Iran's Economy: A Statistical Profile

Recently, President Donald Trump has announced the jarring decision to pull out of the Joint Comprehensive Plan of Action (JCPOA) also informally known as the Iranian nuclear deal. Since his campaign, he has suggested the deal was a poor one for the United States, and that if he was elected president, he would look to rework the deal. To the dismay of the other members of the United Nations Security Council who signed the deal, he followed through on his promise.

In the deals place, President Trump has reintroduced the idea of economic sanctions on Iran which were lifted at the beginning of 2016. The lifting was supposed to help propel Iran to new economic growth allowing oil exports to resume and foreign money to flow. In a paper written by an IMF economist, three benefits were supposed to take effect:

• Exports of oil and gas would resume and cause a “positive external demand shock to the Iranian economy.”
• Accessibility to financial services, specifically “restored access to the international payment system (SWIFT)” would help reduce to costs of trade with other countries.
• The effects of the above and other economic benefits would “propel Iran’s growth to over 4 percent,” mostly due to immediate growth in oil production and exports.

The timeline of the sanction relief as established by the IMF paper is as follows. On July 14, 2015, the JCPOA was signed by the five permanent United Nations Security Council members plus Germany. On October 18, 2015, the plan was adopted by all parties. On January 16, 2016, the lift of the sanctions took effect after Iran confirmed compliance with the monitoring of their nuclear program. Using data from the Iranian Central Bank and this timeline, the effect of the lifting of sanctions can be seen through key Iranian economic indicators.

If embedded version doesn't work, Tableau can be found here and images are included below. Additionally, the data can be downloaded here.

The highest level of sanctions was imposed to cripple the Iranian economy in order to force it to forfeit its development of technology to construct a nuclear weapon. Because Iran relies primarily on its energy sector to grow the economy, exports of oil and gas would be targeted by the sanctions. In 2013 and 2014, the effects on production and energy exports can be seen. Both bottomed in late 2014 the year before the deal was made suggesting the pressure on this part of the Iranian economy pushed it to agree to the JCPOA. As soon as the deal was completed, production jumped about 600,000 b/d and exports jumped about 700,000 b/d. In a matter of a year, increases of 17.8 percent and 39.2 percent increase in these categories helped rekindle GDP growth.

The IMF points out that the reestablishment of oil and gas trade in Iran would create a “positive external demand shock,” and therefore, one might expect net exports to see a significant increase. However, the official start of JCPOA actually saw net exports drop significantly. The first quarter of 2016 saw Iran’s lowest net export value. Was the IMF wrong? Exports of energy commodities certainly did see a boost as evidenced by the previous chart. However, the opening of trade with countries abiding by the sanctions saw an influx of goods into the country. Because Iran’s economy is mostly energy oriented, this influx helps sectors of the economy that need foreign investment or products. As a result, the JCPOA stimulates an increase in Non-oil GDP in 2016 and 2017 well above the levels in 2014 and 2015.

The lifting of sanctions created new forces in the exchange rate market. Before the sanctions were lifted, demand for the foreign currency tightened. The CPI readings in the two years before trended toward inflation. Shortly before the JCPOA was instituted and after, demand for the foreign currency expanded and CPI readings stabilized. This dynamic was caused by foreign capital flowing into Iran creating new external debt that would leave Iranian businesses needing foreign currency to do business with the new market participants. New market participants caused new foreign products to be introduced, and this cooled the CPI index, taming inflation. International trade is essential to Iran because of its imbalanced economy. The JCPOA provided access to these trade channels that reduced the transaction costs of trade enabling Iran businesses to compete for foreign capital.

The IMF paper suggests that GDP growth would jump significantly above 4 percent after the JCPOA relieved the Iranian sanctions. This shows clear confidence from the rest of the world in how this agreement would help spur growth, but the construction and manufacturing responses were mixed. At the official passing of the agreement, Construction Supplies PPI skyrocketed most likely on the idea that there would be more demand for real materials in the country. Urban construction investment, construction permits, and manufacturing investments saw a tamer response. Over the past two years, these categories have gradually increased by not quite at the level of the PPI which suggested that demand was hot.

While some economic trends were more straight-forward, the reaction in the trends of the Iranian stock market proved to be puzzling. Initially, one would think that the Iranian stock market would see a flurry of new activity once the sanctions were lifts. The first quarter of 2016 showed just this, but activity immediately died down. A year after the JCPOA was installed the value of shares traded was down about 43 percent and the number of shares was down 35 percent. It seems that the new agreement sent a flurry of new investors into the market to fuel short-term speculation, however, that excitement ended quickly. This could explain the head fake in construction and manufacturing investment that stalled to relatively flat after the initial JCPOA passing.

President Trump pulled out of the JCPOA and wishes to crack down on Iran once again for its supposed refusal to submit to the terms of the agreement. In addition to leaving the agreement, Trump has asserted that he plans to reinstate the harshest of sanctions against Iran. If this were to occur, he will most likely attempt to target some of the things mentioned above such as Iran’s energy exports, Iran’s access to foreign capital, and Iran’s ability to access materials for its construction and manufacturing sectors. A response from the rest of the members of the JCPOA is expected going forward, and once again, Iran’s economic health is thrown in the balance.

The statistics above were aggregated by the author from Iran’s Central Bank “Economic Trends” report. If you would like to access this data set, click here. Additionally, the Tableau document created by the author can be accessed here.