Sanctions likely to tip Iran into recession

Inflation seen soaring through 2020 as IMF sees GDP shrinking

Iran is likely to ride out the storm from US oil sanctions, suffering recession but no economic meltdown, thanks to rising crude prices and deepening divisions between the US and other major powers, officials and analysts say.

“Iran’s situation is better than pre-2016 because of high oil prices and the fact that the US is isolated this time,” said a European diplomat who asked not to be further identified.

Iran emerged in early 2016 from years of global sanctions under a deal with world powers that curbed its disputed nuclear programme. But President Donald Trump withdrew the US from the deal in May, calling it flawed to Iran’s advantage, and reimposed US sanctions in phases, with the most damaging oil and banking penalties taking effect on November 5.

But the broadly united front of world powers that enforced sanctions on Iran previously, pushing Iran into nuclear restraint, has unravelled since Trump took office and clashed with allies over everything from trade to collective security.

Still, while the US clampdown will probably trigger recession in Iran next year, economic meltdown should be avoided, with a reduced but still significant volume of oil exports continuing, a Fitch solutions analyst said. “Tehran is still likely to see a substantial share of its foreign exchange earnings maintained,” Andrine Skjelland said. “This will enable Tehran to continue subsidising imports of selected basic goods, keeping the costs of these down and thus limiting inflation to some extent.”

In hopes of mitigating the immediate economic hit, Iranian authorities have hinted that Tehran might have to sell its oil at a discount to entice buyers.

In another counter-measure made possible by state control of the oil sector, Iranian authorities are using special exchange centres to sell dollars at cheaper rates to importers of basic foods, medicine and other essential goods.

IHS Markit senior economist Patrick Schneider doubted that Iran could cushion the economic blow in the near term.

“Despite the rhetoric and attempts to mitigate the downside effects ..., uncertainty will remain prevalent for the next 6-12 months,” he told Reuters.

The International Monetary Fund has forecast that Iran’s economy will contract in 2018 by 1.5 per cent and by 3.6 per cent in 2019 due to the dwindling of oil revenues. At the same time the World Bank anticipates inflation in Iran jumping to 23.8 per cent in 2018-19 from 9.6 per cent in 2017-18, and to 31.2 per cent in 2019-20.

The rial’s weakness has sent prices of some imports rocketing, destroying jobs as some factories using imported parts have folded. Around 70 per cent of small factories, businesses and workshops have begun to close down in the past few months due to scarcity of raw materials and hard currency, Iranian state news agency IRNA said.