World Bank: Iran’s Growth to Stabilize Above 4 Percent

EghtesadOnline: As the impact of the previous year’s boost in oil production and exports dissipates, Iran's overall growth rate is expected to stabilize at around 4.2%, with a larger contribution from the non-oil sector.

News ID: ۷۴۵۱۹۷

21 April 2018

Yet, continued high unemployment rate and an expected upward trend in prices are likely to put pressure on household incomes and complicate the space to implement further economic reforms, reads the World Bank's latest report on "Iran's Economic Outlook". According to Financial Tribune, excerpts follow:

(Note: This World Bank report draws on the latest statistics available at the time of compilation. More up-to-date data have been provided by Iranian sources ever since on several macroeconomic indices, such as growth and unemployment.)

> Recent Developments

Real GDP growth at factor prices is expected to moderate from 12.5% in 2016-17 to 4.3% in 2017-18 as oil production stabilizes.

Unlike in 2016-17, the non-oil sector was the main contributor to the overall growth in the first half of 2017-18 (by 3.2 percentage points of the overall 4.5%). Gross fixed capital formation recorded a positive growth rate for the first time since the second half of 2014-15, driven mainly by a pickup in investments in the construction sector. This was supported by a 20% growth in outstanding loans as of December 2017, compared to December 2016.

The fiscal deficit is estimated to slightly widen to 2.4% as government expenditures growth outpaces the increase in revenues. In the first nine months of 2017-18, tax revenues increased by only 4.4% and oil exports receipts surged by 52% compared to 25% and -6.7% respectively in the same period in 2016-17.

On the expenditures side, current expenditures increased by 16.8%, while capital expenditures surged by 91% on the back of a considerably low base and two subsequent years of contraction.

The current account surplus is estimated to slightly improve to 4.1% of GDP in 2017-18 (up from 3.9% in 2016-17), as oil prices increase while export volumes remain stable around the country’s 2.4 million barrels per day and production remains at the amount agreed under the OPEC production cut and 2011-12 daily production level.

However, data for the first 10 months of the current year regarding non-oil trade balance indicate a considerable deficit of around $5.7 billion, as imports increased by 22% and exports by 1.7% on an annual basis.

Following the street protests in Tehran and a number of other cities at the end of December 2017 and early January 2018, sparked by economic concerns, the exchange rate depreciated significantly as uncertainty increased speculative demand for foreign currency.

By mid-February, rial’s parallel market exchange rate against the US dollar was around 16% lower than end-December 2017. In response, the Central Bank of Iran announced a temporary increase on bank deposit return rate ceiling to 20% (up from 15%).

As of end-February, the rial stood at 6.4% lower than its end-December value against the US dollar in the parallel markets. As the gap between the parallel and official exchange rate widened, some critics argued that the government, as the largest supplier of foreign exchange, benefited from this rate premium as a quasi-fiscal tool to cover the mounting cost of problems with pension funds and cash handouts.

Despite the exchange rate turmoil, pass-through remained limited and consumer price index inflation stayed just below 10% in the 12 months prior to Feb. 19.

The Statistical Center of Iran's data put the unemployment rate for the third quarter of the year (October-December 2017) at 11.9% and labor force participation at 41%, which marks a moderate improvement compared with the same quarter of a year earlier (12.3% and 38.9% respectively). This is in line with a gradual improvement in non-oil sector production.

Poverty is estimated to have fallen from about 13-8% between 2009 and 2013 ($5.5 a day line in 2011 purchasing power parity). This was likely due to the introduction of the universal cash subsidy papyment program in late 2010, contributing to positive consumption growth of the bottom 40% of the population, with overall consumption growth between 2009 and 2013 being negative.

Poverty increased in 2014 to 10.5% though and this may be associated with a declining social assistance in real terms.

> Outlook

The economy is expected to maintain a steady growth of slightly over 4%, increasingly based on non-oil sectors and fueled by a recovery in consumption and investment demand and overtaking the contribution of net exports. Some signs of pick up in the construction sector, historically a lead indicator of economic activity, also appear to confirm this trend.

The fiscal deficit is estimated to remain above 2.5% of GDP through 2020, as expenditures increase due to the postponement by the parliament of some reform measures (such as the initially envisioned cash subsidy targeting under the initial draft of the 2018-19 budget).

Furthermore, increased leveraging of government budget through bonds and other financial instruments and the subsequent higher servicing of debt are likely to add upward pressure on expenditures.

The current account surplus is expected to further strengthen and hover around 5% of GDP, mainly due to the steady increase in global energy prices based on current projections and a gradual improvement in non-oil trade balance.

In the medium term, inflationary pressures are likely to increase due to widening output gap and further currency depreciation, pushing CPI inflation into double-digit territory again.

Given political and economic uncertainty Iran has been facing since 2009, poverty has been volatile, making forecasts less precise. Nevertheless, falling real value of cash transfers may continue to have negative impact on poverty, while moderate economic growth and planned improved targeting of benefits may contribute to lower poverty after 2017.

> Risks and Challenges

The lack of job creating growth will continue to pose an important challenge. As the protests in early January 2018 demonstrated, there is widespread concern about poverty, corruption and lack of jobs, particularly for the youth.

In the aftermath of these events, the policy environment in the country has become more challenging for the government’s reform agenda, with significantly different views regarding the country’s development model. Banking sector reforms are largely pending, which, combined with uncertainties around global banks' reengagement with Iranian banks, put pressure on inward investment. The increasing reliance on issuance of debt instruments for financing government arrears and current expenditures can put additional pressure for rollover of maturing debt, increase borrowing costs and undermine the sustainability of government finances in the coming years.

The World Bank report was released a few days after the International Monetary Fund forecasted Iran's economic growth to remain at 4% in 2018 and 2019, down from 4.3% in 2017.

By 2023, the World Bank expects the growth to slightly increase to 4.1%, according to its latest "World Economic Outlook" report.