Iran Economy Outlook
World Bank Report
Iran’s Gross Domestic Product (GDP) in 2019/20 is estimated at US$463 billion. With a population of 82.8 million people, Iran’s economy is characterized by the hydrocarbon, agriculture, and services sectors, as well as a noticeable state presence in manufacturing and financial services. Iran ranks second in the world in natural gas reserves and fourth in proven crude oil reserves. Economic activity and government revenues depend to a large extent on oil revenues and therefore remain volatile.
The Iranian authorities have adopted a comprehensive strategy encompassing the market-based reforms reflected in the government’s 20-year vision and its sixth development plan for the full five-year period from 2016/17 to 2021/22. The plan is composed of three pillars, namely, the development of a resilient economy, progress in science and technology, and the promotion of cultural excellence. On the economic front, the development plan envisages an annual economic growth rate of 8% and the reform of state-owned enterprises and the financial and banking sectors. The allocation and management of oil revenues are among the government’s main priorities.
After a 4.7% contraction of GDP in 2018/19, GDP declined further by 7.6% (yoy) in the first nine months of 2019/20 due to the contraction of the oil sector and weak domestic demand. The oil sector contracted by 14.1% in 2018/19 following the reintroduction of US sanctions in May 2018, contributing the most to overall negative growth. Non-oil sector activity also declined by 2.1% in 2018/19 but has since displayed some signs of recovery. Between April and December 2019, agriculture and non-oil industries grew by 3.2% and 2% (year-on-year), respectively, while value-added services edged down.
The unemployment rate remains high, at 10.6% as of October to December 2019, though it showed improvement compared to the same period the previous year (11.8%). Male and female unemployment rates of 8.9% and 17.3%, respectively, suggest continued gender gaps in the labor market. Youth (15-24 years) unemployment, while declining to 25.8% in the December quarter 2019, remains high compared to the regional average. The labor force participation rate edged down to 44.3% in the December quarter 2019, as female labor force participation rate dropped to about 17.5%.
The fiscal deficit to GDP ratio declined in 2018/19, as the growth in the financing gap (13%) was more than offset by a large increase in nominal GDP in the denominator (the GDP deflator surged by over 50%). Government net disposal of financial assets to finance borrowing requirements remained high as a share of revenues (10.4%) in 2018/19 but lower than the peak in 2016/17 (11.6%). As in previous years, higher current expenditure came at the expense of lower investment (2.9% of GDP in 2017/18).
The current account surplus increased to US$26 billion in 2018/19, as the fall in imports outpaced the decline in exports. Real exports of goods and services contracted by 13.6%after a small growth of 1.8% in the previous year. Real imports contracted sharply by 38.3% due to restrictions on the import of non-essential goods aimed at controlling the pressure on foreign exchange reserves.
Since the attempted unification of the official and parallel exchange rates in April 2018, the economy has been effectively operating under a multiple exchange rate system. In the parallel market, the rial has depreciated more moderately against the dollar in 2019/20 after recovering from a strong decline in mid-2018 due to a surge in speculative foreign exchange demand. Inflation started a gradual decline from a peak of 52% (yoy) in May 2019 to reach 22% in March 2020 as the base effect of the earlier depreciation period declined.
In the medium term, the economy is set to experience a slow recovery with oil exports expected to remain at historic lows and non-oil activity remaining subdued. Facing additional exogenous shocks—including the COVID-19 outbreak in 2020—GDP is expected to further contract in 2020/21. Economic growth between 2020/21 and 2022/23 is expected to remain weak between 2020/21 and 2022/23, experiencing a small pickup in exports and consumption on the demand side and the industry sector on the supply side in the outer years.
Higher import prices and trade restrictions are likely to keep inflation above 20 percent in the coming years. Despite the rial’s depreciation and a large drop in imports, the reduction in oil exports is expected to weigh more heavily on the current account balance than the earlier episode of sanctions, as oil prices are much lower than they were in 2012/13 to 2013/14. The stagnating trajectory of the economy is also likely to put further pressure on labor market dynamics and job creation.
Poverty in Iran, measured at the World Bank’s upper middle-income threshold of US$5.5 per day (2011 PPP), declined to 8% in 2013 after the 2010 universal cash transfers program. The cash transfer program appears to have more than compensated for the likely increase in energy expenditures of less well-off households, thus contributing to positive growth in consumption of the bottom 40% of the population, even though overall consumption growth between 2009 and 2013 was negative. However, poverty has moderately increased since 2013, which may be associated with declining social assistance in real terms due to inflation. The falling value of cash transfers in real terms was exacerbated by the impact of negative growth in 2018, something that is expected to increase the poverty rate even further. Looking ahead, with negative economic growth and high inflation, poverty may have increased, as it was compounded by higher gasoline prices in November 2019. Cash transfers from the Government to 18 million households will help mitigate this impact.
Last Updated: May 01, 2020
