Iran will not suffer as much as other countries from the oil price plunge as it is less reliant on crude exports, its president said on Wednesday, with the state budget depending far less than before on oil revenue due to U.S. sanctions.
But as a major crude producer, Iran’s economy has been hit hard since 2018 when the United States exited Tehran’s nuclear deal with six world powers and reimposed sanctions that have strangled Iran’s oil trade and banking sector.
The sanctions have limited Iran’s financial options to keep its economy running and most of Iranian revenues from oil sales are locked up in foreign bank accounts.
President Hassan Rouhani spoke after oil prices touched historic lows in global markets this week amid a huge supply gut due to the new coronavirus outbreak.
“The more countries rely on oil, the greater they suffer. But as our reliance on oil income has decreased, willingly or unwillingly, either by our own will or by the imposition of the enemy, our losses will certainly be less,” Rouhani said during a televised meeting.
Niels de Hoog, economist at credit insurer Atradius, said it was true that Iran’s financial reliance on oil had diminished. “However, that’s mainly because of the stringent U.S. sanctions rather than the economy having become more diversified.”
He noted that the dependence of Iran’s clerical establishment on oil income dropped significantly in 2019 and the share of oil income in total state revenues is now among the lowest of all net oil exporting countries.
Yet oil export receipts remain an important source of foreign exchange for Iran, he said. “The low oil price will cause the international reserve position to erode further. This comes at a bad time as Iran will increasingly need to rely on its financial buffers to finance crisis measures.”
The Eurasia Group think tank said that in Iran’s budget for this year, it was counting on oil to provide only 9% of revenues, down from 29% last year.
The budget was prepared on expectations of selling one million bpd at an average price of $50, an Iranian official said last year, when the budget draft was presented to parliament.
Oil prices slumped again on Wednesday, with Brent LCOc1 trading at less than $20 per barrel.
Iran is expected to export 500,000 barrels of oil per day this year, according to the International Monetary Fund (IMF).
With many Iranians feeling choked by the U.S. sanctions and more hardship coming from the new coronavirus in the Middle East’s worst-hit country, Rouhani faces increasing pressure on the economic front.
Despite aid packages to low-income Iranians during the outbreak, grassroots frustration is simmering. Prices of most consumer goods have risen and many middle and lower-class Iranians already struggle to make ends meet.
Iran – a leading member of the Organization of the Petroleum Exporting Countries (OPEC) – will see its economy shrink 6% this year from a 7.6% contraction last year, the IMF said this month.
The Washington-based crisis lender – which is evaluating Iran’s request for $5 billion in emergency funding – has forecast the Islamic Republic could hit a budget deficit this year of 15.7% of gross domestic product from 10.6% in 2019.
Iranian Oil Minister Bijan Zanganeh told state TV on Wednesday that oil producing countries should respect crude production cuts aimed at stabilising the oil market.
OPEC, along with Russia and other producing nations – known as OPEC+ – recently partnered with other producers including the United States to cut supply by some 20 million barrels per day.