closed markets, maybe on the verge of opening for business after years of isolation…This is the last major opportunity out there in the world that can suddenly become accessible, almost overnight…” Robertson, who visited Tehran in February 2014, compares Iran to Turkey in 2004, when that emerging market was poised for what turned out to be almost a decade of strong economic growth.  The article highlights the fact that Iran’s population of about 80 million is similar to Turkey`s. And as recently as 2011, it produced twice as many cars as Turkey and consumed more steel annually than either the U.K. or France. Moreover, with the world’s largest reserves of natural gas and fourth largest reserves of oil, Iran is an energy superpower. The biggest post sanctions prize will be Iran’s energy sector. It is estimated that up to USD230 billion is needed to be invested in the next decade in Iran’s energy sector. Given Russia’s political problems with the EU over Ukraine, the EU is seriously looking at Iran to replace a portion of the natural gas it needs to import from Russia in the decades ahead. However, Iran’s domestic needs for natural gas will probably limit the amount of gas that can be exported to the EU.

Sanctions have affected all walks of life in the Iranian economy, in particular the oil and banking sector. Iranian banks have been cut off from the international banking system.

Following the economic recovery experienced in 2014, the Iranian economy was at an advanced at an annual growth rate of only 1 percent during the 2015 Iranian calendar year (i.e., March 21, 2015-March 20, 2016). This performance came in spite of the signing of the Joint Comprehensive Plan of Action (JCPOA) in July 2015 and the significant economic prospects it offered. Inflationary pressures on the economy continued to abate under the less accommodative monetary policy stance, with the Consumer Price Index falling to 12.6 percent per annum in January 2016, from a peak of 45.1 percent in October 2012. Despite this positive development, the fiscal balance of the central government deteriorated due to low oil prices, from a deficit of 1.2 percent of GDP in 2014 to a deficit of 2.7 percent of GDP in 2015. Stimulating private sector growth and job creation is a continued focus for the government considering the number of workers who should enter the labor market in the coming years, including women and youth and the persistently high unemployment rate (11.7 percent). Tackling youth unemployment in particular is a pressing policy issue in line with the evolving demographic profile of the country, which is characterized by more than 60 percent of its population estimated to be under the age of 30 in 2013 (world bank:Iran, 2016)

Government announced that it wants to increase Oil production both in south and north, as Bijan Zangeneh, Oil Minister declared, Iran wants to increase its production from 3.8 million to the level of 4.8 million barrels daily in next five years. Also Iran wants to occupy the first rank among neighboring countries in Petrochemical and Refinery products up to 2025 which refers to the interests of Iran in cooperation with international petroleum Companies.

Moreover, in an aspirating program, signed a MoU with Airbus to buy 118 aircrafts, Iran also wants to buy 100 aircrafts from Boeing, also government is eager to buy aircrafts from Japan, Brazil, and Russia. In fact, Iran wants to revive its Travel and Tourism industry by renovation of its air travel capacity. These agreements are slowly going forward due to some obstacles inside and outside Iran.

In another movement, Government encouraged private sector to build new hotels. Government expects to increase number of 4, 5 star hotels from 130 to 400 in next ten years.

Iran has an old Car Industry started in 1967, and now has a production about 1,400,000 annually. After lifting sanctions, Iranian car companies and some European brands tried to have partnerships. French carmakers Peugeot and Renault are ahead of others as they had former experience of Iran’s market, however sudden exit of Peugeot of Iran in compliance with sanctions, made some problems to easy return of this company. It seems car industry of Iran is thirsty to see real partnerships of western and Asian brands in Iran.

The biggest remaining heritage of sanctions is lack of banking relationship and cautiously making relationship of western banks with Iranian banks who are mainly afraid of reactions of federal treasury of United States specially regarding to US National president election which injects uncertainty to relationship of western banks with Iranian banks.


FAR Law Firm

Leave a Reply

Your email address will not be published. Required fields are marked *