Iran: Interview with Steven Burke, Iran economist at FocusEconomics
On 1 January, the U.S. escalated tensions with Iran, by assassinating a top Iranian general, which sent oil prices and demand for safe-haven assets soaring. The latest escalation put the 2015 nuclear accord and the de-stabilization of the Middle East at further risk. This interview outlines the economic impact the U.S.-Iran dispute is having on the Iranian economy.
Steven Burke has a Master’s in Economics from the University of Toronto. Steven has worked as an economist at FocusEconomics since 2018, with a special focus on Iran and the broader Middle East.
What impact have U.S. sanctions had on Iran’s economy? In light of these sanctions, how do you see Iran’s economy doing this year?
Punishing U.S. sanctions targeting Iran’s energy, shipping and financial sectors and, more recently, the manufacturing and metal sectors are the main reason the economy is in the doldrums. Since the reimplementation of the sanctions in November 2018, Iran’s crude oil production has declined by nearly half, while estimates of Iranian crude oil exports have plunged from a peak of 2.8 million barrels per day (mbpd) in 2018 to less than 0.4 mbpd in recent months.
On the domestic front, U.S. sanctions have caused prices to surge, with inflation averaging 35% since the U.S. pulled out of the nuclear deal in May 2018. This has crippled households’ purchasing power and weighed heavily on private consumption. Late last year, in an attempt to support government finances, the regime cut fuel subsidies by roughly 50%, further hitting household spending levels. On the monetary front, U.S. sanctions on Iran’s Central Bank limit its ability to stimulate the economy. Moreover, a frail banking system and severed international relationships have hindered business investment and access to capital.
The economy is expected to contract at the sharpest pace in multiple decades in SH 2019, which runs from April 2019 to March 2020. The FocusEconomics Consensus Forecast projects the economy to contract 7.8% in this period. Next Iranian year (SH 2020), the economy is seen contracting at a soft pace due to a low base effect. That said, the most recent escalation in U.S. sanctions poses a significant risk to Iran’s non-oil economy and could lead to a sharper deterioration in economic activity in SH 2020 than previously anticipated.
Nonetheless, Iran’s economy is still the second largest in the Middle East, has significant FX reserves to temporarily cope with external shocks and boasts a relatively diversified economy— oil and gas represents less than 15% of GDP. Meanwhile, data from the country’s Statistical Institute has shown a slight fall in the unemployment rate over the July–September period due to a somewhat resilient non-oil private sector. Furthermore, Iran’s steel production and steel exports have remained solid in recent quarters, which also likely provided some relief to the battered economy.
- How are sanctions impacting the fiscal outlook?
Iran has run a fiscal deficit for nearly two decades and FocusEconomics Consensus Forecast panelists see this trend continuing, projecting the fiscal deficit will reach 5.4% of GDP in SH 2020—representing the widest deficit since SH 2008. Iran’s fiscal balance is highly tied to oil prices as a notable chunk of government revenues come from the oil and gas sector; economic sanctions are thus starving public finances. Overall, the fiscal deficit will likely remain elevated until sanctions are lifted and exports normalize.
- How are sanctions impacting the external outlook?
Iran has run a current account surplus for two decades, mainly due to hydrocarbon exports. Moreover, Iran has a relatively diverse economy with a well-educated workforce and a somewhat developed manufacturing sector, exporting a considerable amount of manufacturing and metal products to neighboring countries. In SH 2019, however, FocusEconomics Consensus Forecast panelists estimate the current account will post the first deficit since 1998, with the shortfall expected to deepen to 1.5% of GDP in SH 2020. Sanctions are the driving force behind this year’s projected deficit.
Can Iran withstand the sanctions?
As highlighted above, Iran has a sizable domestic economy and significant resources to withstand the effects of sanctions. Nevertheless, run-away inflation will be weighing on consumption levels and draining the public purse as the costs of social welfare programs rise. Therefore, Iran’s ability to withstand sanctions has a high price tag.
Strategically, Iran can put pressure on the U.S. by threatening to disrupt the Strait of Hormuz or attacking Saudi oil production facilities—as we saw last year. This would significantly disrupt global oil markets and could impact the global economy, although it runs the risk of triggering further conflict between Iran and the U.S. which Tehran seemingly wishes to avoid. Another option would be to further utilize Iran’s proxies and allies in the Middle East—specifically in Iraq, Syria, Lebanon and Yemen—which threaten U.S. interests in the Middle East, although again this would antagonize the U.S.
While several European nations have attempted to offer Iran financial support in an attempt to rescue the 2015 nuclear accord, this has been ineffective due to the lack of U.S. collaboration. Moreover, EU-Iran relations have frayed in recent months after Iran raised its uranium enrichment levels. In response, France, Germany and the United Kingdom threatened to reimpose UN sanctions on Iran, which could result in the collapse of the nuclear accord.
Russia and China are also signatories of the original accord and could heavily influence any UN sanctions vote by vetoing or complicating the process. There is evidence to suggest China would safeguard Iran from UN sanctions, as China is likely benefiting from discounted Iranian oil products.
Do you think the nuclear deal will survive?
The future of the nuclear deal likely depends on the outcome of the U.S. 2020 presidential election. If a Democratic candidate wins the election, this may increase the chance of keeping the current nuclear deal alive. If Trump is re-elected such an outcome appears unlikely; that said, he could change his rhetoric and keep the current deal in place or negotiate a new nuclear accord, as he would not be facing another re-election vote and therefore would have less to risk politically.
In the interim, there is an increasingly small chance the nuclear deal can be saved. It would likely require the U.S. to ease sanctions—which seems highly unlikely until the U.S. 2020 federal elections are decided—and/or for Tehran to lower its uranium enrichment levels and suspend its ballistic missile program. This again, however, seems unlikely. The possibility of UN sanctions would serve another blow to Iran’s economic prospects in the short term, but could ultimately leave Iran little choice but to accept the terms of a new nuclear accord, which could consequently brighten Iran’s outlook further ahead.
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.
Author: Steven Burke, Economist
Date: February 6, 2020
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