Iran

Growth will slow on back of weaker demand and heightened sanctions

Despite support from the oil sector, which is estimated to have contributed around 10% to GDP in 2023-2024, Iran's economic growth is expected to continue to soften in 2025, but to a lesser extent than in 2024. This is primarily attributable to a slowdown in domestic demand (around 50% of GDP) in line with persistent inflationary pressures. Despite the ongoing decline in the pace of price increases that started in 2023-2024, inflation will remain high. It is driven by domestic food prices and housing costs compounded by lasting depreciation of the rial, which lost around 20% against the US dollar between January and May 2024, mainly due to geopolitical tensions in the region and international sanctions.

However, the measures introduced by the central bank, notably restricting the bank’s balance sheet growth and increasing reserve requirement ratios, will further curb inflationary pressures somewhat by limiting the expansion of credit. Heightened sanctions against Iran following the introduction by the US in April 2024 of its “21st Century Peace through Strength Act” will also curb Iran’s ability to secure new clients. A potential deceleration in China's oil consumption (accounting for 90% of Iran’s total oil exports) would put downward pressure on Iran's growth. Oil production was estimated at around 1.5 million barrels per day in 2024 compared with 3.8 million in 2017. The expansion of non-oil sectors is expected to remain moderate due to energy and water shortages, in addition to the weaker investment environment. The re-imposition of sanctions from 2018 onwards, coupled with heightened geopolitical risks and a less favourable investment climate, will weigh on the contribution of investments, including foreign investment, to growth (around 30% of GDP).

The expectation of enhanced economic collaboration between Iran and Saudi Arabia following the resumption of diplomatic ties in 2023 that was brokered by China is yet to materialise. US sanctions, which impact Saudi economic decision-making, and significant discrepancies between both economic agendas, i.e., Saudi Arabia's efforts to diversify its economy under its Vision 2030 program while Iran attempts to mitigate the effects of US sanctions, will continue to thwart their collaboration. Furthermore, Iran will continue to minister to its economic ties with Russia and China as the three participate in several multilateral organisations, including the BRICS and the Shanghai Cooperation Organization. The government's prudent budget forecasts for 2024-2025 also indicate that public spending will offer only a modest contribution to economic growth.

Steady current account surplus, budget deficit will widen

Iran’s current account surplus as part of its national income is expected to remain steady as exports will remain under pressure due to sanctions on oil exports, limited diversification of non-oil exports and export markets. The expiry of OPEC+ restrictions on oil output should also weigh on oil prices globally which will drag on Iran’s exports’ revenues. The traditional trade in services deficit will persist.

The budget deficit will widen slightly due to lower oil revenues despite attempts by the authorities to curb spending. The public sector wage bill, security and welfare (including energy subsidies), and related expenditure will continue to weigh on fiscal accounts. However, authorities’ efforts to implement spending cuts and expand tax collection are expected to reduce the budget deficit over the longer term. That said, the process will be very gradual and slow.

Persistent risks on the political and social fronts amid heightened geopolitical tensions

The first challenge is related to the resumption of the Iran Nuclear Deal, formally known as the Joint Comprehensive Plan of Action (JCPOA) from which the US withdrew unilaterally in May 2018. A return to the deal appears difficult to achieve in the current global geopolitical environment. Iran and the US are unwilling to make the required changes, and many key parts of the original agreement have now expired. A victory by Donald Trump in the US Presidential election in November 2024 could result in increased sanctions, similar to the approach taken during his previous term of office. This might lead to the introduction of further secondary sanctions targeting non-US entities, particularly in China, which is the leading buyer of Iranian oil. In addition, the ongoing conflict in Gaza, which began in October 2023 and has since expanded into Lebanon, Yemen, the Red Sea and Lebanon, is likely to prompt an escalation in tensions between Iran and Israel. Both countries directly attacked each another for the first time in April 2024 then in October. This may push the Gulf states, which have been gradually improving trade relations with both Israel and Iran, to adopt a more cautious approach to their rapprochement with Iran. The relations between Iran and Russia, which entered a new era of mutual cooperation on military, economic, and geopolitical fronts with the start of the Ukraine-Russia war in February 2022, could strengthen further.

Iran has experienced various waves of popular protests and violent crackdowns in recent years (most recently in 2022-2023) that have been driven by economic hardship, social grievances and political dissent stemming from restrictions on civil liberties, repression, and dissatisfaction with government policies. Yet the regime has proved resilient against these shocks. Masoud Pezeshkian, a self-described "reformist politician," was elected President in the second round of the Presidential election in July 2024, but the composition of his cabinet fell short of expectations among reformists. Furthermore, the main power centres, i.e., the Supreme Leader, the Assembly of Experts, the Islamic Revolutionary Guards Corps etc., are likely to remain under conservative control.

Last updated: September 2024