MACRO ECONOMICS

MBA432E

CIA 1 – ECONOMY ANALYSIS

SUBMITTED TO:
DR. HEMALATHA

BY:
VISHWAS.M. PARASHAR
1827227 (F1)

Institute of Management
Christ (Deemed to be University), Bengaluru
July 2019
 UNDERSTANDING THE ECONOMY

Iran's economy is marked by static policies, inadequacies, and over reliance on oil and gas
exports, however Iran conjointly possesses important agricultural, service and industrial
sectors. The Iranian government directly owns and operates many state-owned enterprises and
indirectly controls several companies associated with the country's security forces.

Distortions - including corruption, subsidies, price controls, and a banking system holding
billions of dollars of non-performing loans - weigh down the economy, undermining the
potential for private-sector-led growth. Private sector activity includes farming, small-scale
workshops, some manufacturing, and services, in addition to medium-scale construction,
cement production, mining, and metalworking. Significant informal market activity prospers,
and corruption is widespread.

The economy contracted 4.9 percent in the fiscal year 2018 according to a report released by
Iran’s Statistical Institute in late June. The recession is expected to deepen this year as the US
sanctions continue to affect the country. Recent OPEC report showed that the oil output
declined sharply in April and May. It is also found that much of the oil leaving Iran is stranded
on the sea, the major reason being the lack of buyers. Geopolitical tensions have increased with
the violation of the 2015 nuclear accords by exceeding the limit of uranium possession.

ECONOMIC GROWTH

Iran’s economy is expected to shrink severely in 2019. The sanctions will continue to affect
the oil exports, and the Rial depreciating will fuel inflation and curtail the customer’s
purchasing power. Fragile relations with the U.S, armed conflicts and vulnerability to
fluctuations in oil prices will pose huge risks to the economy. The forecast is that the economy
will contract by 5.4% in 2019.
 ECONOMIC DATA

The following is a table which shows different economic parameters and their measures in
different financial years:

ECONOMIC PARAMETERS 2013 2014 2015 2016 2017

Population (million) 77.4 78.5 79.5 80.5 81.4
GDP per capita (USD) 5629 5451 4931 5272 4477
GDP (USD bn) 436 428 392 424
Economic Growth (GDP, annual variation in %) -0.2 4.6 -1.3 13.4 -4.9
Unemployment Rate 10.5 11.5 11.8 12.5 12.1
Fiscal Balance (% of GDP) -0.9 -1.1 -1.7 -2.2
Public Debt (% of GDP) 10.7 11.8 41.6 48.9 40.9
Money 38.8 22.3 30 23.2
Inflation Rate ( CPI, annual var in %) 34.7 15.6 11.9 9 9.6
Exchange rate (vs USD) 24774 27138 30130 32376 36074
Current Account (% of GDP) 5.8 3.2 0.3 3.9
Current Account balance (USD bn) 25.1 13.6 1.2 16.4
Trade balance (USD Bn) 29.3 18.1 5.4 20.8
Exports (USD Bn) 92.9 89 63 84
Imports (USD Bn) 63.6 70.9 57.6 63.1
Exports (annual variation in %) -4.5 -4.2 -29.2 33.3
Imports (annual variation in %) -7.5 11.5 -18.7 9.5
International Reserves (USD) 118 126 128 121

5 MAJOR ECONOMIC FACTORS

1. GROSS DOMESTIC PRODUCT:

Iran's economy was badly affected for several years by sanctions imposed by the international
community over the country's nuclear programme. In 2015, President Hassan Rouhani agreed
a deal with the US and five other world powers to limit Iranian nuclear activities in return for
the lifting of those sanctions. The following year, after the deal was implemented, Iran's
economy bounced back and GDP grew 12.3%, according to the Central Bank of Iran. But much
of that growth was attributed to the oil and gas industry, and the recoveries of other sectors
were not as significant as many Iranians had hoped.

Growth fell back to 3.7% in 2017, helping to fuel the economic discontent that led to the biggest
anti-government protests in Iran for almost a decade that December. The reinstatement of US
sanctions last year - particularly those imposed on the energy, shipping and financial sectors in
November - caused foreign investment to dry up and hit oil exports. The sanctions bar US
companies from trading with Iran, but also with foreign firms or countries that are dealing with
Iran.

As a result, Iran's GDP contracted by 3.9% in 2018, according to estimates from the
International Monetary Fund (IMF). The IMF said in late April that it expected the Iranian
economy to shrink by 6% in 2019.

2. EXPORTS:

Oil exports are about 75% of Iran’s total exports. During the last five years the exports of Iran
have decreased at an annualized rate of -3.5%, from $63.6B in 2012 to $53.7B in 2017. The
most recent exports are led by Crude Petroleum which represent 71.7% of the total exports of
Iran, followed by Ethylene Polymers, which account for 5.12%.

At the start of 2018, Iran's crude oil production reached 3.8 million barrels per day (bpd),
according to data gathered by the Organization of the Petroleum Exporting Countries (OPEC).
The country was exporting about 2.3 million bpd.

But due to the sanctions, by March 2019, Iran's oil exports had fallen to 1.1 million bpd on
average. Taiwan, Greece and Italy had halted imports altogether, while the two biggest buyers
- China and India - had reduced them by 39% and 47% respectively. Iran's government had lost
more than $10bn ($7.7bn) in revenue as a result.
 3. CURRENCY:

The Iranian currency was stable for almost four years. But it has lost almost 60% of its value
against the US dollar on the unofficial market since the US sanctions were reinstated. The fixed
official rate of 42,000 rials to the dollar is used for a limited range of transactions, so most
Iranians rely on currency traders. The traders were supposedly offering 143,000 rials to the
dollar on 30 April, which shows the state of the currency.

The rial's slide has been attributed to Iran's economic problems and a high demand for foreign
currency among ordinary Iranians who have seen the value of their savings eroded and worried
that the situation will get worse. The rial has regained some of its value since September 2018,
when the Central Bank of Iran released more dollars into the market and authorities cracked
down on currency dealers as prices reached a record low of 190,000 to the dollar.

Iran's currency woes have also led to shortages of imported goods and products that are made
with raw materials from abroad causing widespread problems.
 4. CURRENT ACCOUNT:

The government deficit is expected to widen significantly in 2019 in view of the decline in
budgetary revenues. These revenues will be hurt still further by the contraction of oil income,
which represents 40% of revenues, and by the decline in non-oil revenues, which are expected
to suffer from the economic recession.

'Current Account balance (USD bn)' VS 'Trade balance (USD

Bn)'
Current Account balance (USD bn) Trade balance (USD Bn)

35
30 29.3
25 25.1
20 20.8
18.1 16.4
15 13.6
10
5 5.4
0 1.2
2013 2014 2015 2016 2017
ECONOMIC PARAMETERS
 5. INFLATION:

The annual inflation rate in Iran surged to 52.1 percent in May 2018 from 51.4 percent in the
previous month. It was the highest inflation rate since July 1995 Inflation Rate in Iran averaged
13.99 percent from 1957 until 2018, reaching an all-time high of 59.02 percent in May of 1995
and a record low of -3.27 percent in April of 1958.

Iran managed to get inflation down to 9% in 2017 which seemed to be farfetched. But the IMF
estimates that it soared to 31% in 2018 and predicts that it could reach 37% or more this year
if oil exports continue to fall. The plunging value of the rial has affected not only the prices of
imported goods but also of locally produced staples. In the past 12 months, the cost of red
meat and poultry has increased by 57%, milk, cheese and eggs by 37%, and vegetables
by 47%.

The price rises have led to long queues at government-subsidised grocery shops. Some Iranian
farmers are selling meat in neighbouring countries to obtain foreign hard currency.

There is also a plan to introduce electronic coupons to help the poorest people obtain meat and
other essential goods. An estimated 3% of Iranians - some 2.4 million people - were living on
less than $1.90 (£1.46) a day in 2016.
 FORECAST AND CONCLUSION

The Iranian economy has entered a period of stagflation and is expected to contract by more
than 2 percent on average between 2018/19-2019/20 due to negative external shocks. Central
government fiscal deficit has reached record levels in recent months due to lower realized
revenues from a shrinking economic activity base. Unemployment rate remains high at close
to 12 percent.

In the medium term, the economy is expected to undergo a period of stagflation until April
2020 as oil output continues to decline along with other mounting external economic
challenges. The economy is projected to contract by more than 2 percent in 2018/19 and
2019/20 before returning to a modest recovery path albeit from a smaller base. Inflation is
expected to be around 30 percent in 2018/19 and increase further in the following year as the
full effect of the exchange rate depreciation is passed on. The fiscal deficit is projected to widen
as incomes continue to fall short of the previous years due to lower tax revenues and oil exports.
On the external side, Iran’s current account surplus is expected to decline to very low levels in
the coming years as exports decline in both goods and services categories despite limited US
sanctions waivers for some importers of energy and oil from Iran. The shrinking current
account balance, along with expected rise in outward flows from the financial account, are
likely to raise the challenge of managing the value of the rial and inflation by the CBI. A decline
in real GDP per capita with double-digit inflation are expected to have a further negative impact
on poverty through different channels, including the labor market and a further erosion of the
real value of cash transfers. Poverty is expected to continue to increase after 2016, reaching
12.8 percent in 2021. The exact poverty trend will also depend on the public policy response
of the government. Increasing the value of cash transfers, possibly along with introducing
targeting mechanisms, may help the poor and vulnerable population cope with the social and
economic shocks.
 Multiple values by 'ECONOMIC PARAMETERS'
40 34.7
29.3
30 25.1
20.8
18.1 16.4
20 15.6 13.6
10.5 11.5 11.8 11.9 12.5 12.1
9 9.6
10 5.4
1.2
0
2013 2014 2015 2016 2017
ECONOMIC PARAMETERS

Unemployment Rate Inflation Rate ( CPI, annual var in %)

Current Account balance (USD bn) Trade balance (USD Bn)

REFERENCES:

Iran’s Economy - http://pubdocs.worldbank.org/en/930061553672411223/Iran-MEU-April-2019-

Eng.pdf

BBC NEWS - https://www.bbc.com/news/world-middle-east-48119109

CENTRAL INTELLIGENCE AGENCY: https://www.cia.gov/library/publications/the-world-

factbook/geos/ir.html

TRADING ECONOMICS - https://tradingeconomics.com/iran/unemployment-rate

COFACE for trade - https://www.cofacecentraleurope.com/Economic-analysis/Iran-Islamic-Republic-

of

Foreign policy report - https://foreignpolicy.com/2019/02/13/irans-economy-is-crumbling-but-

collapse-is-a-long-way-off-jcpoa-waivers-sanctions/