Sanctions bite: Iran to slip into recession in 2018 and 2019

dubai - There is expected to be a sharp decline in volume of exports of crude oil

The US sanctions will have a serious impact on Iran in 2018-19, pushing its economy into recession for two consecutive years due to a drop in oil exports, forecasts a new report released on Tuesday.

"We expect the [Iranian] economy to contract by around three per cent in 2018 and four per cent in 2019 due to the expected sharp decline in volume of exports of crude oil and condensates, and private consumption and investment," Garbis Iradian, chief economist for Mena at the Institute of International Finance (IIF), said in note released on Tuesday.

Unemployment in Iran could rise to above 14 per cent, Iradian said, adding that the sharp depreciation of the rial has made imports, particularly intermediate and capital goods, very expensive in local currency, leading to cancelling contracts and a drop in industrial production.

"While non-oil exports will benefit from the weaker currency, some of Iran's non-oil exports are also subject to re-imposed US sanctions - including carpets and other manufactured goods," he said.

The Iranian economy has deteriorated since May 2018 when the US President Donald Trump's administration withdrew from the 2015 nuclear deal. The first wave of US sanctions against Iran took effect on August 7 with a focus on trading in cars, gold and other precious metals. The second wave of sanctions are scheduled to come into force on November 4 and will target the energy and the financial sectors.

The rial has lost about 80 per cent of its value against the dollar in the free market since the end of 2017. With the collapse of the rial, inflation in August may have increased to over 40 per cent year on year.

The IIF has projected that Iran's nominal GDP will reduce from $405.2 billion in 2017-18 to $307.2 billion in 2018-19 and $337.2 billion in 2019-20.

The global institutions said the EU, China and Turkey may try to preserve economic ties with Iran. Europe accounts for around a fifth of Iran's exports of crude oil. Germany is considering setting up a rival international payments system to maintain the nuclear deal with Iran. But such a system will fail to persuade major European companies to do business with Iran, the note said.

- waheedabbas@khaleejtimes.com