Iran’s economy is expected to recover on account of the upturn in private consumption and the successful diversification into the non-oil sector, according to Market Research Firm, Frost & Sullivan.
The California-based consulting firm notes in its latest report that the lifting of sanctions has catalyzed a ripple of positive boosters to the Iranian economy and that economic growth is expected to pick up in 2016-2017 driven by higher oil production, lower costs for trade and financial transactions, and restored access to foreign assets. The first effect would be a positive external demand boost, both for oil and non-oil exports
“The economy has made some good strides since 2013. Growth went up to 4.3% in 2014 from -1.9% in 2013. Additionally, inflation declined from 34% in 2013 to 15.5% in 2014,” Frost & Sullivan highlights in its report.
The second largest economy in MENA after Saudi Arabia and a population close to 80 million makes Iran the second most populous nation in the area. Of its people, 60% are below the age of 30 indicating a huge domestic consumption economy. In addition, the decline in the cost of external trade and financial transactions is expected to lower the price of imports while raising the price of exports.
Robust Policies
The report notes that Iranian authorities have adopted a comprehensive strategy covering market-based reforms as reflected in the government’s 20-Year Vision document and the Fifth Five-Year Economic Development Plan (2011–16). Iran’s new budget will focus on privatization, subsidy reforms, and promulgating a law that would make the country’s state budgets independent of oil export revenue.
The anticipated lifting of sanctions has brought an ever-increasing influx of the major international corporations to Tehran to make contacts and express their interest in investing in the country.
Finally, restored access to foreign assets and higher oil exports would also trigger a positive wealth effect. Taken together, these propellants are likely to create a significant momentum in the outlook for the economy in the years ahead, outweighing the adverse effects from the sharp decline in global oil prices over the past year.
The World Bank estimates that foreign direct investment would double to $3 billion a year, although this would still be below the 2003 peak. The need of the hour is structural reforms of the business climate and labor and financial markets that would play a key role with respect to growth.
Cross-Sector Growth
Influenced by the government and the industry alike, multiple initiatives and strategic plans are being drawn to promote industrial development and growth across a multitude of industries. Initiatives are bearing results with Iran moving nine places forward in the World Economic Forum’s global competitiveness ranking to the 74th rank.
Iran’s automotive sector is the country’s second largest industry after oil and gas, accounting for 10% of the GDP. The auto manufacturing hub at the Chabahar Economic Zone in the southeast will host the country’s third automobile manufacturing hub. The strategic Chabahar zone is the shortest and the most secure route connecting Central Asia and Afghanistan to international waters. It is also the only ocean port of the country. Iran used to be the 10th largest market for cars and trucks in the world. After signing a nuclear deal with the six world powers in July the country has been gaining keen attention from Peugeot, which used to be a dominant player in Iran, as well as Renault and General Motors, to name a few.
Another sector that is evolving is the steel industry, which plays the main role in industrial development and economic prosperity, and has been attracting attention of economic professionals, investors and decision makers. A recent Iran Steel Market Conference in Tehran, has further opened up the investment opportunities for the steel industry in the country.
Iran’s robust banking sector that represents the world’s largest financial system based on Islamic, or sharia, law is exhibiting rejuvenated enthusiasm. The lifting of sanctions in the months ahead is expected to turn the Iranian banks to positive credit. Significant new business opportunities are expected to arise from increased trade and investment in the sizeable domestic economy. This would, in turn, boost growth in the banking sector and support the performance of their loans.
Also, the repatriation of frozen assets and potential interest from foreign investors and financial institutions in the Iranian banking sector would allow domestic banks to strengthen their solvency levels through much-needed recapitalization. Banks and financial institutions have a huge opportunity with the government planning almost $40 billion of infrastructure development, which would require significant bank financing.
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