Iran Economic Monitor (PDF)

World Bank — Spring 2020
(Click to download)

This study includes the following special focus topics:

• The Economic Impact of COVID-19 in Iran: a preliminary assessment
• Understanding Poverty Trends in Iran during 2016/17–2018/19 with poverty simulation from gasoline reform and the COVID-19 outbreak

Summary

The recession in Iran accelerated in 2019/201 as US sanctions further tightened. After a 4.7% decline in 2018/19, Iran’s GDP contracted by 7.6% percent (YoY) in the first 9 months of 2019/20 as oil and gas output fell by 37% (YoY). Non-oil activity stagnated in 2019/20 but represented a marginal improvement compared to 2018/19. All major components of expenditure side GDP contracted in the first three quarters of 2019/20, pointing to a broad-based recession. The contraction in investment slowed as a result of construction sector activity but follows years of a shrinking capital stock.

GDP Growth Oil and Non-oil Breakdown

All major components of expenditure side GDP contracted in the first three quarters of 2019/20, pointing to a broad-based recession. \ (Source: CBI, SCI and World Bank staff calculations.)

After two years, Iran’s balance of payments became positive in 2018/19 due to restrictions on imports and capital flows. However, more recently, the current account surplus has almost entirely faded despite continued decline in imports. The share of Iran’s trade with China increased in 2019/20 despite a decline in China’s oil imports. Exports to immediate neighbours, while not as sizable as with China, have also gained more importance. Exports to India saw the largest decline amongst all other destinations of Iranian exports. Nevertheless, the relative importance of Iran’s main import partners remained unchanged despite the sharp decline in the level of imports.

Inflation has gradually declined as the impact of the sharp depreciation of the rial in 2018/19 dissipated but foreign exchange reserves remain limited. Food, housing and transport remained the top three contributors to consumer price inflation in 2019/20. High food price inflation has impacted the composition of the food basket of the average Iranian household.

The rial saw a more sustained depreciation trend in the second half of 2019/20 but has been influenced by the COVID-19 outbreak. After the attempted unification of the dual exchange rates in April 2018, foreign currency transactions effectively operate under a multiple exchange rate system. The Central Bank of Iran (CBI) has started pursuing conventional monetary tools for a more effective control on the inter-bank rate and liquidity growth. The Tehran Stock Exchange has seen strong gains over the last two years capturing part of the high liquidity growth and impacted by the rial’s depreciation and investor expectations.

The growing gross borrowing needs has increased the government’s reliance on debt issuance and withdrawals from strategic reserves.

Lower economic participation contributed to unemployment marginally improving in the March quarter 2019. Labour force participation declined in the last quarter of 2019/20 at a higher rate for the male population. Female and youth unemployment rates remain high in the most recent reported period. The overall pace of job creation has declined; only the services sector has provided additional employment opportunities.

Iran is one of the worst hit countries by the Corona Virus 2019 (COVID-19) global pandemic which has brought a huge loss of life and economic cost.

Facing a growing global pandemic, low oil prices and increasing sanctions, Iran’s economy is projected to contract for the third consecutive year in 2020/21 and grow at a moderate pace thereafter. The negative global outlook due to the COVID-19 pandemic will negatively impact Iran’s main trading partners and their demand for Iranian exports in 2020/21. The fiscal deficit is projected to widen as revenues fall short of targets and COVID-19 adds to expenditures. Iran’s current account balance is projected to be in deficit due to trade restrictions and oil market dynamics.

The recent decline in inflation and slower depreciation of the rial are likely to reverse with COVID-19. Negative economic growth and high inflation coupled with COVID-19 will put further pressure on household livelihoods in 2020/21.

The current unique situation of Iran’s economy presents significant downside risks for the baseline macroeconomic outlook. Bottom 40% of population in Iran were benefiting the least from economic growth in 2017/18 and lost the most in 2018/19.

The country’s economic and social challenges disproportionately impact the lower income decile households who have faced significant economic pressure. Both consumption and income poverty dropped in 2017/18 and increased in 2018/19 period. Poverty marginally decreased in 2017/18 and increased back in 2018/19 regardless of welfare measured by consumption or income. In contrast, inequality was not as volatile. Rural poverty continues to be much higher than poverty in urban areas, but trends remained the same.

Finally, the World Bank experts estimate that the monthly per capita cash transfer required to bring poverty to the pre-shock level would be of about 437,000 rials, or 507,000, depending on two different scenarios. The overall costs of such transfer program would depend substantially on the capacity for targeting the transfer; under perfect targeting the cost of mitigating measures would be reduced by almost 4 to 5 times. ■