Iran: Economy continues to face challenges

We anticipate an acceleration in Iran’s real GDP growth this year, forecasting 3.5% in 2022 compared with an estimated 3.0% last year. However, the risks to this outlook are weighted predominantly to the downside as the Iranian economy continues to face major challenges in 2022, not least a surge of coronavirus cases at the start of the year, high levels of inflation, and a persistent impasse in the country’s negotiations around a new nuclear deal.

Daily Covid-19 cases, 7dma

Source: Bloomberg, Emirates NBD Research

The 2021 growth rate will have largely been predicated on the back of stronger oil production as non-oil sectors remained under significant pressure as coronavirus cases rose rapidly. By contrast, our projection for stronger growth this year is based mainly on an expectation that pressures related to the pandemic will ease rather than any boost from the oil sector, given a repeat of 2021’s increase in production is unlikely. However, the outlook for Q1 remains precarious. While current daily case numbers remain far off the levels seen last summer (the 7dma was 2,788 on January 19 compared to 39,314 on August 18), they are mounting rapidly once more as the Omicron variant has arrived in the country. Nearly two thirds of the population have now received two vaccine doses which bodes well for the recovery, but this latest wave will nevertheless hinder activity in the near term. Later in the year, however, we see scope for a much stronger performance from sectors such as leisure and hospitality, especially given the tourism sector’s ambitious growth projections.

Aside from the ongoing pandemic challenges, Iranian households will also have to contend with a persistently high level of inflation which has hovered around 40%. Private consumption levels have been under duress in Iran for several years, contracting by -7.7% in 2019 and -0.4% in 2020, in part due to low labour participation rates and in part because of high inflation levels, and this will remain the case in 2022 given currency weakness will likely remain in play. The parallel exchange rate for the IRR has been highly volatile, moving up and down with the nuclear talks news cycle, but having gone as low as IRR 300,000/USD in December, it remains substantially weaker than the official exchange rate of IRR 42,000/USD.

Iran oil production, '000 b/d

Source: Bloomberg, Emirates NBD Research

At present it does not appear likely that there will be any breakthrough in nuclear talks in 2022 that would see the lifting of sanctions on Iran and allow it to start exporting major volumes of oil once more, potentially giving a boost to that exchange rate. Iran boosted oil production in 2021 as it produced an average 2.43mn b/d, compared with 2020’s 1.97mn b/d – growth of 23.4%. However, while inflationary challenges in the US could see its negotiators become more amenable to allowing Iranian crude back on the market, for the time being there is no indication that a deadlock will be lifted. Should a deal be reached, however, then there is substantial upside potential for the Iranian economy. Current production is far off the 2018 levels of 3.8mn b/d, and a renewed inflow of FX receipts and foreign investment would provide a substantial boost to economic activity.