Iran set to be 2nd worst-performing economy globally

dubai — Battered by US sanctions, Iran slipped deeper into a recession and will be the second worst-performing economy globally as it will witness faster economic contraction in the current fiscal year than the previous one, a new study says.

The International Institute of Finance (IIF) said the Iranian economy contracted by 4.6 per cent in fiscal year 2018-19 ended in March as a result of the sanctions.

“We expect the contraction to deepen to 7.2 per cent in the current fiscal year 2019-20. Most of the contraction is due to the sharp decline in volume of exports of crude oil and condensates, which dropped from a peak of 2.8 million bpd in May 2018 to less than 0.4 million bpd in recent months,” said Garbis Iradian, chief economist for the Mena at the IIF.

Globally, Venezuela’s economy will be the worst performer, contracting by 15 per cent.

The re-imposition of US sanctions in May 2018 hit the Iranian oil sector hard and caused foreign investment to dry up, including disruption of major business deals with the European Union. Iran is reducing its reliance on oil exports by increasing taxes and cutting energy subsidies, which raised annual inflation level to 50 per cent.

The recent spike in tensions between Washington and Tehran will also have repercussions for the Iranian economy in the months to come as the Middle Eastern country witnesses protests due to rising costs and tension with America.

“Tight US sanctions have virtually wiped out Iran’s ability to sell crude oil and condensates and pushed its economy into deep recession for a second consecutive year and raised annual inflation to 50 per cent — the highest rate in the past two decades,” he added.

The IIF noted that Iran’s real GDP will contract by 8 per cent in the current fiscal year.

The spread between the official and the parallel market exchange rates widened following the reimposition of US sanctions. As of January 10, the official exchange rate was 42,000 Iranian riyals while the black-market rate was 132,800 riyals.

As a result of the slump in the economy, the current account balance has shifted to a small deficit for the first time since 1998. Iran’s official reserves are likely to decline further to $73 billion by March 2020 — a loss of nearly $40 billion in just two years.

“We also estimate a decline in nominal GDP of $97 billion to $275 billion in fiscal year 2018-19. The unemployment rate has increased to 17 per cent, with youth unemployment of around 30 per cent,” Iradian added.