LONDON: Iran’s economy could see 6 to 8 percent growth, according to a new economic scenarios report released by IHS Inc. (NYSE: IHS), the leading global source of critical information and insight.
IHS will discuss growth opportunities across multiple sectors in the Middle East at the IHS Forum in Dubai from 27-29 April.
Report author Bryan Plamondon, senior Middle East economist at IHS, highlighted three possible scenarios for Iran’s future as well as forecasts for Iranian crude production.
If economic sanctions are lifted and Iran is allowed to engage in uninhibited trade and investment with industrial nations, Iran’s economy will likely grow 6 to 8 percent over the medium term. This is a strong jump from the average 5 percent growth that we have seen from 2000 to 2010.
Under this scenario, Iranian crude production could jump to almost four million barrels per day by 2020. Additionally, intra-regional trade would increase, with countries like the UAE restoring some previously lost trade relationships.
In this scenario, the government’s attitude towards foreign investment will mirror that of the Khatemi era. Iran will have to partner with foreign firms to revitalize the country’s domestic technological capacity. However, the underlying assumption for this scenario is that the main bottleneck facing the Iranian economy is political and security risks, rather than a shortage of economic resources.
In a scenario where relations between Iran and the West again worsen, economic growth would actually slow to a 1 to 2 percent annual rate over the medium term. Economic imbalances would place further strain on the government and would likely lead to a severe economic shock. Iran could potentially see conditions in its oil and gas sector deteriorate, with production dropping to almost two million barrels per day by 2020.
If there is a continuation of the current situation, the economy will continue on its growth rate path of 1 to 3 percent per year, with a high degree of macroeconomic instability and uncertainty. Iran will remain under moderate economic and financial sanctions, which have had an adverse effect of its foreign trade and limited access for foreign investment. Key sectors of the economy will be deprived of private capital and a large share of the government’s economic resources will be devoted to consumer and producer subsides to sustain economic activity. Under this constant case scenario, crude production would flat line at its present level of almost 2.8 million barrels per day.
Rapprochement with the West will help to stabilize Iran’s economy. IHS forecasts Iran’s real GDP will rise by 1.5 percent in FY 2014/15, after two years of contraction. Signs of improved relations along with temporary and conditional sanctions relief have breathed life into the Iranian economy. The EU has suspended its ban on insurance coverage for Iranian oil shipments, $4.2 billion in oil revenues has been unblocked, and current restrictions on imports of crude will be held steady for the six countries still purchasing oil from Iran.
However, Iran is not out of the woods yet. External and fiscal balances will remain under pressure, inflation will continue to run at high double-digit rates and trade and current account balances have been cut sharply due to sanctions. IHS estimates that since 2011, Iran’s economy has shrunk by more than $270 billion due to sanctions.