Iran: Lifting of Sanctions Will Lower Oil Prices and Boost Domestic Economy If Managed Well

August 10, 2015

WASHINGTON August 10, 2015— Lifting sanctions related to Iran’s nuclear program will have a significant impact on the world oil market, the Iranian economy and Iran’s trading partners. Iran’s full return to the global market will eventually add about a million barrels of oil a day, lowering oil prices by US$10 per barrel next year, according to the World Bank, which also expects economic growth in the country to surge to about 5% in 2016 from 3% this year.

If the agreement reached on July 14, 2015 is ratified, sanctions on Iran by the United States and the European Union will be removed in return for Iran decelerating its nuclear program. The World Bank’s Middle East North Africa (MENA) Quarterly Economic Brief, Economic Implications of Lifting Sanctions on Iran, sees Iran’s capacity to export more oil as speeding its economic recovery. But the report projects lower export earnings and revenue for MENA’s other oil exporters, such as the Gulf States and Libya, while oil importers in the region, such as Egypt and Tunisia, will benefit from lower world prices.

“Just as the tightening of sanctions in 2012 led to a sharp decline in Iran’s oil exports and two years of negative growth, we expect the removal of sanctions to boost exports and revive the economy,” said Shanta Devarajan, World Bank Chief Economist for the Middle East and North Africa region.

Iran’s cost of doing trade will also fall, increasing not just the volume but the value of its oil trade and non-oil trade. The Bank’s report estimates that exports from Iran will eventually increase, too, by about US$17 billion, which is about 3.5% of its GDP. Britain, China, India, Turkey and Saudi Arabia are among the countries most likely to see the largest rise in post-sanctions trade with Iran. Foreign direct investment may increase to about US$3 billion a year, double the current rate but still lower than its peak in 2003.

“Since the framework agreement of April 2015, we have seen increased interest from multinational companies in investing in Iran, especially in the oil and gas sector,” said Lili Mottaghi, World Bank MENA Economist and the author of the report. ”That trend is likely to accelerate with the lifting of sanctions, providing much-needed capital and upgrading of technology to Iran’s oil sector.”

The lifting of sanctions represents an economic windfall to the Iranian economy. Iran’s experience with managing previous oil windfalls is sobering. The real exchange rate appreciated undermining non-oil exports. Governments facing such economic windfalls have the opportunity to put in place a policy framework that puts the economy on a path of sustained growth.

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