Iran posts strong GDP, but challenges loom ahead

International banks are still cautious about doing business in Iran.

3 March 2017 | 16:08

Source: Annahar

  • By T.K. Maloy
  • Source: Annahar
  • Last update: 3 March 2017 | 16:08

Iranians carry a banner showing a caricature of U.S. President Donald Trump during an annual rally in Tehran commemorating the anniversary of the 1979 Islamic revolution. Friday, Feb. 10, 2017. (AP Photo/Ebrahim Noroozi)

BEIRUT: Iran's real GDP is expected to post a strong 5.7 percent for fiscal year 2016/17 ending March 30, but then contract to 2.8 percent for the following fiscal year as ageing oil infrastructure holds production at its current maximum rate, according to figures releases this week by the Institute of International Finance.

Also, while the Washington-based institute expects moderate president Hassan Rouhani to be re-elected for a second four-year term in May 2017, the forecast is for continuing power struggles in the Islamic Republic.

"The political scene in Iran is polarized. The power struggle between pro-reform forces and regime hardliners (including the Revolutionary Guard, the judiciary, and conservative clerics) is expected to intensify as the country prepares for presidential elections in May at which the current centrist president, Hassan Rouhani, is seeking to be re-elected," the group noted in its recent report, adding, " The death of Mr. Rafsanjani (the former President, and a key ally of Rouhani), may complicate the current power struggle between pre-reform groups and hardliners. This could lead to a period of more radical foreign policy."

The report also noted that: "Rouhani is being criticized for failing to promote domestic investment following the lifting of economic sanctions in early 2016. Nonetheless, we believe that Rouhani is in a strong position to be reelected for a second four-year term. He has managed to unite reformist and moderate conservative factions to support his economic reform agenda. Moreover, the hardliners have yet to decide on their consensus presidential candidate."

According to the IIF, crude oil production in the current fiscal year is expected to increase by 35 percent to 3.5 million barrels per day (mbd) following the lifting of economic sanctions in early 2016. Non-hydrocarbon real GDP growth, however, remained weak (around 1 percent) due to continued difficulties in access to finance and renewed uncertainty regarding sanctions, which has dampened private sentiment.

Additionally it was reported that "International banks are still cautious about doing business in Iran, in part because the U.S. still retains extensive sanctions against Iran. U.S. dollar clearing restrictions have not been lifted and continue to pose a major challenge for global banks to re-establish correspondent banking relations. "

The report added, "This in turn restricts access to corporate trade and primary sanctions remain in place. In addition to maintaining a broad domestic trade embargo prohibiting most transactions between U.S. individuals and Iranian entities, the U.S. also retained sanctions on Iranian entities connected to terrorism financing, human rights abuses, and the ballistic missile program. Foreign firms may be subject to U.S. secondary sanctions for facilitating financial transactions with designated Iranian institutions."

The Department of Treasury took action last fall to alleviate foreign bank concerns by issuing guidance that non U.S. banks can do dollar trades with Iran, provided they don't pass through a U.S. institution. However, following the elections, there is strong support in Congress and in the new Trump Administration for maintaining economic pressure on Iran.

In late 2016, the Congress passed, by overwhelming margins, a 10-year extension of the Iran Sanctions Act, which provided the framework for secondary actions.

The IIF noted that the domestic banking system in Iran is "fragile and faced continued difficulties in reconnecting to the global financial system, and that hurdles to reform the regulatory system have held back major long-term commitments to invest."

It was noted that Iranian banks need large capital injection management restructuring, and governance improvements. Renewed external uncertainty and lack of broad-based support for structural reforms would hinder a strong recovery in investment.

The report added that there is currently much uncertainty on how the Trump Administration will handle the Iran nuclear deal. On the one hand, President Trump has been harshly critical of the deal, which he called "the worst deal I have ever seen negotiated." While, Vice President Mike Pence vowed during the campaign to "rip up the deal."

On the other hand, the U.S. has limited options outside the deal. The status quo is no longer available; UN and EU sanctions have been limited and are unlikely to be re-imposed. It would be hard for the U.S. to restore the level of economic pressure on Iran that persuaded the Islamic Republic to negotiate in the first place.

In his confirmation hearing, the Secretary of Defense, James Mattis, said that although the deal was imperfect, "when America gives her word, we have to live up to it and work with our allies."

The Institute of International Finance is the global association of the financial industry, with close to 500 members from 70 countries.

According to a recent International Monetary Fund report, the rate of job creation in Iran is inadequate to keep up with the average of 500,000 persons joining the labor market annually during the next five years. The unemployment rate of above 12 percent "remains high," IMF analysts noted. Also, almost 20 percent of university graduates are lacking work.

It is the analysis of the IMF that ordinary Iranians – which in the country of 80 million are largely young – have not yet experienced any tagible economic benefits from the nuclear accord and the subsequent lifting of sanctions.

"The lifting of sanctions and (Iran's) ambitious reform agenda are yet to produce their full beneficial impact on the Iranian economy," Jafar Mojarrad, an IMF executive director, wrote in an addendum to the report.


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