Oil price drop piles more pressure on Iran's economy

Significance

Iranian officials appear to have been caught off guard by the collapse in oil prices. The draft budget for the fiscal year 2015-16 (March-March) was presented to the legislature last December based on an estimated oil price of 70 dollars per barrel. It is now being hastily revised based on 40 dollars per barrel. The subsequent reduction in forecast revenues makes significant spending cuts and revenue raising necessary. However, with a nuclear agreement yet to be sealed and parliamentary elections on the horizon in 2016, questions remain over whether the government will have the political will to carry out such measures.

Impacts

• The fall in oil revenues will reduce the Central Bank's ability to counteract further falls in the exchange rate.
• Inflation is likely to rise, reducing the government's spending power further.
• Rouhani's credibilty rests on efficient management of the economy and his ability to engineer a recovery.
• With elections due in 2016, proposed spending cuts are likely to face stiff resistance in parliament that will slow the budget's passage.