The proposed lifting of sanctions on Iran, following its July 14, 2015 nuclear agreement with the permanent members of the UN Security Council and Germany (“P5+1”), will have consequences for the global, regional and Iranian economies.
By Lili Mottaghi and
The proposed
lifting of sanctions on Iran, following its July 14, 2015 nuclear agreement
with the permanent members of the UN Security Council and Germany (“P5+1”),
will have consequences for the global, regional and Iranian economies.
The
resumption of Iranian oil exports to pre-2012 levels could eventually add one
million barrels per day on the world oil market, bidding down world prices.
Iran’s major trading partners, including the United Arab Emirates and other
countries in the Middle East and Central Asia, will see an expansion of oil and
non-oil trade, as sanctions-induced trading costs come down. Most importantly,
as barriers to trade are relaxed, the Iranian economy will shift its production
mix in favor of goods that fetch high prices abroad and its consumption towards
cheaper imports, with attendant effects on growth, distribution and household
welfare.
Ianchovichina et
al. (2015) quantify the economic effects of the lifting of sanctions on Iran
using a modified version of the GTAP 9 database and the global, computable
general-equilibrium (CGE) model, as documented in Hertel (1997). CGE models
capture the interaction between producers and consumers in the economy,
mediated through the price mechanism. The global CGE model used here also
captures the trade flows between countries and solves for a set of world prices
that equilibrate global supply and demand. The model simulates the effect of a
“shock”, such as the removal of a trade sanctions, on the market-clearing
prices at the global and national levels. We are therefore able to isolate the
consequences of the lifting of sanctions from other ongoing developments in the
economy. Since the model captures the new equilibrium of an economy that has been
perturbed, the time horizon of a simulation is best thought of as one to two
years.
In the
simulation, the lifting of sanctions on Iran has three components:
(i) a
lifting of the EU oil sanction;
(ii) a reduction in transport costs on trade
with Iran; and
(iii) improvements in the productivity of cross-border trade in
services.
The 2012 restrictions on imports of Iranian oil by the EU was the most
far-reaching of the sanctions (see below). Its removal is expected to have the
largest macroeconomic impact on Iran and the rest of the world: oil accounts
for 65 percent of Iranian export revenue and Iran has a relatively large share
(8 percent) of total world exports. As cargo inspections on Iranian exports and
imports, imposed as part of the sanctions regime, are removed or reduced
significantly, transport costs on trade with Iran will decline. This will have
an effect on merchandise trade and boost in particular exports of agricultural,
machinery, and other goods with large transport margins. And as the US and
other partners lift restrictions on finance, tourism and transport trade with
Iran, the productivity of cross-border trade in these services will improve.
The removal of these restrictions will boost exports of finance, insurance, and
tourism exports from Iran.
The paper finds
that Iran’s gains from the sanctions removal are sizable, resulting in a
welfare gain of $13 billion to the economy, or an increase in per capita
welfare of 2.8 percent. Most of these gains (2 percent or approximately $10
billion) stem from the lifting of the EU oil sanctions while the reduction in
trade costs and improvements in conditions for cross-border trade result in an
additional gain of close to one percent. In the global economy, net oil
importers gain and net oil exporters lose as the world price of oil declines by
about 14 percent in real terms due to the additional amount of oil sold on the
global market. That additional one million barrels could cause such a sizeable
decline in oil prices is due to the low demand and supply elasticities of oil (Figure
1).
Figure 1. Iran’s
sanctions removal effects on oil prices
The gains to the
EU and the US, both net oil importers, are sizable in absolute terms US$74
billion and US$37 billion but small in relative terms as per capita welfare
increases by a half of a percent in the EU and a third of a percentage point in
the US. The losses are steepest for OPEC members, especially the GCC, which is
expected to lose 4.4 percent in per capita welfare (equivalent to US$62 billion
in 2011 prices). Per capita welfare for other OPEC members and Russia declines
by 3 percent ($22 billion) and 1.8 percent ($34 billion), respectively. The
rest of the world is not affected by the reduction in Iran’s trade costs
because Iran is responsible for a negligible share of the world’s non-oil
exports.
Chart Attribute: Iran's Crude Oil and Natural Gas Reserves, EIA.gov
The removal of
the EU oil sanctions will foster an expansion of Iran’s oil sector raising the
real price of capital by 8 percent (the oil sector is intensive in capital use)
and to a lesser extent the wages of skilled and unskilled Iranian workers (1.1
and 0.4 percent, respectively). The wage increase comes from the spending of
oil revenues and not from the direct effect of oil sector expansion as the oil
sector employs a negligible share of the Iranian workforce. The boost in
overall trade on account of lower trade costs translates into additional
increases in wages,especially for skilled labor. Overall, wages of skilled and
unskilled labor are expected to go up by 2 and 0.5 percent, respectively, as
sanctions on Iran are removed. The supply response to lower trade costs will be
negligible but the increases in volumes of exports, albeit from a small base,
will be significant: 19 percent for agricultural and food products, 33 percent
for metals and mineral products, 13 percent for machinery, 18 percent for
textiles, 24 percent for light manufactures, 10 percent for finance and
insurance, 7 percent for transport services, and 18 percent for tourism and
recreation.
Latest Developments:
EU extends Iran sanctions freeze by extra two weeks - Al Arabiya
As clock ticks down on sanctions, oil-laden Iran tankers set to target India and Europe - The Economic Times
Companies are Lining Up to Do Business with Iran. Are you Falling Behind? - The Huffington Post
U.S. says Iran compliance with nuclear deal means easing of U.N. sanctions soon - The Los Angeles Times
About The Authors:
Lili Mottaghi is
Economist in the Chief Economist Office for the World Bank’s Middle East and
North Africa Region. She works on economic growth, international trade and
policy reform issues in developing and transition economies. Her recent work
includes development of two semi-annual publications – MENA Economic
Monitor and MENA Quarterly Economic Brief – which
present recent economic developments and prospects for the region’s economies
and provide analyses of issues shaping MENA’s future. Before joining the
Bank, she worked at the Management and Planning Organization in Iran where she
held senior positions in the areas of growth and macroeconomic modeling. Ms.
Mottaghi’s research and publications cover macroeconomics, economic growth, and
trade policy. She has Master and Ph.D. degrees in Economics from Claremont
Graduate University and Tehran University.
Shantayanan Devarajan is the Chief
Economist of the World Bank’s Middle East and North Africa Region.
Since joining the World Bank in 1991, he has been a Principal Economist
and Research Manager for Public Economics in the Development Research Group,
and the Chief Economist of the Human Development Network, South Asia, and
Africa Region. He was the director of the World Development Report 2004, Making
Services Work for Poor People. Before 1991, he was on the faculty of
Harvard University’s John F. Kennedy School of Government.
The author or
co-author of over 100 publications, Mr. Devarajan’s research covers public
economics, trade policy, natural resources and the environment, and general
equilibrium modeling of developing countries. Born in Sri Lanka, Mr. Devarajan
received his B.A. in mathematics from Princeton University and his Ph.D. in economics
from the University of California, Berkeley.
Publication
Details:
The report was
prepared by Lili Mottaghi, with inputs from Elena Ianchovichina and Hadi Salehi
Esfahani, under the guidance of Shanta Devarajan (Chief Economist, Middle East
and North Africa Region).
Cite This Article:
Shanta
Devarajan, Lili Mottaghi. 2015 “Economic Implications of Lifting Sanctions on
Iran” Middle East and North Africa Quarterly Economic Brief, (July), World
Bank, Washington, DC. Doi: 10.1596/10.1596/ 978-1-4648-0702-2 License: Creative
Commons Attribution CC BY 3.0 Licenses: Creative Commons Attribution CC BY 3.0
IGO, Download The Paper - LINK
