Over the past two years, Iran’s economy has contracted by 14 percent according to the International Monetary Fund (IMF). After Venezuela, Iran is the second worst performing economy in the world.
How will Iran’s economy react to the Covid-19 pandemic? Iran is likely to experience a third straight year of economic contraction according to all economic indicators. The global credit ratings agency, Fitch, last week revised downward[1] its forecast for Iran’s economic growth to a negative 1.7 percent.
Fitch started the year with a negative 0.4 percent forecast for Iran’s economy, but revised it downward last week due to “the negative impacts of the Covid-19 outbreak on Iran’s economic activity, as well as a recent sharp drop in oil prices, which limits the authorities’ ability to provide fiscal stimulus in response to the crisis.”[2]
If this forecast proves to be correct (and it may need to be revised downward again), then Iran’s economy will remain one of the world’s worst performing economies, with an economic contraction exceeding 15 percent over a three year period according to IMF figures for 2018-19 and Fitch’s forecast.
According to the World Bank’s Global Economic Prospects published in January 2020, Iran’s economy contracted by 8.7 percent in 2019 and by 4.9 percent in 2018, totaling a 13.6 percent contraction over a two year period.
The IMF has an even darker outlook for Iran’s economy. In January of this year, the IMF declared that Iran’s economy contracted in 2019 by an extraordinary 9.5 percent, with a contraction of 4.8 percent in 2018, bringing the two year total to a negative 14.3 percent.
To put this into perspective, Iran’s economic growth between 2018-19 was the second worst in the world, according to Rasanah’s analysis of IMF figures.
Iran ranks among the top seven countries worldwide with regard to Covid-19 infections (nearly 45,000) and deaths (nearly 3,000). A study by the University of Toronto warned that the crisis in Iran could grow much bigger. Given its weak economic base, Iran can hardly afford a spiraling coronavirus crisis. What’s more, the ongoing dispute between Saudi Arabia and Russia over oil production along with declining demand due to the outbreak of the coronavirus pandemic will continue to exert downward pressure on the oil market, causing further problems for Iran’s economy which has been struggling to stay afloat ever since the United States vowed to stop Iran’s oil exports.
Oil production numbers are difficult to verify, but a Reuters report based on a wide-ranging survey notes that Iran’s production has fallen to below 2 million barrels per day, less than half of what it was producing in 2018. Iran is exporting, less than 250,000 barrels per day, according to Kepler, a shipping and tanker tracking service.
China is Iran’s top oil importer, but the coronavirus pandemic has forced Beijing to slash its oil imports. Furthermore, Beijing is cautious about how much oil it imports from Iran due to US efforts to reduce Tehran’s oil exports to zero. China is not highly reliant on Iranian oil, accounting for only 3 percent of its imports. Its oil imports are diversified across geographical regions, with Saudi Arabia its top supplier in 2019.
US Deputy Assistant Secretary of State for Counter Threat Finance and Sanctions David Peyman recently sent a public warning to all shippers that store Iranian oil or oil products at sea. These are often the ships that evade sanctions, selling oil ship-to-ship. Last year, Chinese shipper COSCO faced US sanctions after transporting Iranian crude in violation of US sanctions, resulting in a significant increase in shipping costs, though the sanctions on COSCO ships were lifted early this year.
A sign of Iran’s tough economic predicament was when it requested help from the IMF to fight the coronavirus outbreak. Tehran asked the IMF for a $5 billion loan, its first ever request since the 1979 revolution. The IMF has estimated a sharp drop in Iran’s foreign exchange reserves to some $70 billion, down from $86 billion in 2019.
Iran’s IMF loan request is likely be challenged by the United States, the financial institution’s largest shareholder. However, the European Union (EU) has expressed support for Iran’s emergency funding request from the IMF. If approved, the loan would add to a $5 billion potential loan from Russia to Iran, as announced in the annual budget unveiled by President Hassan Rouhani in late 2019. Given the extensive nature of Iran’s economic woes, the EU’s offer to send 20 million euros to help the country fight the coronavirus outbreak seems very little.
The coronavirus pandemic has clearly exacerbated already existing structural problems in Iran’s economy. The dual shock of both the coronavirus pandemic and declining oil prices will continue to create fiscal challenges for Iran’s policy makers, while weakening the country’s private sector further. Add to this the US-led sanctions, and Iran faces a triple shock that will plague the struggling economy throughout the year.
[1] “Covid-19, Oil Price Drop To Hit Already-Weak Iranian Economy,” Fitch Solutions, March 17, 2020.
[2] Ibid.
