Economic Trends: April and May

May 31, 2016
By
Cameron Glenn

In April and May, the Iranian economy showed signs of improvement. Oil exports reached 2.3 million barrels per day, nearly double the amount prior to implementation of the nuclear deal in January. Inflation dropped to historic lows. Iranian officials and the International Monetary Fund (IMF) predicted that the economy could grow between four and five percent this year. Tehran continued to host a flurry of foreign trade delegations and ink trade and investment deals.

Despite the improvements, several Iranian officials – including Supreme Leader Ayatollah Ali Khamenei, Foreign Minister Mohammad Javad Zarif, and Central Bank governor Valiollah Seif – accused the United States of hindering economic progress by failing to honor its commitments under the nuclear deal. Some international banks and investors are still wary of doing business in Iran because of remaining U.S. sanctions for terrorism and human rights abuses. Secretary of State John Kerry, however, insisted that banks have the right to pursue business with Iran legally. “We want to make it clear that legitimate business, which is clear under the definition of the agreement, is available to banks,” he said on May 12.
 
At the same time, hardliners and reformists in Iran are debating an even more fundamental question: how much the Islamic Republic should open up its economy to the rest of the world. In April, protesters gathered outside the Ministry of Economic Affairs, accusing President Hassan Rouhani of undermining Supreme Leader Ayatollah Ali Khamenei’s call for a “resistance economy” focused on domestic production. Rouhani, however, has insisted that his policies to pursue international trade and investment are not at odds with Khamenei’s vision for the economy.
 
The following is a rundown of economic developments in April and May.
 
Domestic
 
Growth & Economic Outlook
 
On May 15, International Monetary Fund (IMF) First Deputy Managing Director David Lipton arrived in Tehran to discuss economic developments and policy initiatives following sanctions relief. He told Iranians that “your ultimate success depends on what you do at home” in a speech at the Central Bank on May 17. Lipton highlighted areas for improvement in the banking sector that could help attract more foreign investment. He also emphasized the need to build a strong and flexible economy that will be less dependent on the oil sector.
 
The World Bank expects Iran’s economy to grow by 4.2 percent in 2016 and 4.6 percent in 2017, “as a result of the lifting of the sanctions and a more business-oriented environment,” according to its Spring 2016 Middle East and North Africa Economic Monitor Report. The report added that low oil prices, slow global growth, remaining U.S. sanctions, and the need for structural reforms present challenges for Iran's economic outlook.
 
On May 24, Economic Minister Ali Tayyebnia made a similar growth prediction, claiming that the Iranian economy would reach 5 percent growth in the next year. “This year marks the beginning of the end of the zero growth era, as the country is in a unique position to achieve decent growth and generate jobs,” he said at the 26th annual Conference on Monetary and Exchange Rate Policies in Tehran.
 
Central Bank of Iran chief Valiollah Seif predicted in May that inflation would drop to single digits by the end of the summer. “Our main objective is now to preserve the low inflation rate and keep it at that level,” Seif said.
 
Oil & Gas
 
In April and May, Iran ramped up oil and gas production, which has been increasing since the nuclear deal was implemented in January. On April 6, Oil Minister Bijan Zanganeh predicted that Iran’s oil production would rise to 4 million barrels per day by March 2017. On May 1, Rouhani announced that oil exports had reached 2.3 million barrels per day – nearly twice as much as before the nuclear deal.
 
Oil exports to China, India, Japan, and South Korea increased 50 percent in March compared to the same period in 2015. On April 8, the National Iranian Oil Company announced that Iran’s oil exports to Europe had reached their highest levels since 2011, accounting for 35 percent of exports.
 
As in past months, Iranian officials maintained that the Islamic Republic would increase oil output in spite of calls by several major oil producers – including Russia and OPEC members Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, and Venezuela – to freeze production in response to low prices. Zanganeh said in April that Iran would only participate in talks about production freezes after the target of 4 million barrels per day is met. On April 17, Central Bank governor Valiollah Seif said that “What Saudi Arabia is asking Iran to do is not a very fair [or] logical request.” Deputy Oil Minister Rokneddin Javadi reiterated Iran’s stance on May 22, stating that Iran did not plan to freeze its oil outputs.
 
Iran has also been increasing its natural gas production, reaching around 130 million cubic meters per day in May. Deputy Oil Minister Hamidreza Araqi announced on May 25 that output had risen by 23 billion cubic meters in the past year, due to the development of phases 15 and 16 of the South Pars field – the largest gas field in the world. Ali-Akbar Sha’banpour, managing director of Pars Oil and Gas Company, said that Iran’s natural gas production will likely surpass 500 million cubic meters per day once phases 17-21 of development projects in the South Pars field are completed.
 
Diversification
 
Echoing a trend in the past few months, Iran pushed for greater diversification of its economy. In the last Iranian calendar year, which ended on March 19, Iran had a non-oil trade surplus for the first time since the 1979 revolution. Non-oil exports totaled $42.4 billion, and imports totaled $41.5 billion. In the first month of the Iranian year (March 20-April 19), non-oil exports were up around 8 percent compared to the same period a year ago, according to the Islamic Republic of Iran Customs Administration. China, the United Arab Emirates, Iraq, South Korea, and India were the top destinations for Iran’s non-oil exports. Only around 25 percent of Iran’s budget for this fiscal year relies on oil revenues, compared to 60 percent in past years.
 
Economic policy
 
On April 13, demonstrators gathered outside the Ministry of Economic Affairs in Tehran, protesting Rouhani’s economic policies for not adhering to the guidelines of the “resistance economy.” 
 
 
In March, Khamenei had declared that the theme of the upcoming year would be “The Resistance Economy: Action and Implementation.” Focusing on domestic production, Khamenei argued, is Iran’s best defense against sanctions and the way to properly address other problems such as unemployment.
 
Rouhani has denied that the “resistance economy” contradicts his policies. “Resistance Economy is both interior and exterior; here, our ambassadors and foreign envoys can play a crucial role in bringing boom and competition to the hard-hit economy,” he said in a speech on May 15.
 
Subsidy reform
 
On April 13, Iran’s outgoing parliament approved a bill to cancel monthly cash payments to 24 million Iranians. The cash payments – established under former President Mahmoud Ahmadinejad to replace subsidies – have strained the state budget, since all Iranians had been eligible to receive them, regardless of income.
 
The bill was introduced by Ahmad Tavakoli, a conservative politician who lost his seat in the February 2016 parliamentary elections. Although Rouhani has encouraged restricting the handouts to only the poorest Iranians, the extent of the cuts was larger than the number proposed by his administration and may be unpopular to implement.
 
Auto industry
 
In April, Iran banned the import of U.S.-made cars. The Islamic Republic does not import American cars directly, but it had imported cars manufactured by Chevrolet via other countries. “Americans themselves don’t use U.S.-made cars,” Khamenei said on April 27. “We have seen this reflected in American media. They argue that fuel consumption is high and the cars are heavy.”
 
International sanctions took a toll on Iran’s auto industry, and production plummeted from 1.65 million units in 2011 to 740,000 in 2013. Now that sanctions have been lifted, officials hope to increase domestic production to 1.6 million cars by 2018 and 3 million by 2025.
 
Steel
 
Iran produced 5.5 million tons of steel in the first four months of the year, a 1.5 percent increase from the same period last year, according to the World Steel Association. Despite the increase, many of Iran’s steel producers are operating below capacity, in part due to the uptick in steel imports, according to Mahmoud Akbari, sales manager of the Mobarakeh Steel Company. Imports totaled more than 3 million tons between March and December 2015, an 86 percent increase from the same period in 2014.
 
Iran is the largest steel producer in the Middle East and the 14th largest worldwide. But in recent years, the industry has struggled struggled from low demand, high production costs, and competition from low-cost steel products from China.
 
International
 
Sanctions
 
Despite the lifting or suspension of certain U.S., E.U., and U.N. sanctions, investors still run the risk of violating remaining U.S. sanctions on Iranian entities for terrorism and human rights violations. Even accidental violations carry heavy penalties.
 
Some Iranian officials claimed in April and May that U.S. banking restrictions constitute a violation of the nuclear deal. “The United States needs to do way more. They have to send a message that doing business with Iran will not cost them [European banks],” Foreign Minister Mohammad Javad Zarif told The New Yorker in April. On April 15, Valiollah Seif, Governor of the Central Bank of Iran, said that “almost nothing” has happened since the nuclear deal was implemented in January. “Unless serious efforts are made by our partners to make the JCPOA work, in my view they have not honored their obligations,” he said during an event at the Council on Foreign Relations. 
 
Supreme Leader Ayatollah Ali Khamenei accused the United States of taking deceptive measures to scare investors away from Iran. “On paper, the Americans say banks can trade with Iran but in practice they act in such an Iranophobic way that no trade can take place with Iran,” he said.
 
Deputy Foreign Minister for International and Legal Affairs Seyyed Abbas Araghchi acknowledged that economic improvements take time, claiming that it would be “naïve” to expect changes overnight. “We should allocate a reasonable time to recover from the shock of sanctions and rebuild our economy,” he said on May 29. But he also pointed to “sabotage by other governments” as an impediment.
 
Secretary Kerry, however, refuted the idea that the United States was engaged in undue interference in Iran’s economy. On May 10, he said that European businesses “should not use the United States as an excuse” for not dealing with Iran. “I think it’s important to have clarity, and the clarity is that European banks, as long as it’s not a designated entity, are absolutely free to open accounts for Iran, trade, exchange money, facilitate a legitimate business agreement, bankroll it, lend money,” he told reporters in London.
 
South Korea
 
HRPGMay2016On May 2, Park Geun-hye became South Korea’s first president to visit Iran, accompanied by a delegation of ministers, economic officials and businessmen. South Korea, the world’s fifth largest oil importer, is one of the largest buyers of Iranian oil, though sanctions led to a decline in imports in recent years, hovering around 100,000 barrels per day before the nuclear deal. Since sanctions were lifted in January, however, Iranian oil exports to South Korea have more than quadrupled to 400,000 barrels a day.
 
During the visit, officials signed 19 memoranda of understanding and cooperation documents to strengthen bilateral ties in fields ranging from energy to science, culture and more. In a joint press conference with his South Korean counterpart, President Hassan Rouhani said they intended to triple bilateral trade to some $18 billion. The trade volume last reached that level in 2011, before international sanctions were imposed on Iran for its nuclear activities.
 
 
India and Afghanistan
 
On May 23, Iran signed a trilateral agreement with India and Afghanistan to develop the strategic Chabahar port in southeastern Iran. India pledged to invest up to $500 million in the port, which will expand India’s trade with Iran and other Central Asian countries while bypassing land routes in Pakistan. 
 
Indian Prime Minister Narendra Modi and Afghan President Ashraf Ghani met with Iranian President Hassan Rouhani in Tehran to sign the deal. Both leaders also met with Supreme Leader Ayatollah Ali Khamenei.
 
Modi was the first Indian prime minister to visit Iran in 15 years. During his visit, he signed 12 cooperation documents with the Islamic Republic to strengthen bilateral ties in economics, trade, transportation, science, culture, and academia. Before sanctions were tightened in 2012, Iran had been India’s second largest supplier of crude oil
 
In late May, Iran’s ambassador to Pakistan, Mehdi Honardoost, said that Iran welcomed China and Pakistan to participate in the port agreement as well.
 
Chabahar agreement
 
Germany
 
In early April, Iran’s Ambassador to Berlin Ali Majedi said that Iran is close to finalizing a deal with Volkswagen to invest in Iran’s auto industry. German auto part maker Bosch later announced in May that it plans to open an office in Tehran by the end of the year and hire 50 additional staff.
 
In late May, Chairman of the Tehran Chamber of Commerce Masoud Khansari met with a German economic delegation to discuss expanding bilateral ties and banking relations. “Iran’s economy in the post-sanctions era is rapidly moving towards privatization, and now is a good time for foreign companies, especially those from Germany, to take advantage of investment opportunities,” Khansari said.
 
Switzerland
 
Yves Rossier, state secretary at the Swiss Foreign Ministry, said on May 24 that Switzerland is prepared to help Iran reenter the international market. “Due to its (Iran’s) absence in financial markets, Tehran is lagging behind in finance and technology, especially when it comes to the country’s internal infrastructure,” he told Sputnik news. “[Switzerland’s help] is mostly about technical and technological support to assist Iran in getting back to international financial markets.”
 
On May 3, an Iranian delegation led by CBI Monitoring Deputy Hamid Tehranfar met with a Swiss delegation in Bern to explore opportunities in financial and banking cooperation.
 

 

By
Cameron Glenn