Iran Economic Forecast

The economy has seemingly performed poorly so far this year. Non-oil activity is likely being hit by sky-high inflation, rising unemployment, interest rate hikes and strikes. In addition, exports to China—Iran’s main trading partner—tumbled 39% in January–April, and oil prices are currently down by over a fifth from their mid-Q4 levels, which will be weighing on government coffers. Oil output was up just 1.9% year on year in January–April but has risen in sequential terms so far this year. In politics, following the reestablishment of diplomatic relations with Saudi Arabia earlier this year, at end-May Iran’s supreme leader voiced his support for the resumption of ties with Egypt. Talks between the two countries are set to take place in June. That said, the economic benefits from warming relations with Arab neighbors will likely be limited as long as tough U.S. sanctions remain in place.

Inflation dipped to 54.6% in May from 55.5% in April. Price pressures continued to be stoked by the weak parallel-market rial, a large monetary expansion and last year’s elimination of the subsidized exchange rate. The Consensus is for inflation to average the second-highest in the region this calendar year on the weak parallel-market currency and high money supply growth.