October 12, 2018 | Policy Brief

IMF and World Bank Predict Economic Slowdown in Iran

The IMF and World Bank this month released data predicting Iran’s economy will shrink over the next two years. This data follows U.S. President Donald Trump’s announcement in May to leave the Iran nuclear deal and to re-impose U.S. sanctions. The first round of renewed sanctions took effect in August, with another round coming in early November.

As the first round of sanctions began to take effect, the IMF announced on October 8 that it estimates Iran’s economy will shrink 1.5 percent by the end of 2018 and a further 3.6 percent in 2019, matching estimates also released this month from the World Bank for the Persian fiscal years ending in March 2019 and 2020. Citing the impact of sanctions, the World Bank predicts that Iran’s industry sector will be hit hardest, with a 7 percent contraction predicted for both years. Both organizations also anticipate inflation reaching over 20 percent in 2018 and over 30 percent in 2019.

This follows the Iranian Parliament Research Center’s own forecast, released in August, predicting economic slowdown. Also citing the impact of sanctions, the center estimates Iran’s economic contraction to be between 0.5 and 2.8 percent in 2018-2019 and between 3.8 and 5.5 percent for 2019-2020. The report also noted that European cooperation with Tehran will be a critical factor in determining how hard Iran’s economy will suffer.

While many European companies have decided to leave the Iranian market to avoid U.S. sanctions, some have yet to announce. Most decisions will be made before November 4, when the rest of U.S. sanctions go into effect. The more European companies that cut ties with Tehran, the larger the contraction will be.

Interestingly, Iran’s economy was slowing before Trump’s announcement. In September, the Central Bank of Iran published its preliminary estimates of the growth for spring 2018, which was 1.8 percent. This was a significant drop compared to the 4.6 percent growth rate reported for the spring of 2017. This may be linked to Trump’s warning in January that there would be no further sanctions waivers for Tehran. The manufacturing and service sectors were hit hardest. The oil sector, however, continued to grow.

Despite claims from skeptics that U.S. unilateral sanctions would not be effective, it is clear that the new round of sanctions, and even the threat of sanctions, are putting economic pressure on Tehran. The Trump administration aims to use this leverage to change the behavior of the regime.

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

Follow FDD on Twitter @FDD and follow FDD’s Center on Sanctions and Illicit Finance @FDD_CSIF. FDD is a Washington-based, nonpartisan research institute focusing on national security and foreign policy.