Resilience Amidst Challenges: Iran’s Economic Landscape in 2023/24

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Iran’s economy in the fiscal year 2023/24 showcases a scenario of resilience against a backdrop of international sanctions, geopolitical tensions, and environmental challenges. Despite these adversities, Iran has recorded significant economic growth, driven largely by its oil sector but also supported by notable performances in non-oil sectors such as services and manufacturing. This comprehensive analysis delves into the multifaceted aspects of Iran’s economy, examining its growth, inflation, fiscal policies, and the broader socio-economic environment.

Economic Growth and Sectoral Contributions

In the first half of the Iranian fiscal year ending March 20, 2023, Gross Domestic Product (GDP) growth accelerated to 5.1% year-on-year. This growth was primarily propelled by a 17.1% increase in the oil sector’s value-added, benefiting from a tight global oil market and strategic pricing adjustments that improved Iran’s oil export volumes. Furthermore, the non-oil sectors exhibited robust growth of 3.8% during the same period, signaling a balanced economic expansion beyond petroleum-based industries.

Growth in Oil and Non-Oil Sectors

The oil sector witnessed a growth of 10 percent, significantly influenced by the tightening of global oil markets. This sector’s performance was critical, especially considering the sanctions that have traditionally stifled its output. In 2022/23, oil production volumes increased by 3.3 percent. However, it’s important to note that this growth rate was still below the average for OPEC countries, which saw an average increase of 7 percent. Consequently, Iran’s share in OPEC production dipped slightly from 9.2 percent in the previous year to 8.8 percent.

The average price for Iranian crude oil surged by 21.2 percent, aligning with the historical Brent premium. However, due to sanctions-related discounts, the final selling price was likely lower than this surge might suggest. By June 2023, oil production had reached a four-year high, although it remained 1.1 million barrels per day below the pre-sanctions levels of 2018.

The non-oil sector reported a growth of 3.5 percent. This growth was primarily driven by the services and manufacturing sectors. The latter, in particular, saw significant expansion, with the Industrial Production Index (IPI) for selected industries in the stock market showing a robust upward trend since April 2022. The automotive and basic metals industries were major contributors to this growth, rebounding strongly after a contraction in 2021 caused by power outages, microchip shortages, and heightened import restrictions due to the pandemic.

Challenges in Non-Oil Industries

Despite the positive growth figures, the non-oil industries faced several challenges, including energy shortages, labor strikes, and an uncertain investment climate. Manufacturing growth was notable at 9.5 percent, but the petrochemical sector, which is the largest manufacturing industry in Iran, showed signs of stagnation from October 2022 onward, primarily due to subdued global demand for commodities.

The Construction Sector: A Decade of Contraction

The construction sector in Iran has been in a state of prolonged recession for the last decade. In 2022/23, this trend continued, exacerbated by limited financing and rising production costs. Bank credit allocations to the construction sector witnessed a significant decline, dropping from 13 percent in 2018/19 to a mere 7.1 percent. The skyrocketing prices of construction materials and land, which have surged over 280 percent and 150 percent respectively over the past three years, further strained the sector.

Despite an acute demand for housing, the affordability crisis, propelled by escalating housing and rent prices, has kept home ownership out of reach for many Iranians. In response, the government announced ambitious plans to amplify housing production, aiming to build one million affordable houses annually over the next four years. However, in the first year, only about a quarter of this target was met, indicating significant hurdles in realizing these goals. Moreover, while 20 percent of total bank credits were mandated for construction, the actual fund disbursements failed to materialize, leaving many projects stalled and ambitions unmet.

Agricultural Sector: Growth Amidst Adversity

The agricultural sector of Iran, despite facing severe challenges such as water shortages and climate variability, managed a moderate growth of 1.1 percent in 2022/23. This growth was aided by more favorable weather conditions and an increase in the guaranteed purchase price for agricultural products. However, the sector continues to battle against the backdrop of eliminated subsidized exchange rates, which led to a sharp increase in the prices of fertilizers and other agricultural inputs. These factors not only elevated production costs but also impacted domestic food production critically. Addressing these challenges through effective policies is crucial for enhancing food security and reducing dependency on imports.

Services Sector: Driving Non-Oil Growth

The service sector has emerged as a significant driver of non-oil growth in Iran, particularly over the last two years. In 2022/23, the sector expanded by 2.7 percent year-on-year, bolstered by strong performance in transport, storage, wholesale, retail, and information and telecommunication services (ITS). The ITS along with the banking and insurance sectors have been pivotal, showcasing average annual real growth rates of 17 percent and 10.5 percent respectively over the past decade.

Despite this growth, the service sector faces challenges, particularly in the gig economy, which is grappling with shortages of high-skilled labor and issues related to the quality and stability of internet services. The sustained expansion of this sector is essential for Iran’s non-oil economic development, highlighting the need for strategic enhancements in labor and digital infrastructure.

Expenditure Trends: Consumption, Investment, and Government Spending

On the expenditure side, private consumption was the primary driver of GDP growth in 2022/23, expanding by 8.7 percent. This surge in consumption was driven by a post-pandemic rebound and inflation hedging behaviors, where consumers increasingly invested in durable goods amidst negative real interest rates and high inflationary expectations. On the contrary, government consumption saw a contraction of 3.6 percent, attributed to the shortfall in revenue realization against an expansive budgetary framework.

Investment in the economy, particularly in machinery, rose by 6.7 percent, signaling a positive, albeit cautious, investor sentiment. However, the stark contraction of gross fixed capital formation by over 50 percent in the past decade underlines a significant retreat in long-term investments, which poses serious concerns for future economic stability and growth.

Employment and Social Policies

A remarkable outcome of this economic resilience is the return of employment rates to pre-pandemic levels. By the third quarter of 2023/24, job creation in Iran increased by 2.9%, reducing the unemployment rate to a record low of 7.6%. This improvement is largely attributed to the expansion in both the oil and non-oil sectors, which have collectively spurred job opportunities across various industries.

Social Protection and Fiscal Strategies

Iran’s approach to social welfare, particularly its quasi-universal cash transfer program, has played a pivotal role in cushioning vulnerable populations from economic shocks. Despite budgetary constraints and reduced government revenues—which saw only 72% of budgeted revenues realized in the first seven months of 2023/24—Iran has managed to sustain its social safety nets. These measures have not only supported consumption-led growth but also helped in gradually improving poverty metrics and reducing income inequality.

Inflation Dynamics and Monetary Policy

Despite the positive strides in growth and employment, Iran continues to battle elevated inflation levels. As of November 2023, the headline and core Consumer Price Index (CPI) remained high at 41.6% and 41.4% respectively. The persistence of high inflation is fueled by rising food prices and housing costs. In response, the Central Bank of Iran has adopted a tighter monetary stance, which includes measures such as constraining bank balance sheet growth, increasing reserve requirements for riskier banks, and raising deposit and interbank interest rates.

Structural Challenges and Environmental Concerns

Iran’s economic landscape is still marred by structural challenges that hinder sustainable development. Key issues include energy subsidies leading to allocative inefficiencies, an undercapitalized banking sector, and environmental strains exacerbated by climate change. These challenges not only impact economic stability but also pose significant risks to food security and the overall quality of life.

Iran’s Fiscal Dynamics: Public Sector Finance and Economic Policy in 2022/23

Financial Landscape in 2022/23

The fiscal year 2022/23 for Iran marked a period of significant economic shifts, influenced heavily by global oil markets and internal policy decisions. The government’s fiscal account benefited notably from improved revenues from oil and taxes, amidst a backdrop of tightening global oil supply and ongoing nuclear negotiations.

Enhanced Oil and Tax Revenues

Iran’s oil revenues saw a remarkable increase, growing by over 70 percent and reaching 4.3 percent of GDP, the highest since the re-imposition of sanctions. This surge was driven by higher global oil prices and an increase in oil exports, though the revenue fell short of the government’s optimistic budget target by 20 percent. The diagram labeled as Figure 10 in the provided materials presumably illustrates these trends in oil revenue against budget expectations.

Tax revenues also showed strong performance, achieving full realization and contributing to more than 40 percent of the government’s total revenues. Despite a shortfall in import taxes, the stability of tax revenues as a share of GDP at 5.1 percent was notable. Direct taxes, particularly corporate taxes, which grew by 56 percent overall with corporate tax alone increasing by 62 percent, were significant contributors. These taxes comprised about two-thirds of direct tax revenue, with income taxes and wealth taxes making up the rest. Sales and consumption taxes achieved 84 percent of the budget target, supported in part by inflation which nominally increased the tax base. However, the sale of government assets only met 23 percent of its targeted budget.

Expenditure and Deficit Management

The Iranian government managed to cover most of its expenditures through these increased revenues, effectively curbing the fiscal deficit. Total budget expenditures grew nominally, driven by higher cash transfers and import bills, a response to mitigate the high inflation rates, alongside higher wage bills and pension adjustments. Yet, as a percentage of GDP, expenditures declined to 13.2 percent. The execution of current expenditures met 97 percent of the budget, while capital expenditures were fully realized, as depicted in Figure 11.

A significant portion of the government-issued bonds was allocated for servicing existing debt, leaving the remaining budget deficit to be financed through the National Development Fund and borrowing from the banking system.

Looking Ahead: 2023/24 Budget Projections

The budget law for 2023/24 anticipates expenditure growth exceeding revenue growth, thus indicating higher financing needs. The government aims to increasingly rely on tax revenues, projected to grow by 67.6 percent and constitute about half of total revenues—a notable increase from the previous year’s 44 percent. Corporate taxes are expected to see the highest increase at 118 percent. Oil revenue forecasts are based on an export volume of 1.4 million barrels per day and an average price of $85 per barrel. However, these projections might be overly optimistic given the competition from discounted Russian oil and a potential softening in global oil demand.

The budget also assumes an implicit exchange rate of IRR230,000/US$, unchanged from the previous year, despite recent significant depreciation of the domestic currency. This exchange rate assumption might serve as a buffer against potential shortfalls in oil revenue when converted to the local currency.

Current expenditures are projected to grow by 51 percent, with investment expenditures growing by 44 percent. Public sector wages and pensions are set to increase by an average of 20 percent, which, in the context of inflation rates above 40 percent, effectively means a real wage cut. The wage increase strategy is progressive, favoring employees with lower salaries.

Fiscal Challenges and Absence of Comprehensive Reforms

Despite these financial strategies, the 2023/24 budget reflects a lack of comprehensive reforms to address structural challenges such as curbing inflation, promoting investment in critical areas like climate change resilience, and fostering job creation. The budget also fails to address rising imbalances in the banking sector, including the need to repay government arrears to banks. Additionally, the pension system’s sustainability is not addressed, despite the increasing fiscal burden and the government’s retreat from plans to raise the retirement age.

Overall, the fiscal policies and economic management in Iran during these fiscal years reflect a complex interplay of global market conditions, domestic economic needs, and policy responses that shape the nation’s economic trajectory.

Tumultuous Times: Economic Strains and Monetary Reforms in 2022/23

The year 2022/23 was marked by significant economic turmoil, primarily driven by global inflationary pressures and domestic monetary policies. In this comprehensive examination, we delve into the depths of the economic challenges faced during this period, focusing on consumer price inflation, the impact of new food import policies, and the strategic monetary responses instituted to counteract these adversities.

Consumer Price Inflation and Contributing Factors

Consumer price inflation (CPI) witnessed a sharp escalation during 2022/23, continuing a trend of heightened inflation rates that topped 40 percent for the fourth consecutive year. The period recorded headline and core inflation at alarming rates of 48.7 percent and 42.4 percent, respectively. Among the leading contributors to this inflationary spike were soaring food prices, which accounted for approximately 40 percent of the inflation figure, followed closely by housing costs.

The root of the surge in food prices can be traced back to the phasing out of import subsidies for essential goods, combined with a global increase in commodity prices following the ongoing conflict in Ukraine. These factors collectively expedited the inflationary momentum, with a substantial impact on lower-income households. These groups found themselves particularly vulnerable as their food and housing expenses consumed about 80 percent of their budgets, while their real wages concurrently declined.

The depreciation of the rial played a significant role in exacerbating inflationary conditions. Following a deadlock in nuclear negotiations and extended public protests, the rial depreciated by approximately 40 percent in 2022/23. The gap between the parallel market rate and the Central Bank of Iran’s (CBI) auction exchange rate (NIMA rate) widened notably, reflecting rising inflationary expectations.

In response to these fluctuations, the CBI took decisive action by fixing the exchange rate at IRR285,000/US$ for the import of essential and intermediate goods, although this measure was later confined to essential goods only. The depreciation of the rial, coupled with global price hikes, fueled a rapid increase in import prices, which in turn propelled the producer price index (PPI) to ascend by 33.3 percent year-over-year. Agriculture, hit by a 52.9 percent increase due to the removal of subsidized exchange rates for imported agricultural inputs, was a major inflation driver in the PPI.

Monetary Policy Adjustments and Market Responses

The monetary landscape during this period was characterized by significant expansions in monetary aggregates, which added to the prevailing inflationary pressures. The monetary base (M0) grew by 42.4 percent, well above its long-term average, signaling ongoing challenges in managing money supply growth. However, growth in broad money (M2) moderated to 31.6 percent year-over-year, thanks to regulatory measures that capped banks’ balance sheets and increased the required reserves for riskier banks.

In an effort to control the rampant inflation, the CBI implemented its first inflation targeting in May 2020, setting an interest rate corridor between 14 percent and 22 percent. By February 2023, the floor and cap rates were adjusted to 17 percent and 24 percent, respectively, in response to heightened demand in the money market which pushed interbank interest rates to historic peaks. Banks were also permitted to increase interest rates on deposits and loans by an average of 5 percent, although these rates remained considerably below the prevailing inflation rate.

Challenges in the Banking Sector and Stock Market Dynamics

The banking sector in Iran faced numerous hurdles, with over 70 percent of banks not meeting the capital adequacy ratio (CAR), and nearly half exhibiting negative CARs, posing a grave risk of bankruptcy. The situation was aggravated by an elevated average non-performing loan (NPL) ratio of 16.2 percent in 2021/22. This figure excluded rollover loans, which constituted a significant portion of the banking sector’s loan portfolio. The challenges were deeply entrenched in fiscal dominance, institutional weaknesses at the central bank, and widespread misconduct, including corruption within banks.

In response, the CBI took several steps to mitigate risks, including raising the required reserve ratio to 15 percent and curbing banks’ balance sheet growth. Despite these efforts, liquidity shortages remained a critical issue, prompting banks to restrict large withdrawals and offer higher interest rates on deposits to stem further liquidity drains.

The stock market mirrored the economic volatility, experiencing fluctuations before eventually adjusting to the currency depreciation in 2023/24. After initial gains early in the fiscal year, driven by progress in nuclear negotiations and rising global energy prices, the market faced a downturn due to stalled nuclear talks and a sluggish global economic environment. However, by March and April 2023, the market rebounded significantly, buoyed by the depreciating rial, which enhanced the profitability of exporting firms, particularly in the petrochemical sector.

Economic Dynamics and External Sector Shifts in Iran’s Trade: 2022/23 Overview

In the fiscal year 2022/23, Iran’s economy witnessed significant fluctuations and strategic shifts, primarily influenced by global economic conditions and internal policy adjustments. This detailed exploration provides an in-depth analysis of Iran’s external sector during this period, focusing on the dynamics of oil and non-oil trade, the impacts of international sanctions, and the evolving landscape of international trade partnerships.

Oil Price Surge and Current Account Surplus

The first half of the fiscal year 2022/23 (H1-22/23) was characterized by a robust surge in oil prices, which significantly bolstered Iran’s current account balance. Oil exports grew by an impressive 57 percent, markedly outpacing the growth in non-oil exports, which increased by 22 percent. This disparity in growth rates pushed the share of oil exports to 58 percent of total exports during this period, reaching a three-year peak.

Overall, exports expanded by 40 percent in H1-22/23, surpassing the growth in imports, which saw a 21 percent increase. This led to a current account surplus equivalent to 3.4 percent of Iran’s annual GDP, amounting to US$13.4 billion. The substantial growth in oil exports was the principal contributor to this surplus, demonstrating the critical role of the energy sector in Iran’s economy.

Services Trade and Capital Account Deficits

While the trade in goods experienced significant gains, services trade also showed signs of recovery, increasing by 55 percent. However, it still remained slightly below pre-pandemic levels. Despite the positive current account balance, Iran faced challenges on the capital account front. The net capital account recorded a deficit of US$12.8 billion, largely due to capital flight and subdued Foreign Direct Investment (FDI) inflows. This capital account deficit slightly offset the gains from the current account surplus, leading to a marginal decline in international reserves.

Non-Oil Trade Dynamics

The year 2022/23 also highlighted a shift in non-oil trade dynamics. Despite rising international commodity prices boosting non-oil trade, the growth in imports (12.5 percent) outstripped that of non-oil exports (9.4 percent), resulting in a widening non-oil trade deficit of approximately 2 percent of GDP (US$6.5 billion). This was the highest level since the re-imposition of US sanctions in 2018. Notably, the overall volume of exports and imports contracted by 0.6 percent and 9.8 percent, respectively, compared to the previous year, indicating that price levels were a significant driver of trade dynamics rather than volume changes.

Key Trade Partners and Shifts in Import Sources

China continued to be the top destination for Iran’s non-oil exports in 2022/23, with other significant export partners including Iraq, UAE, Turkey, and India, which together accounted for over 71 percent of total exports. India notably returned to the top five export destinations, replacing Afghanistan, where exports declined by 11.2 percent due to political instability and reduced purchasing power. Petrochemical products and liquid natural gas remained the mainstays of Iran’s non-oil export basket.

On the import front, there was a noticeable shift away from European partners, influenced by the intensification of sanctions and Iran’s strategic policy responses. The UAE emerged as the top exporter to Iran, accounting for about one-third of Iran’s total imports. Imports from China and India also saw significant increases, with imports from India jumping by 86.3 percent, surpassing those from Germany. The main imported items included cellphones and essential food items such as rice, wheat, corn, and soybean.

The concentration of trade among a few key import partners increased, making the country more vulnerable to external shocks. By 2022/23, the top four importers accounted for 72.2 percent of total imports, up from 68.9 percent in the previous year. This increased concentration reflects Iran’s strategic pivot towards Asian countries to mitigate potential impacts from future sanctions or disruptions in global trade.

The fiscal year 2022/23 was a period of significant economic adjustment for Iran, marked by robust gains in oil exports and strategic shifts in trade partnerships. The challenges of managing trade dynamics amidst global commodity price fluctuations and sanctions underscored the resilience and adaptability of Iran’s external sector. As the country continues to navigate through economic uncertainties and geopolitical tensions, the shifts in its trade strategies will play a pivotal role in shaping its economic future.

Iran’s Economic Horizon: Navigating Sanctions, Scarcity, and Shifting Markets

In the upcoming years from 2023 to 2026, Iran faces a complex economic landscape characterized by numerous internal and external challenges. This detailed exploration delves into the factors shaping Iran’s economic outlook, including the impact of ongoing sanctions, global demand shifts, and resource scarcities, alongside the anticipated trends in various economic sectors.

Economic Growth Projections

Iran’s real GDP growth is expected to moderate to an annual average of 2.1 percent over the period from 2023 to 2026. This rate is notably lower than that of other major oil exporters, primarily due to the pervasive effects of economic sanctions that impact both the oil and non-oil sectors. The oil GDP is projected to experience only marginal growth, largely due to the weakened global demand for oil. Conversely, the non-oil GDP, which includes industries such as agriculture, manufacturing, and services, is anticipated to grow at a subdued rate. This is largely attributed to the lack of substantial investments in recent years, compounded by ongoing challenges in expanding production capacity.

Agriculture and Non-Oil Industries

The agriculture sector remains particularly vulnerable, facing significant threats from droughts and the broader impacts of climate change. These environmental challenges are expected to hinder productivity and exacerbate the sector’s volatility. In the non-oil industries and services sectors, although some growth is anticipated, it is likely to be restrained by the existing limits on production capacity expansion. This is a critical issue as these sectors are major employers and are crucial for the diversification of Iran’s economy.

Domestic Consumption and Fiscal Health

Domestic consumption, previously a primary driver of economic growth, is forecasted to remain weak. This trend follows four years of high inflation which has eroded purchasing power significantly. Fiscal pressures are also expected to intensify, with government expenditures rising and oil revenue growth stagnating. Despite improvements in tax collection, the overall sluggish economic activity, especially in the non-oil sectors, will likely restrict tax revenues.

Furthermore, with ongoing high inflation, nominal revenues are anticipated to face pressures due to the time lag in economic activity and tax collection, effectively translating into lower real revenues. This situation is projected to result in a gradual widening of the fiscal deficit, reaching about 2.4 percent of GDP by 2025/26.

Inflation, Employment, and Household Welfare

The outlook for inflation remains concerning, with rates expected to stay elevated at over 40 percent annually until 2026. This persistent inflationary pressure, coupled with ongoing currency devaluation and a growing budget deficit, presents a grim picture for household welfare. The prospect of job creation is particularly bleak; agriculture’s reliance on water in a time of scarcity, coupled with slower growth in the service sector, suggests that the employment needs of the economy will not be met. The private sector continues to grapple with macroeconomic volatility and an uncertain investment climate, further dampening economic prospects.

While government transfers might provide temporary relief from economic pressures for households, this approach is likely to exacerbate inflationary tendencies and further limit fiscal space necessary for investments that could spur growth.

External Sector and Trade Dynamics

On the external front, the current account surplus is expected to diminish gradually, settling at about 2.8 percent of GDP by 2025/26. This decline is primarily attributed to the anticipated drop in oil prices and subdued global demand. Iran’s oil exports are also facing increasing competition from other major exporters in key markets, which could lead to reduced market shares and revenues.

Moreover, the country will likely experience higher capital outflows and limited access to international financial reserves, adding further pressure on the value of the rial and depleting foreign reserves.

The economic trajectory for Iran through 2023 to 2026 is fraught with challenges. The interplay of sanctions, global market shifts, and internal vulnerabilities, especially in terms of resources and production capacity, will dictate the pace and direction of economic growth. Navigating this landscape requires a nuanced understanding of the various forces at play and strategic adjustments to foster resilience and sustainable development in the face of adversity.

Iran’s Economic Landscape: Navigating Through Risks and Seizing Opportunities

Economic Risks: External and Internal Factors

The economic outlook for Iran is primarily contingent upon several risk factors, both external and internal, that have profound implications for its future growth trajectory. Externally, Iran’s economic fortunes are heavily tied to the oil market’s dynamics due to its significant reliance on oil revenues. The potential for economic sanctions to persist or even intensify poses a considerable threat, as does the global economic climate, particularly the demand patterns from major economies like China.

A downturn in global demand for oil, possibly triggered by tighter global monetary policies or an economic slowdown in China, could lead to a sharp fall in oil prices, adversely affecting Iran’s economic growth prospects. Moreover, Iran’s increasing economic ties with China and its concentrated trade relationships expose it to significant risks if disruptions occur in these established trade and finance channels.

On the domestic front, several factors could destabilize the economic environment. Social unrest, including protests and industrial strikes, alongside potential internet disruptions, could severely impact economic activities and employment. Environmental challenges, particularly lower rainfall, pose a direct threat to the agriculture sector, exacerbating the risk of energy shortages due to reduced hydroelectric power generation.

Economic Opportunities: Sanctions, Regional Integration, and Climate Adaptation

Conversely, there are notable opportunities that could positively influence Iran’s economic landscape. A potential easing or removal of sanctions could significantly boost both oil and non-oil sectors. Improvements in diplomatic relations, as evidenced by the recent thawing of tensions with Saudi Arabia, could pave the way for enhanced economic links and investments. Such regional integration could foster new economic growth avenues by facilitating development financing and expanding trade networks.

However, Iran continues to grapple with severe climate change impacts. The recurring droughts and declining precipitation levels not only threaten agricultural output and employment but also pose broader risks to food security and livelihoods. Addressing these challenges requires a multi-faceted approach involving effective water resource management, implementation of water demand management policies, development of appropriate institutional frameworks, and cooperation with neighboring countries.

Energy Sector: Adapting to New Realities

The energy sector, particularly vulnerable to climate impacts due to its reliance on hydropower, faces the dual challenge of increasing energy demand and decreasing water supplies. Without substantial investments and reforms in energy pricing, these factors could lead to significant energy shortages, affecting industrial production and economic stability. Proactive measures, such as gradual energy price reforms, increased investments in renewable energy sources, and enhancements in energy efficiency, are critical for adapting to and mitigating these risks.

Setting the Stage for Future Growth

To effectively navigate these economic challenges and capitalize on opportunities, Iran needs to set realistic objectives within its development frameworks. The seventh development plan aims for an ambitious average economic growth rate of 8 percent from 2022/23 to 2026/27, focusing on productivity enhancement and maintaining inflation in single digits. However, the feasibility of these targets must be critically assessed, given the economic disruptions caused by sanctions, the pandemic, and governance issues.

Achieving sustainable growth will require prioritizing structural reforms to address critical challenges like job scarcity, low productivity, and inadequate infrastructure. Emphasizing private sector-led development, diversifying exports, and promoting foreign investment are crucial strategies that can align the economy with the plan’s ambitious goals.

Financial Sector Reforms: Ensuring Stability and Growth

Coordinating monetary and fiscal policies will be essential for managing inflation and fostering sustainable economic growth. Fiscal policy should focus on managing the budget deficit through measures such as reducing tax exemptions, cutting unproductive expenditures, and enhancing public investment efficiency. Financing the fiscal deficit through bond issuance is preferable to deficit monetization, which could aggravate inflationary pressures.

For the banking sector, implementing rigorous supervision, adopting international reporting standards, and enhancing liquidity management are vital. Banking reforms should also include a comprehensive crisis management framework, strengthening asset quality reviews, and facilitating the recapitalization of viable banks. Additionally, securitizing government debt could improve liquidity in the banking system, providing a more stable financial environment for economic activities.

By addressing these multifaceted challenges and leveraging potential opportunities, Iran can navigate its complex economic landscape towards a more stable and prosperous future.

Longitudinal Analysis of Iran’s GDP Growth (1961-2022)

Iran’s economic journey since 1961 has been characterized by significant volatility, influenced by political changes, oil market dynamics, sanctions, and regional conflicts. This analysis seeks to understand the trends in GDP growth during this period and to identify the key factors driving these changes.

Data Overview: The data analyzed in this report covers annual GDP growth rates from 1961 to 2022, as recorded in the World Bank database under the indicator code NY.GDP.MKTP.KD.ZG. These figures represent the year-over-year percentage change in real GDP.

Analysis of GDP Growth Trends:

  • 1961-1978: Growth and Modernization Pre-Revolution: The 1960s and 1970s witnessed robust economic growth, averaging around 11% annually. Major contributors included high oil revenues and substantial foreign investments. The period saw peaks of 17% in 1965 and 15.5% in 1969 due to aggressive industrialization and infrastructural development.
  • 1979-1988: Revolution and War: The 1979 Islamic Revolution followed by the Iran-Iraq war led to economic instability, with growth rates plummeting to -12.8% in 1979 and -21.6% in 1981. The economy contracted due to sanctions, war expenditures, and the disruption of oil exports.
  • 1989-2000: Post-War Recovery and Fluctuations: Post-war reconstruction and liberalization policies initiated a recovery, with growth reaching 8.6% in 1990. However, the economy experienced significant fluctuations due to ongoing political instability and varying oil prices.
  • 2001-2012: Reforms and High Oil Prices: The early 2000s saw higher growth rates, peaking at 8.1% in 2003 and 2004, driven by global oil demand and internal economic reforms. However, growth was again disrupted by international sanctions imposed over nuclear program concerns.
  • 2013-2022: Recent Economic Challenges: Since 2013, the economy has faced renewed sanctions, particularly in 2018, leading to a significant contraction of 6.8% in 2018. However, sporadic recoveries are noted, such as a 8.8% growth in 2016 due to temporary lifting of sanctions and a 4.7% growth in 2021 as global conditions began to stabilize.

Factors Influencing GDP Growth:

  • Economic Sanctions: Repeatedly, sanctions have negatively impacted Iran’s oil exports and foreign investments, leading to significant economic contractions.
  • Oil Price Volatility: As a major oil exporter, fluctuations in global oil prices have directly affected Iran’s economic growth.
  • Political and Regional Instabilities: Domestic political shifts and regional conflicts have often resulted in economic disruption.
  • Policy Reforms: Various economic reforms have occasionally spurred growth, though their sustainability has been impacted by external pressures.

Future Outlook: The economic outlook for Iran remains uncertain, largely dependent on geopolitical developments and domestic policy directions. Future growth will hinge on the global economic environment, oil market conditions, and the potential lifting or intensification of sanctions.

Image : GDP growth (annual %) – Iran, Islamic Rep. – World Bank national accounts data, and OECD National Accounts data files.


YearGDP Growth (%)
196110.39
19627.91
19637.04
19648.48
196517.04
196611.50
196711.25
196814.40
196915.52
197010.93
197113.70
197214.50
19737.44
19745.80
1975-0.33
197618.26
1977-2.77
1978-12.84
1979-12.02
1980-21.60
1981-5.70
198223.17
198311.09
1984-7.14
19851.87
1986-9.78
1987-0.17
1988-6.08
19896.13
199013.59
199112.72
19923.30
1993-1.47
1994-1.70
19952.40
19966.35
19971.35
19982.08
19992.00
20005.85
20012.39
20028.08
20038.64
20044.34
20053.19
20065.00
20078.16
20080.25
20091.01
20105.80
20112.65
2012-3.75
2013-1.52
20144.98
2015-1.42
20168.82
20172.76
2018-1.84
2019-3.07
20203.33
20214.72
20223.78

GDP growth (annual %) – Iran, Islamic Rep. – World Bank national accounts data, and OECD National Accounts data files.


Navigating the Winds of Change: Iran’s Non-Oil Real GDP Growth in the Post-Sanctions Era

Iran’s economic landscape has undergone significant transformation over the past few years, particularly in the non-oil sectors. This transformation is reflected in the metrics of non-oil Real GDP growth in constant prices, a critical indicator of the country’s economic health beyond its traditional reliance on oil revenues.

Economic Overview

In 2024, Iran reported a non-oil real GDP growth rate of 2.44357%, a slight decrease from the 2.79764% observed in 2023. This trend of gradual decrease has been consistent since 2021 when the growth rate was 3.90452%. The decline over these years highlights the challenges faced by the Iranian economy, including external pressures and internal policy dynamics​.

Historical Context

The trajectory of Iran’s non-oil GDP growth has seen fluctuations influenced by a variety of factors. From a more robust growth of 3.90452% in 2021 to a tempered 2.44357% in 2024, the data reveals the impact of geopolitical tensions and domestic economic policies. The sanctions imposed by Western countries have historically played a role in these economic dynamics, affecting the non-oil sectors that Iran has been keen on developing​ ​.

Comparative Analysis

The regional context provides an additional layer of understanding. For instance, countries like the United Arab Emirates and Qatar also report their non-oil GDP growth, with UAE showing a growth of 4.10000% and Qatar at 3.60000% in 2024. This comparison underscores the diverse economic strategies and outcomes within the Middle East, influenced by differing levels of economic diversification and policy approaches​ ​.

Forward-Looking Statements

Looking ahead, projections for 2025 suggest a slight improvement in Iran’s non-oil GDP growth, anticipating a rate of 3.05020%. These projections are part of broader regional economic outlooks provided by institutions like the International Monetary Fund, which consider a range of macroeconomic indicators and policy impacts on economic performance​ .

Image : Non-Oil Real GDP Growth in Constant Prices for Iran, Islamic Republic of, Percent Change, Annual, Not Seasonally Adjusted – copyright debuglies.com

Navigating Uncertainties: Iran’s Economic Forecast 2024/25 to 2026/27

Iran’s economic journey into the mid-2020s is set against a backdrop of both hopeful resilience and formidable challenges. As the country pivots from the notable growth spurt in fiscal year 2023/24, fueled primarily by its oil sector, projections for 2024/25 to 2026/27 suggest a tempered outlook with moderated growth rates and continuing economic pressures. This detailed analysis explores the economic forecast for Iran, assessing the interplay of global market dynamics, domestic policies, and external geopolitical factors.

Economic Growth Projections

Real GDP growth in Iran is forecasted to moderate to an annual average of 2.8 percent from 2024/25 to 2026/27. The sharp increase in oil production and exports witnessed in 2023/24 is expected to stabilize, with subsequent years seeing a significant slowdown. This moderation is anticipated to have a spillover effect into the non-oil sectors, which are also projected to experience slower growth.

Image : Islamic Republic of Iran / Real GDP growth and supply-side contributions to real GDP growth – Sources: Central Bank of Iran (CBI) and World Bank staff calculations.

Factors Influencing Economic Moderation

Several factors contribute to the expected slowdown in economic growth:

  • Global Economic Conditions: Weaker global demand, particularly in key markets, poses a significant risk to Iran’s export-oriented sectors.
  • Sanctions and Geopolitical Tensions: Ongoing economic sanctions continue to restrict Iran’s access to international markets and capital, while heightened geopolitical tensions, particularly in the Middle East, add to economic uncertainty.
  • Domestic Constraints: Challenges such as energy shortages, liquidity constraints, and underinvestment in critical infrastructure are expected to hinder domestic economic activity.

Inflation and Fiscal Outlook

While inflation in Iran is expected to decelerate further from the highs of previous years, it will likely remain elevated due to several persistent factors:

  • Supply Chain Disruptions: Continued disruptions, partly due to sanctions and internal inefficiencies, contribute to price pressures.
  • Fiscal Pressures: Despite government plans to consolidate the budget in 2024/25, fiscal deficits are expected to persist. These deficits are exacerbated by off-budget expenditures and the need to finance social welfare programs.

Current Account and External Balances

The current account surplus, which has benefitted from high commodity prices, is projected to gradually decrease as global commodity prices stabilize or decline. This trend will likely be influenced by heightened global competition and a potential normalization of market conditions.

Poverty Reduction and Social Policies

The rate of poverty reduction in Iran is expected to slow down in the coming years. While the poverty rate at the US$6.85 line is projected to drop by an additional 3 percentage points over the next three years, the reduction at the US$3.65 line will be more modest. The government’s continued focus on inclusive growth and robust social safety nets is critical to ensuring that poverty reduction efforts are sustained.

Image : Islamic Republic of Iran / Actual and projected poverty rates and real GDP per capita

Image : Source World Bank


TABLE 2 Islamic Republic of Iran / Macro poverty outlook indicators                                 (annual percent change unless indicated otherwise)

 2021/222022/232023/24e2024/25f2025/26f2026/27f
Real GDP growth, at constant market prices4.73.85.03.22.72.4
Private consumption3.98.73.22.42.11.8
Government consumption8.3-3.61.61.92.12.2
Gross fixed capital investment0.06.75.84.54.23.1
Exports, goods and services5.28.215.47.15.25.2
Imports, goods and services24.17.51.61.82.12.1
Real GDP growth, at constant factor prices4.44.05.03.22.72.4
Agriculture-2.61.11.00.90.80.8
Industry3.27.48.84.93.73.7
Services6.52.73.62.72.51.9
Inflation (consumer price index)46.246.540.835.332.030.5
Current account balance (% of GDP)3.13.42.92.72.32.2
Fiscal balance (% of GDP)-3.2-1.9-2.0-2.2-2.4-2.5
Revenues (% of GDP)11.011.711.811.811.811.9
Gross public debt (% of GDP)42.430.130.732.334.135.9
Primary balance (% of GDP)-2.7-1.5-1.6-1.8-2.0-2.1
International poverty rate ($2.15 in 2017 PPP)a,b0.70.50.40.40.40.3
Lower middle-income poverty rate ($3.65 in 2017 PPP)a,b5.03.83.33.12.92.8
Upper middle-income poverty rate ($6.85 in 2017 PPP)a,b24.821.920.019.018.217.6
GHG emissions growth (mtCO2e)2.92.93.12.01.81.6
Energy related GHG emissions (% of total)67.867.667.867.767.567.3

Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast.

a/ Calculations based on 2019-HEIS and 2022-HEIS. Actual data: 2022. Nowcast: 2023. Forecasts are from 2024 to 2026. b/ Projection using annualized elasticity (2019-2022) with pass-through = 0.7 based on GDP per capita in constant LCU.


Socioeconomic Strategies

To combat the slowdown in poverty reduction, Iran will need to implement targeted strategies that include:

  • Enhancing Social Protection: Strengthening the existing social safety net to protect the most vulnerable populations from economic shocks.
  • Boosting Domestic Production: Encouraging growth in non-oil sectors to reduce dependency on oil revenues and create sustainable employment opportunities.

External Risks and Opportunities

Iran’s economic outlook is heavily influenced by a complex array of external risks and opportunities:

  • Oil Market Dynamics: Fluctuations in global oil demand and prices directly impact Iran’s major revenue source.
  • Climate Change: Increased frequency of extreme weather events poses risks to agriculture, threatening food security and employment in rural areas.
  • Economic Linkages with China: As economic ties with China deepen, Iran’s economy becomes more susceptible to fluctuations in the Chinese market.
  • Potential for Sanction Relief: Any relaxation or removal of international sanctions could provide a significant boost to Iran’s economy, improving access to global markets and financial resources.

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