The consolidation of power by hardliners in Iran following the election of Ebrahim Raisi is likely to limit the scope of the nuclear deal with the international community and therefore the pace of its economic recovery, according to the Institute of International Finance.
Iran has been in talks about re-establishing or renegotiating the Joint Comprehensive Plan of Action, a deal agreed in 2015 that lifted some economic sanctions in return for setting limits on the country’s nuclear programme. The US withdrew from the pact in 2018 under former US President Donald Trump’s administration.
If a more ambitious, renegotiated deal is agreed, Iran’s economy could grow by 4.3 per cent this year and 5.9 per cent in 2022. However, a deal that is more limited in scope would restrict recovery, with gross domestic product growth of 3.5 per cent this year and 4.1 per cent next, according to IIF forecasts. If Iran does not reach a deal and current sanctions remain in place, growth would slow to 1.8 per cent this year and 1.6 per cent in 2022, from 3.6 per cent in 2019.
“Iran’s current position is to restore the 2015 deal without changing the terms. Even if an agreement is reached to lift most economic and financial sanctions, [Mr] Raisi’s conservative foreign and economic policies … may deter foreign investors, particularly from Europe and the US,” the institute said in a paper written by its chief Mena economist Garbis Iradian and executive vice president of research and policy, Clay Lowery.
A comprehensive deal would lead to foreign capital flows from Europe and emerging Asia, including foreign direct investment across all sectors of the economy, according to the paper said.
The opening up of the Iranian economy to the world will also result in “a significant decline in unemployment”, it added. Iran’s unemployment levels currently stand at around 20 per cent.
A burgeoning current account surplus as a result of increasing oil exports would boost Iran’s official reserves to almost $143 billion by the end of 2023 from $70bn in May 2021 – 90 per cent of which is currently frozen due to US sanctions, the IIF said.
However, the election of hardliners means hopes for a more comprehensive deal may already have “evaporated”, the IIF warned.
A more modest deal based on the 2015 agreement would boost Iran’s reserves and narrow its fiscal deficit to 3.4 per cent this year and 1.8 per cent next – from 5.4 per cent in 2020 – but it “may not reduce unemployment significantly”.
Should Iran fail to negotiate a nuclear deal with the west, its economy is likely to remain “fragile” but not on the brink of collapse.
Tehran will also likely align its economy more closely with China, which has stepped in to develop projects in Iran after western companies pulled out following the re-imposition of sanctions, the IIF said.
Beijing has committed to investing between $400bn and $600bn in Iran over the next 25 years.
China, the world’s top importer of crude has also been aggressively buying Iranian oil and condensate, with its imports doubling in volume between September 2020 and April 2020, compared with the same period in the preceding years.
The possible return of Iranian crude to the global markets will likely depress prices, the IIF said.
“The lifting of economic sanctions, combined with the return of foreign expertise in the energy sector and renewed ability to purchase spare parts would allow for a rebound in Iranian crude oil and condensates exports to their pre-sanction levels of 2.5 million barrels per day within 12 months,” the report noted.
Opec+, which is looking to bring 2 million bpd back to the markets by July, may have to pause additional supply and maintain current levels to support the markets, it added.
Oil futures have been trading at multi-year highs with both Brent, the international benchmark, and West Texas Intermediate, the main US gauge, rallying above $70 per barrel.
Brent settled 0.82 per cent higher at $76.18 per barrel on Friday. WTI settled 1.02 per cent higher at $74.05 per barrel.