28 Mar 2024
Monday 28 October 2019 - 16:21
Story Code : 362346

Irans economic resiliency makes talks more likely

Bloomberg | Esfandyar Batmanghelidj: The International Monetary Fund has revised downward its projections for Irans economy this year, predicting a 9.5% contraction, as against its previous projection of a 6% shrinkage. It will be the economys worst performance since 1984, when Iran was mired in a war with Iraq.

At first glance, this seems to support the Trump administrations claims that its maximum pressure sanctions campaign is bringing the Iranian economy to the brink of collapse. But this view is challenged by the IMFs projection that the decline will halt in 2020, when Irans economy will rebound to zero growthdespite the sanctions.








At first glance, this seems to support the Trump administrations claims that its maximum pressure sanctions campaign is bringing the Iranian economy to the brink of collapse. But this view is challenged by the IMFs projection that the decline will halt in 2020, when Irans economy will rebound to zero growthdespite the sanctions.

A closer examination reveals an economic recovery is already underway, as stability returns to consumer prices, manufacturing, trade, and the Iranian currency. Somewhat counterintuitively, this could improve the prospects of talks between Iran and the U.S. A stable economy may reassure the Islamic Republic that it can negotiate from a position of some strength.

The most obvious sign of the recovery is the rebounding rial. Since May, the Iranian currency hasappreciated 40% against the dollar. The Central Bank of Iran introduced new technologies to connect exchange bureaus with banks, creating a unified foreign-exchange market that is digitally supervised, making it harder for speculators to abuse the market. The new systems appear to be workingeven as geopolitical tensions reached new highs this summer, the currency market remained unfazed.

A stronger rial has helped ease inflation. The consumer price index rose just 6.1%in Septemberthe slowest pace since the reimposition of sanctions 18 months ago. Abdolnasser Hemmati, the central bank governor, is predictingfurther easing of inflationin the coming months.

Stability in the foreign-exchange market has also helped support a recovery in manufacturing. After several months of contraction at the beginning of the year, manufacturing activity gradually expanding, as reflected in the purchasing managers index (PMI) complied bythe Iran Chamber of Commerce. Irans PMI score has exceed 50 in five of the past seven months as firms report improved inventories of intermediate goods.

The rebound in manufacturing has helped the Tehran Stock Exchange acquire theunlikely mantleas the worlds best-performing exchange over the past year. More importantly, the fact that most of Irans factories are finding ways to sustain output means they can keep their workers employed and foreign customers supplied.

Irans non-oil exports are projected to reach a record level of over $40 billion this year. The result of an effort by the government and private sector to boost regional trade, this may be the first year in Irans modern history that non-oil exports will exceed oil exports, which will be constrained to around $10 billion following the Trump administrations revocation of key sanctions waivers in May.

While the fall in oil exports has certainly constrained Irans foreign-currency earnings and government revenues, a structural adjustment towards non-oil exports is taking place. It is often overlooked that the oil industry has rarely accounted for more than 20% of GDP. Iran is not in fact an oil economy.

Ordinary Iranians remain generally gloomy about the economy, but there are signs the mood is shifting. In a recentnationally-respresentative survey54% of respondents felt the economy was continuing to get worse, compared with 64% in April last year. In the same period, the proportion of respondents who believe the economy is getting better has risen 3.5 points to 30.5%. This may reflect the belief of 63% of respondents that Trumps sanctions campaign is maxed out.

That a recovery is underway does not diminish the harm has been done by U.S. sanctions.Iranian households are feeling a great deal of pain. As detailed in the IMF report, consumer prices increased 35% over the past year, and unemployment rose from 14.5% to 16.8%. The maximum pressure campaign has immiserated millions even as it has failed to collapse the Iranian economy.

Still, economic resiliency is an enabling factor for diplomacy. Recent Iranianovertures for talkswith the U.S. and other world powers may reflect, not a fear of pressure, but a confidence that Tehran can survive it.

It is often assumed Iran was forced into nuclear negotiations in 2013 by the debilitating impact of U.S., United Nations and European Union sanctions. What is missed in this analysis is that although the sanctions resulted in a sharp 7.4% contraction of the Iranian economy 2012, this was followed by an immediate recovery: GDP shrank a mere 0.2% in 2013. Iran agreed to the negotiations precisely because the economy had demonstrated resiliencythe government was confident it would not need to grovel for economic relief. The likelihood of a rebound in 2020 may allow history to repeat itself.



This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.









https://theiranproject.com/vdcdox0s9yt09s6.em2y.html
Your Name
Your Email Address