Iranian Economy In Moderate Recovery Thanks To Sanctions Relief, New Report Finds

WASHINGTON – The Foundation for Defense of Democracies (FDD) and Roubini Global Economics (RGE) released their eighth joint report today on the effects of sanctions relief on the Iranian economy. The study found the country in the midst of a moderate economic recovery, after bottoming out in the 2013/14 fiscal year (ending March 20, 2014).

The study used a detailed econometrics model developed by RGE, in partnership with FDD, to present new economic forecasts for Iran, which highlight the impact of both direct and indirect sanctions relief on the Iranian economy and implications for the nuclear negotiations which are set to resume this month in Vienna.

The study determined that the Obama administration’s decision to de-escalate sanctions pressure in mid-2013, and the direct sanctions relief provided as part of the Joint Plan of Action (JPOA), were key factors that led to inflation decreasing by more than half to 14.7% in August 2014. Iran also improved due to better fiscal and monetary policy by the Rouhani government, which benefited from less economic pressure under the JPOA.

The report predicts the average pace of growth should accelerate through the current fiscal year, which will end next March, as recovery in the industrial sector and labor markets slowly translates into stronger domestic demand. But, at a 2.5% pace, Iran’s economic expansion will remain below its potential, constrained by the need for reform.

“As negotiators resume their work, ahead of the Nov. 24 deadline, Iran already has benefited from the de-escalation of sanctions pressure as a result of the JPOA and the Obama administration’s decision to block new congressional legislation,” said Mark Dubowitz, FDD’s executive director and co-author of the report. “The sanctions relief has directly led to Iran’s moderate recovery, enhanced negotiating leverage and increased nuclear intransigence.”

Under the scenario of an extension of the nuclear talks past the November deadline, Iran will likely gain access to an additional $4 billion to $5 billion dollars in oil revenue under a JPOA and billions more in indirect relief as its economy continues to recover.

“The only way for Iran’s economy to turn from its current upward trajectory would be if talks collapse and sanctions are reinstated,” Dubowitz said. “At some point, the West’s ability to conclude a nuclear deal on satisfactory terms or to enforce a nuclear deal against Iranian noncompliance will diminish as Iran’s economic recovery hardens.”

Rachel Ziemba of RGE, a co-author of the report, said “We believe many domestic and international investors will remain on the sidelines in the coming quarters, watching the potential for a nuclear agreement and its rollout. Iran’s long-term growth will depend heavily on the sanctions trajectory.”

The study’s key findings include:

• Iran’s energy and, to a lesser extent, the industrial sector outperformed in late fiscal 2013/14, contributing to the bulk of economic growth. However the labor-intensive service sector lagged, continuing to shrink, and deferring the benefits of sanctions relief felt by average Iranian households.
• Following the election of President Hassan Rouhani and the start of nuclear negotiations, external pressures allowed the new administration to focus on macroeconomic stabilization. Tighter fiscal and monetary policies limited consumption and credit growth, but also reduced inflation, tempered asset bubbles and built resilience against future shocks.
• More substantial benefits of sanctions relief are expected in the second six-month period from July to December than the first six-month period, from the implementation of the Joint Plan of Action (JPOA) in January to June 2014.
• The recent drop in global oil prices is more meaningful for Iran’s longer-term prospects than its near-term growth or financial stability. Falling oil revenues will translate into the slower accumulation of reserves, but little change in the near-term outlook for imports, currency, or government spending. A long-term decline in oil prices that reflects weaker demand would devalue Iran’s untapped energy reserves and reduce its attractiveness to foreign investors, while lower revenues strain the government’s budget and impair long term growth.
• A collapse in nuclear negotiations and a quick re-imposition of sanctions would weaken growth substantially, but the resulting recession would be far less extreme than in the original imposition of sanctions in 2012. Economic performance in FY 2015/16 will depend heavily on the outcome of negotiations.

Download the full report at: https://s3.us-east-2.amazonaws.com/defenddemocracy/uploads/publications/RoubiniFDDReport_Oct14.pdf

About the Foundation for Defense of Democracies:

The Foundation for Defense of Democracies (FDD) is a non-profit, non-partisan 501(c)3 policy institute focusing on foreign policy and national security. Founded in 2001, FDD combines policy research, democracy and counterterrorism education, strategic communications and investigative journalism in support of its mission to promote pluralism, defend democratic values and fight the ideologies that drive terrorism. Visit our website at www.defenddemocracy.org and connect with us on Twitter, Facebook and YouTube. 

About Roubini Global Economics:

Founded in 2004 by economist Nouriel Roubini, Roubini Global Economics is an independent, global macroeconomic research firm. The firm’s research combines expert insights with systematic analysis to translate economic, market and policy signals into practical intelligence for a wide range of financial, corporate and policy professionals. This holistic approach uncovers opportunities and risks before the come to the attention of markets, helping clients arrive at better decisions in a timelier manner. Roubini Global Economics is headquartered in New York, with offices in London and Singapore.

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