The World Bank has revised upwards its forecast for Iranian GDP growth in 2022.
In a recently released report, the bank expects Iran’s economy to grow by 2.4% in 2022, 0.2% higher than the bank’s June 2021 projection.
“Growth in the Islamic Republic of Iran in 2022 has been revised slightly upwards with the reduction of mobility restrictions related to Covid-19 in favor of the service sector and a gradual recovery of the oil sector,” he said. declared.
According to the World Bank Group’s new flagship report, Global Economic Outlook, the impact of the pandemic on Iran’s services sector has been limited and oil production and industrial activity have rebounded, minimizing the slowdown in economic growth. .
He estimated that Iran’s economy grew by 3.1% in 2021, 1% more than previous estimates. Its projections for 2023 indicate that GDP will grow by 2.2%, 0.1% less than expected.
“As the world enters the third year of the Covid-19 crisis, economic developments have been both encouraging and troubling, clouded by numerous risks and considerable uncertainty,” reads the opening of the report. .
“The good news is that production in many countries rebounded in 2021 after a sharp decline in 2020. Advanced economies and many middle-income countries achieved substantial immunization rates. International trade has picked up and high commodity prices are benefiting many developing countries. Domestic financial crises and external debt restructurings have been less frequent than might have been expected in times of severe global shocks.
Noting that for many developing countries, progress towards recovery has been hampered by daunting challenges, the World Bank referred to three such challenges:
1. Macroeconomic imbalances have reached unprecedented proportions. Government spending, deficits and debt in several advanced economies have reached record highs relative to GDP. The balance sheets of the Central Bank of Iran absorbed unprecedented amounts of long-term assets funded by bank reserves, leading to an inequitable distribution of capital. Spending in developing countries jumped to support economic activity during the crisis, but many countries now face record levels of external and domestic debt…
2. The world faces growing income inequality between and within countries. The Covid-19 crisis has reversed years of progress in poverty reduction. As government fiscal space has shrunk, many households in developing countries have suffered severe job and income losses – women, unskilled and informal workers being the hardest hit…
3. In addition to this rise in inequality, the world is going through a phase of exceptional uncertainty. The emergence of the Omicron variant is a stark reminder that the Covid-19 pandemic is not over. New variants of the virus can put pressure on even highly vaccinated countries and threaten to wreak havoc on those with low vaccination rates, who are the poorest and most vulnerable of all.
Iran’s economy is gradually recovering after a lost decade (2011-2020) of negligible economic growth, reads the Iran Economic Monitor report, another World Bank publication: “Adapting to the New Normal: A Protracted Pandemic and Ongoing Sanctions” . Below is the executive summary:
Less stringent Covid-19 restrictions, adjustment to the new normal – reflected in a recovery in consumption and more favorable conditions for the oil sector led to a four-quarter rebound after June 2020, albeit from June 2020. a weak base. The rebound was spurred by the rapid deployment of Covid-19 vaccines in the second half of 2021-22.
However, limited accessible foreign exchange reserves, due to ongoing US sanctions, have led to exchange rate volatility and a surge in inflation. The economic rebound has also been mostly jobless, which, coupled with high inflation, has translated into declining household well-being, especially among lower income deciles who have also been disproportionately affected by the pandemic.
Meanwhile, adverse climate change events such as droughts and record high temperatures have led to water shortages and power outages that have rendered the socio-economic urgency of these challenges.
Back to growth
After emerging from a two-year recession in 2020-21, Iran’s economy has regained some growth in 2021-22. Easing cross-border trade, improving oil market conditions and loose Covid-19 restrictions drove Iran’s economic rebound in the first quarter of 2021-22, which was led by oil and services . The impact of the Covid-19 pandemic on gross domestic product (GDP) growth in 2020-21 has been less pronounced compared to other countries due to less stringent Covid-19 restrictions, less dependency towards heavily impacted sectors such as tourism, oil recovery in the second half of 2020-21 and a relatively weaker economic base after two consecutive years of economic contraction following the reimposition of US sanctions.
Real GDP in 2020-21 was at the same level as a decade ago, while the country gave up the demographic window of opportunity (a highly educated young population) as well as a period of high oil prices (2010-14) and unemployment remained high at around ten%.
Fiscal targets missed
The government fell short of its fiscal targets in the first four months of 2021-22, but managed to keep the deficit close to 2020-21 (as a percentage of GDP). Fiscal data from April to August 2021 shows that while fiscal targets, including for oil revenue, were not met, oil revenue nevertheless increased from its historically low levels (1.1% of GDP ) in 2020-21. However, this only covered 15% of budget revenue for the period.
In light of these elements, the government has adjusted spending which has helped keep the deficit-to-GDP ratio close to the 2020-21 rate. The fiscal deficit from April to August 2021 was mainly financed by bond issuance and the withdrawal of Iran’s National Development Fund, as planned asset sales did not materialize.
Iran’s relatively low level of public debt, which comes mainly from domestic sources, provides room for new debt issuance and helps cushion some of the fiscal shocks.
Inflation and current account balance
Inflation continued to rise in 2021-22 due to inflationary expectations and the continued depreciation of the rial. In the absence of an effective nominal anchor, inflation was fueled by rising inflationary expectations that had been brought under control after the US presidential elections and the start of nuclear talks. This trend reversed after nuclear talks paused in June 2021, causing inflation to rise to 43% year-on-year (YOY) in April-November 2021.
The exchange rate of the rial against the dollar followed a similar trend to expectations, but ultimately depreciated by 18% (YOY) from April to November 2021, as the restricted access to foreign exchange reserves abroad has limited the scope for direct market interventions.
Government borrowing from the banking system and sales of foreign assets to the central bank also led to strong growth in the money supply, thus reinforcing the rise in prices. High inflation and the loss of real disposable income have worsened household well-being. The pandemic has also severely affected jobs and incomes in many labor-intensive activities, including high-contact services and the informal sector.
The current account balance (CAB) turned positive in 2021-22 as an increase in oil and non-oil exports offset the increase in imports. The post-pandemic recovery led to sharp increases in oil and non-oil exports of 125% and 69% in April-June 2021 (YOY), respectively. This led CAB to register a surplus for the first time since the pandemic despite imports which also increased by 42% during the same period.
Other sources of external financing, namely foreign direct investment and portfolio investment, also remained weak due to US financial sanctions, high inflation and exchange rate volatility.
Outlook and risks
Iran’s economic outlook is affected by the Covid-19 pandemic and the demand outlook from major export partners. Nationally, the initial slow response to Covid-19 vaccination in the face of the large wave of Delta variants is expected to dampen growth due to the scarring effects of the pandemic and the lingering threat of future waves of infection. Tighter Covid-19 containment measures aimed at containing the spread as well as shortcomings in attracting new investment, due to negative real interest rates, will be additional headwinds to growth in the outlook.
Globally, slowing growth in major trading partners such as China, as well as ongoing US export sanctions, are also expected to weigh on growth in the oil and non-oil sectors. Thus, average GDP growth should be modest, less than 3% per year, in the medium term.
The main risks to Iran’s economic outlook relate to the evolution of the pandemic and the outlook for geopolitical developments. The emergence of new, more infectious and deadly variants of Covid-19 and the resulting containment measures would pose a significant risk to the recovery of the Iranian economy until the complete vaccination of a large part of the population. population is realized.
Trade disruptions and reduced demand from neighboring countries such as Afghanistan and Iraq, the main source of accessible foreign exchange reserves, would also prove a major impediment to growth and import financing. The economy also remains vulnerable, although less than in the past, to future declines in global oil prices.
Growing challenges of climate change leading to more severe water and energy shortages, as well as high inflation, could further increase pressures on the most vulnerable and deepen social grievances. Upside risks relate to the possibility of sanctions relief that could stimulate economic activity, as the economy has been chronically operating below its potential capacity.