The end of economic sanctions on Iran would mean a 14 percent drop in world oil prices and a $15 billion boost in Iranian oil revenue, according to a World Bank report.
The report said that lifting sanctions — which would give Iran access to frozen assets the Obama administration estimates at roughly $56 billion — would create a “windfall” that Iran could use to resurrect its oil fields, revive domestic industries such as auto and pharmaceutical manufacturing, and reduce widespread unemployment.
Additional help for Iran’s economy could come from foreign investment, which the World Bank predicted would climb to as much as $3.5 billion in a couple of years, double this year’s level but still below the peak in 2003.
“With the lifting of sanctions, the government of Iran has the opportunity to put in place a policy framework that will enable the economy to make maximum use of this windfall and put the economy on a path of sustained economic growth,” the report said.
The report, the latest quarterly brief published by the bank’s Middle East and North Africa division, also said that the end of sanctions on Iran’s oil exports would hurt other oil exporters, including Iran’s regional rival, Saudi Arabia. The bank estimates that Iran’s return to crude oil markets could lead to annual losses of $40 billion for Saudi Arabia and $5 billion for Libya.
As President Obama strives to win congressional support for the accord limiting Iran’s nuclear program, the impact of lifting economic sanctions has become a controversial component of the plan. Critics of the deal fear that Iran will lose its incentive to stick to the accord and might use its windfall to finance its proxies throughout the region, including U.S. foes such as Hezbollah, Houthi forces in Yemen, Shiite militias in Iraq and Syrian President Bashar al-Assad.
In an Aug. 5 speech at American University, Obama argued that “the truth is that Iran has always found a way to fund these efforts, and whatever benefit Iran may claim from sanctions relief pales in comparison to the danger it could pose with a nuclear weapon.”
But he also sought to calm those fears about how Iran would use its windfall. “The notion that this will be a game-changer with all this money funneled into Iran’s pernicious activities misses the reality of Iran’s current situation,” he said. “Partly because of our sanctions, the Iranian government has over half a trillion dollars in urgent requirements, from funding pensions and salaries to paying for crumbling infrastructure.”
The president said that “even a repressive regime like Iran’s cannot completely ignore” the expectations of its people, and “that’s why our best analysts expect the bulk of this revenue to go into spending that improves the economy and benefits the lives of the Iranian people.”
Oil industry experts say that eventually Iran’s oil exports could triple to about 3 million barrels a day, which the World Bank said would require major investments.
The oil and gas sector’s needs are part of a broader need for large investments. The report estimated that investment is about $20 billion a year below the level for the economy to grow strongly. It said Iran’s leadership would have to “avoid the temptation to spend large parts of the windfall on consumption” and avoid spending on wasteful projects. It cited gasoline subsidies and vast subsidized housing developments.
The report gave a nuanced picture of how sanctions have hurt the Iranian economy in recent years. It estimated that the tightening of U.S. and European Union sanctions led to a loss of $17.1 billion in export revenue from 2012 to 2014, the equivalent of 4.5 percent of Iran’s gross domestic product.
The economy contracted at a rate of 6.8 percent in 2012 and 1.9 percent in 2013, but it rebounded in 2014 in part thanks to reforms undertaken by President Hassan Rouhani.
Foreign direct investment has also plummeted and is likely to return only slowly. The bank’s report said foreign direct investment tumbled from $4 billion in 2010 to “a complete halt in 2012” and still amounts to less than $2 billion.
The report added that “the decline in foreign investment hurt the oil industry the most, as sanctions cut Iran’s access to technology, knowhow and investment.”
But other areas of the economy have also been hurt and could revive. After sanctions were tightened, automobile production fell to 700,000 cars from 1.6 million. Pharmaceutical exports worth $2.5 billion prior to 2012 have tumbled but could resume.
Ending sanctions would also lower trade costs caused by the need to entice buyers willing to sidestep the sanctions regime. The bank said those costs have sometimes amounted to a third of the value of Iran’s exports.
However, Iran’s currency will also gain strength once a nuclear agreement is in place, and that will make the country’s exports less competitive.