(Bloomberg Opinion) -- The International Monetary Fund has revised downward its projections for Iran’s economy this year, predicting a 9.5% contraction, as against its previous projection of a 6% shrinkage. It will be the economy’s worst performance since 1984, when Iran was mired in a war with Iraq.
At first glance, this seems to support the Trump administration’s claims that its “maximum pressure” sanctions campaign is bringing the Iranian economy to the brink of collapse. But this view is challenged by the IMF’s projection that the decline will halt in 2020, when Iran’s economy will rebound to zero growth—despite the sanctions.
A closer examination reveals an economic recovery is already underway, as stability returns to consumer prices, manufacturing, trade, and the Iranian currency. Somewhat counterintuitively, this could improve the prospects of talks between Iran and the U.S. A stable economy may reassure the Islamic Republic that it can negotiate from a position of some strength.
The most obvious sign of the recovery is the rebounding rial. Since May, the Iranian currency has appreciated 40% against the dollar. The Central Bank of Iran introduced new technologies to connect exchange bureaus with banks, creating a unified foreign-exchange market that is digitally supervised, making it harder for speculators to abuse the market. The new systems appear to be working—even as geopolitical tensions reached new highs this summer, the currency market remained unfazed.
A stronger rial has helped ease inflation. The consumer price index rose just 6.1% in September—the slowest pace since the reimposition of sanctions 18 months ago. Abdolnasser Hemmati, the central bank governor, is predicting “further easing of inflation in the coming months.”
Stability in the foreign-exchange market has also helped support a recovery in manufacturing. After several months of contraction at the beginning of the year, manufacturing activity gradually expanding, as reflected in the purchasing manager’s index (PMI) complied by the Iran Chamber of Commerce. Iran’s PMI score has exceed 50 in five of the past seven months as firms report improved inventories of intermediate goods.
The rebound in manufacturing has helped the Tehran Stock Exchange acquire the unlikely mantle as the world’s best-performing exchange over the past year. More importantly, the fact that most of Iran’s factories are finding ways to sustain output means they can keep their workers employed and foreign customers supplied.
Iran’s non-oil exports are projected to reach a record level of over $40 billion this year. The result of an effort by the government and private sector to boost regional trade, this may be the first year in Iran’s modern history that non-oil exports will exceed oil exports, which will be constrained to around $10 billion following the Trump administration’s revocation of key sanctions waivers in May.