October 5, 2017 | Policy Brief

Iran’s GDP Growth Back to the Normal Level

October 5, 2017 | Policy Brief

Iran’s GDP Growth Back to the Normal Level

Iran’s Parliament Research Center (PRC), an official arm of the country’s legislature, or majlis, has forecast the country’s GDP growth to be 3.7 percent for the Persian year 1396, which runs from March 2017 to March 2018. This is far less than the previous year’s growth rate of 12.5 percent, announced by the Central Bank of Iran, although only a three-point drop from the 6.6 percent estimated by the IMF and World Bank.

Last year’s strong performance was the result of explosive growth in the oil sector, which began after the implementation of the nuclear deal led to a suspension of oil export sanctions.

This year, Iran’s growth will be distributed much more evenly across the economy’s four major sectors: oil and gas, industry and mining, agriculture, and services. According to the PRC, the oil and gas sector will contribute 0.9 of the estimated 3.7 percentage points of GDP growth; the sector was responsible for 9.8 percentage points of the 12.5 percent growth in 2016-2017. In absolute terms, the PRC forecasts 4.1 percent growth for the oil and gas sector, much smaller than the 62 percent realized growth in 2016-2017 when Iran’s oil export and production almost reached its natural ceiling.

OPEC data show that Iran’s oil production over the fourth quarter of 2016 and the first and second quarter of 2017 has been almost constant at around 3.7-3.8 million barrels per day. Unless there is a price hike, the sector will remain on the trajectory foreseen by the PRC. Over the past 10 years, the oil and gas sector has produced 20-25 percent of the country’s GDP, but given its role in generating hard currency via exports, its indirect effect on the GDP goes far beyond its direct share. 

With only 0.3 percentage points, the agriculture sector will make the smallest contribution to GDP growth. The agriculture sector is not very dependent on the country’s business cycles, which are mainly influenced by the price of oil.

Today, however, the agricultural sector is facing an existential challenge. Iran has a water crisis caused by a combination of mismanagement and natural environmental trends. The country’s traditional system of agriculture is partly responsible for its depleted underground water reserves. As a result, the government needs to make a decision about whether to import more agricultural products in order to limit the depletion of reserves. This decision has political dimensions, since an increased reliance on exports may push farmers to immigrate to urban centers. A similar pattern of rural-to-urban migration helped to pave the way for the 1979 Islamic revolution.

The manufacturing and mining sector will contribute 1.1 of the 3.7 percentage points of GDP growth, almost double its 0.6 percent contribution in 2016-2017. In 2016-2017, the manufacturing sector’s production returned to its 2011-2012 level, before the sanctions storm hit the country hard.

Finally, the PRC projects that the service sector will contribute 1.4 percentage points of total GDP growth. The overall size of this sector remains below its 2011-2012 level, which shows the effect of sanctions on Iran has been deep and long.

Two years after the nuclear deal, Iran’s economy is clearly recovering but still on shaky ground. New sanctions could hit the regime hard at a time when it is involved in multiple wars and the gap between people’s expectations and their reality is expanding. The United States should use this opportunity to put pressure on Tehran to fix the flawed nuclear deal, stop Iran’s ballistic missile program, and curb its expansionary foreign policy in the region.

Saeed Ghasseminejad is a research fellow at the Foundation for Defense of Democracies. Follow him on Twitter @SGhasseminejad.