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publication October 11, 2017

Iran's Economic Outlook - October 2017

The Iranian economy strongly recovered in 2016, on the back of a significant rise in oil production and exports, following the removal of nuclear related international sanctions. However, unemployment remains high and non-oil sector activity remains subdued, as anticipated foreign investment flows have not materialized, in the absence of a full integration of the banking sector with the global banking system and continued uncertainties regarding full implementation of the JCPOA. Growth prospects in the medium term are modest.

Recent Developments

In 2016, the economy registered a strong oil-based bounce back, with an annual headline growth rate of 13.4 percent, compared to a contraction of 1.3 percent in 2015. The largest contribution to growth was from the industry sector (at about 25 percent) as oil and gas production increased by a staggering 62 percent, mainly as a result of sanctions relief. Recovery in non-oil GDP however was limited at 3.3 percent, although this represents the highest growth rate in the last 5 years. Recent data suggests that growth in crude oil production in the first quarter of 2017 declined to 17 percent year over year.

On the demand side, all components except investment registered improvements over the previous year. Investment continued to contract in 2016, albeit at a much lower rate of 3.7 percent (compared to 12 percent a year earlier). The reduction in investment was primarily driven by the continued contraction in the construction sector since 2012 following a boom in speculative demand for housing. Despite the growth in the non-oil sector, unemployment increased to 12.6 percent in Spring 2017 up from 12.4 percent six months earlier, which suggests a very limited employment generation capacity in the sectors spearheading growth. The CBI together with the Money and Credit Council have implemented measures to increase investment and non-oil growth.

The average interbank interest rate was reduced by around 6 percent to 18.6 percent in 2016, although the declining trend in 2015 has ended. The fiscal deficit further widened to 2.2 percent of GDP in 2016, but the debt to GDP ratio fell to around 35 percent due to a higher GDP. The current account surplus increased by more than 80 percent to reach around 4 percent of GDP, up from 2.3 percent in 2015, primarily as a result of increase in oil exports. However, non-oil merchandise exports declined by 9 percent in 2016 and recent data for the first four months of the new fiscal year indicates a negative growth in non-oil exports (-10 percent year over year).