The resurgence of Iran
Major economic changes could be in store for both Iran as well as much of the Middle East as a result of the 17 July landmark nuclear agreement that includes the eventual removal of the economic sanctions that have plagued Iran in recent years. Recent opposition from within the United States threatens to derail the agreement, which could have significant implications for the economies of the country and the Middle East.
Iran’s economy during the sanctions
The implications that a potential lifting the sanctions on Iran are enormous for both the country and the region. The Iranian economy has been seriously affected by the economic sanctions implemented by the European Union, the United States and the United Nations after the Persian country refused to stop its nuclear program. Sanctions include a ban on oil and gas exports, freezing of overseas assets, and disconnection from the SWIFT mechanism, among others.
The most significant effect of the economic sanctions was a dramatic reduction in oil production and, therefore, a widespread shortage of foreign exchange, as well as soaring inflation and weaker growth. Nevertheless, the consequences of the sanctions were not all negative as they prompted the government to accelerate its import substitution strategy and diversify the economy away from oil. As a result, the country enjoys a relatively diversified economy compared to its regional peers.
Economic benefits of lifting the sanctions
The recent agreement paves the way for Iran to be reintegrated into the world economy, and with this come huge economic and geopolitical implications. Despite having been isolated due to sanctions since 1979, Iran is the second largest economy in the MENA region and trails only Egypt in terms of population. The country has the world’s fourth-largest proven oil reserves and ranks second in gas reserves. Moreover, the country enjoys a relatively diversified economy due to the effects of the economic sanctions and the government’s import-substitution strategy. While Iran cannot immediately return crude production to pre-sanctions levels of about 4.0 million barrels per day (currently 2.8 mbpd)—the country requires massive investment to upgrade its infrastructure—analysts estimate that it could release the approximately 30 to 40 million barrels it has in storage relatively quickly.
Impact on the MENA economy
Given Iran’s size and importance, the normalization of relations between it and the international community will have a profound economic and political impact in the MENA region. Iran is expected to boost oil supply in the mid- to long-term, which will add to a global supply glut and exert downward pressure on prices. Low oil prices will likely put an additional strain on the budget and the current account of some oil-export–dependent economies. On the other hand, those economies less reliant on crude will benefit from a reduced oil import bill.
The gradual removal of sanctions after decades of economic isolation will boost Iran’s demand for imported goods and services. The United Arab Emirates stands to be the principal beneficiary as it has a large Iranian community and already has strong commercial links with the Persian country (the UAE accounts for around 36% of total Iranian imports). Moreover, with Iran returning to the international community, the Ayatollah’s regime could help to stabilize the political situation in the Middle East given that it plays a pivotal political role in the region.
A challenging road ahead for Iran
The agreement has come under heavy criticism from the Republicans in the United States; the party controls both houses of the U.S. Congress and vowed to sink the nuclear pact. Although they are still short of the two-thirds majority required to override a presidential veto, some Democrats have spoken out against the deal, adding to the uncertainty regarding the final outcome of the vote scheduled for mid-September. In Iran, hardliners, which had benefited from years of isolation, could maneuver to derail the process in order to retain their privileges. Although it will not be smooth sailing for Iran, the outlook for Iran and the region is promising if both parties fulfill the agreement and Iran gradually reintegrates into the global economy.
Written by: Ricard Torné, Senior Economist
Author: Ricard Torné, Head of Economic Research
Date: August 28, 2015
TagsBrazil Iran USA Trade Infographic Euro Area Oil Exchange Rate Company News Ukraine Spain Russia Housing Market Japan Base Metals Commodities Eastern Europe Investment Unemployment rate precious metals Forex Turkey Australia Energy Commodities Venezuela China Precious Metals Commodities Sub-Saharan Africa Industrial Metals Commodities Brexit European Union Tunisia World Bank Economic Growth (GDP) Portugal UK Consensus Forecast United States Financial Sector MENA Africa Banking Sector United Kingdom South Africa France Fed G7 Mexico OPEC Latin America Argentina Colombia Italy Vietnam Greece Agricultural Commodities Panelists Canada IMF Nordic Economies Asia Commodities Gold Major Economies Germany Emerging Markets oil prices NAFTA Inflation India
Sub-Saharan Africa GDP 2018 Forecast: analysts slash forecasts on political risks https://t.co/myw4vXbCDM
2 hours ago
How will China’s upcoming National Congress of the Communist Party shape the economic and political future? https://t.co/0wYwPd07q7
7 hours ago
Sub-Saharan Africa is in a precarious situation with a myriad of political risk causing analysts to cut 2018 outlook https://t.co/aqSXcIHbi2
19 hours ago
1 day ago
The Colombian Ministry of Mining & Energy confirms official endorsement for Pacific Alliance Energy Forum. Register… https://t.co/mbUlPsPOYk
1 day ago
- Emerging Markets Are Kicking Into Higher Gear In 2017
- Why is foreign direct investment in Latin America falling again?
- Are Central Banks Nationalising the Economy?
- Bounty or burden? The impact of refugees on European economies is far from clear
- What’s the future of U.S.-Latin America trade relations?
- Taxes or cutbacks? Latin America's challenge of sustaining spending without causing debt to skyrocket
- Are uranium prices making a comeback?
- Taxing the Economy: Achieving a Delicate Balance
- Is the UK really "shackled to a corpse"?
- How will Latin America’s upcoming lengthy election cycle affect the reform agenda and credit ratings?
- How will emerging market economies perform in 2017?
- Chilean Economy in Focus: Interview with Senior Economist of the Chamber of Commerce of Santiago
- CEOs Rank Top Economies for Growth Opportunities
- The Mobile Ecosystem & Latin America's Economy
- Prospects and Challenges for the Global Economy: Interview with Tim Cooper from BMI Research
- How will the Fed reduce its balance sheet & and how will the ECB end QE? - 19 economic experts weigh in
- Thoughts on "unwinding" QE from Frances Coppola
- Gold: The Most Precious of Metals (Part 3)
- The Fed and ECB at a crossroads: Unwinding QE
- Spain: The economy that continues to silence the critics
- Latin America: The Most Unequal Region in the World
- The History of OPEC: Has it been a Success?
- FocusEconomics Announces 2017 Analyst Forecast Awards Winners
- Latin America’s rising unemployment bucks nearly decade long trend
- Escape from the Central Bank Trap by Daniel Lacalle
- China's economic rebalancing act: What to look out for in 2017
- Driving Growth in Latin America: Challenges & Priorities
- Is the Global Economy Rebalancing?
- Commodity exporters face challenging times
- Recent Global Events Facilitate Mercosur-Pacific Alliance
- 23 economic experts weigh in: Why is productivity growth so low?
- Mexico's outlook as Trump nears 100-day mark
- Interview with Oxford Economics Senior Economist on implications of the possible outcomes of the French Presidential Election
- The anxiety of the small saver in a world of negative interest rates
- Brexit negotiations. Between Uncertainty and Urgency
- An Economic History of the EU from El Blog Salmón
- Baby Boomin': Implications of high population growth in Latin America
- Survey of International Economists Predicts a Le Pen Defeat in French Elections, Says Macron has Best Economic Plan
- Spain in a global context: developed economy with some challenges
- How much is crime costing Latin America?
- Predictions & Estimates from Economist Daniel Lacalle
- What economy will the new Dutch government inherit?
- “The data is not a true reflection of reality in India” Interview with Société Générale India Economist
- 2017 & 2018 Economic Outlook for the Top Oil Producing Countries
- Which countries will have the highest and lowest inflation in 2017?
- What are the prospects for Emerging Economies in 2017?
- What to expect in Asia for 2017
- Top Economics & Finance Blogs of 2017
- Latam to Resume Moderate Growth in 2017 but Important Risks Plague Outlook
- 4 Key European Elections That Will Impact the Economy in 2017
- How are security concerns and political chaos affecting Turkey’s economy?
- Global growth to edge up in 2017
- Set to breach targets again? Debt and deficit outlooks for Southern European Eurozone countries in 2016 & 2017
- What does Donald Trump mean for the U.S. economy?
- How will emerging markets perform in 2017?
- The economic impact of a break in U.S.-Philippines ties
- Trump election: Base metals surge due to infrastructure plan
- 5 updates on the Venezuelan economic crisis
- Canada: When your neighbor’s house is on fire…
- Short-term pain before long-term gain? A look at French labor reform and economic growth
- Asia: Unremarkable growth & unfulfilled promises?
- How India's latest monsoon is affecting the economy
- Russian economy update in wake of OPEC deal announcement
- Innovation in Latin America: Potential Goes Untapped Due to Weak Economic Conditions
- The Wisdom of the Crowds and the Consensus Forecast
- Can the peso predict the U.S. election results?
- There's no end in sight to the Venezuela crisis
- A Look at the European Union Political Calendar
- Survey of international economists shows uncertainty surrounding elections damaging U.S. growth prospects
- FocusEconomics partners with leading online statistics provider Statista
- China: Recent postive economic data may be papering over the cracks
- Sub-Saharan Africa's 2016 & 2017 growth rates
- The Italian Dilemma: Weak banks pose risk to already faltering domestic demand
- How much money do migrants from Latin America send home?
- The U.S.' (Not So) Mysterious Case of the Missing Men
- What to expect from the G20 economies by 2020
- The Pain in Spain: Robust GDP growth cannot mask the persistent structural deficit