World Bank on Iran: No Growth Until 2021

EghtesasdOnline: The World Bank estimates that Iran's economy shrank 8.7% in 2019 compared to the previous year.

News ID: ۷۴۹۴۲۳

12 January 2020

The international financial institution's latest estimate in its January 2020 edition of "Global Economic Prospects" has been revised down by 4.2% compared to the June 2019 edition of the report.

World Bank's forecasts for Iran's GDP growth are 0% in 2020 and 1% in both 2021 and 2022, according to Financial Tribune.

The 2020 forecast has been revised down by 0.9% compared to the June 2019 edition of the report.

The 2021 forecast indicates no change compared to the previous report.

The report also shows Iran's economy contracted by 4.9% in 2018 after experiencing a 3.8% growth in 2017.

The contraction of Iran's economy in 2019 was mainly due to external shocks experienced by the oil and gas sector. The plummeting exports come after the expiration of US waivers temporarily granted to major Iranian oil importers and the tightening of banking restrictions, in addition to new sanctions imposed on the country’s petrochemicals, metals, mining and maritime sectors, the World Bank said in an autumn economic update released on Oct. 9. Excerpts follow:

The oil sector decline, coupled with international trade and capital flow restrictions, has negatively influenced economic activity in key non-oil sectors, including auto, machinery and construction sectors, which have faced supply chain challenges and higher operational costs.

In August 2019, the housing sector registered the lowest volume of sales in six years while prices rose by around 78% year-on-year. On the supply side, these developments, among other shocks such as floods and earthquakes, are likely to result in further stagnation in the services sector, the largest production component of GDP (56% share in 2017-18).

Similarly, the GDP expenditure components are to be strongly influenced by the shock to exports. However, the simultaneous reduction in imports is expected to moderate part of the downward pressure on the trade balance and the current account.

Real government consumption is also expected to contract at a faster rate of 5.4% compared to the previous round of oil export embargos placed on Iran in 2012-13.

The fiscal deficit is estimated to further widen to 5.6% of GDP in 2019-20, as more than 30% (and as high as 63% in 2002-03) of the government budget is sourced directly from the sales of oil and gas.

The reduction in the tax base due to lower economic activity would also have a negative effect on current revenues and is likely to come at the expense of lower capital expenditures that have been under-realized, relative to the budget-approved levels in recent years.

The medium-term economic outlook remains challenging. The baseline assumption for the medium-term rests on continued oil exports of around 500,000 barrels per day on average.

In the coming years, the effect of the recent large exchange rate depreciation could allow the country’s goods and services to become more competitive regionally and help close the expected current account deficit gradually.

The fiscal deficit is projected to further widen in the next two years due to the legacy of the 2018-19 oil shock, pushing government expenditures such as social protection measures upwards at the same time as receiving lower oil income and tax revenues.

Risks of Recession

Political and economic uncertainty makes it difficult to project future poverty trends. However, a sharp decline in real GDP per capita and double-digit inflation are expected to have a strong negative impact on poverty rates through different channels, including the labor market, increasing costs of living and a further erosion of the real value of cash transfers.

Future poverty rates will also depend on the government’s public policy response. Any increase in the value of cash transfers, possibly along with introducing targeting mechanisms, could help the poor and vulnerable population cope with the socioeconomic shocks, but fiscal constraints may limit the scope for significant response.

The nature of uncertainties facing the economy means that downward risks to the projected growth path remain in place. If oil exports were to be curtailed further, the economy could enter into a deeper recession and experience higher inflation rates. The challenge of protecting the vulnerable households would put additional pressure on the government finances and potentially the value of rial.

Further restrictions on trade volumes and financial transaction arrangements with Iran’s neighbors could also pose a major risk to current projections. If these remain unaddressed, the ongoing liquidity and recapitalization challenges of the banking sector could further undermine banks’ ability to continue facilitating economic activity.

These important challenges highlight the crucial role of further economic diversification by focusing on non-oil sources of growth and government revenues. Building on the economic base in the non-oil trade sector would improve resilience to external shocks and achieve a long-envisioned development plan goal that has been elusive to Iran and other countries of the region.

Domestic Reports

Good and hopeful news! The gross domestic product, excluding oil, has been positive during the first six months of [the Iranian year] 1398 [March 21-Sept. 22], the governor of the Central Bank of Iran posted on Instagram in mid-December.

Abdolnasser Hemmati added that in the second quarter of the current fiscal year (June 22-Sept. 22), the sectors of agriculture, industry and mines, and services saw respective growth rates of +9.5%, +0.4%, and -1.4%, leading to an overall economic growth of +0.6% in Q2.

"All in all, we experience +0.5% in [non-oil] economic growth during the first half of the year," Hemmati said.

The CBI chief stopped short of revealing growth in the oil sector and only said, "The oil sector is under its own special circumstances."

Hemmati first announced the comeback of Iran's economic growth in September, saying: "The first three months of the year [13]98 [current Iranian year that started on March 21, 2019], saw the non-oil sector, which is the productive sector of the economy, grow 0.4% compared to the corresponding period of [13]97 [last Iranian year]," wrote in a write-up published on CBI's website.

"Although this growth is well below the potential capacity, considering the negative growth rates of the three preceding quarters and the beginning of decline in inflation, it's a cause for hope," he added.

He attributed the Q1 growth to the return of relative stability in the value of national currency against foreign currencies and the die-down of external shocks from sanctions and the United States "maximum pressure" campaign against Iran.

The rial lost about two-thirds of its value against the dollar in the last Iranian year (March 2018-19).

Iran's gross domestic product shrank by 4.9% in the March 2018-19 fiscal year compared to the year before, according to the Statistical Center of Iran.

Economic growth without taking oil production into account stood at -2.4%.

Production of the two groups of industry and agriculture contracted by 9.6% and 1.5% respectively. The services group posted a meager 0.02% growth.

Solid increase in agricultural production this year has been the main driver of economic growth, as reported by Iranian officials.

The sector reportedly saw the highest growth rate of +9.5% in H1. With 6.5%, the agriculture sector also saw the highest growth among Iran's economic sectors in Q1. The rate for last year's corresponding period stood at 0.3%.

The significant boost in agricultural production owes largely to abundant rainfall at the beginning of the year, which led to increased yields.

"Growth in the agriculture sector has saved the Iranian economy over the past two years," says the caretaker of Agriculture Ministry, Abbas Keshavarz.

According to former agriculture minister, Mahmoud Hojjati, says Iran meets 85% of its demand for agricultural products domestically and the remaining 15% are provided through imports.

Around $80 billion worth of agricultural products are produced in Iran every year, $75 billion of which are consumed inside the country.

Director General of the Ministry of Industries, Mining and Trade's Food, Medicine and Toiletries Industries Department Mehdi Sadeqi Niyaraki says 95% of Iran’s food industry are owned by the private sector, noting that the sector accounts for 15% of the country’s industrial employment.

Iran’s economy emerged from recession in the fiscal 2014-15 with a 3% growth after two years of recession when the economy contracted 5.8% and 1.9% back to back, according to the Central Bank of Iran.

Growth in 2015-16 has been put at -1.6% by CBI and 0.9% by the Statistical Center of Iran.

CBI has put 2016-17 growth at 12.5% while SCI says it was much lower and near 8.3%.

Growth in the fiscal 2017-18 has been put at 3.7% by both CBI and SCI.

IMF Estimate, Forecast

The International Monetary Fund estimates Iran's economy to have further shrunk to -9.5% in 2019 from -4.8% in 2018.

The IMF's latest World Economic Outlook report shows the country will experience zero percent economic growth in 2020.

The IMF had previously forecast Iran’s economy to shrink by 6% this year, but that estimate preceded Washington’s decision in April to end six months of waivers that had allowed Iran’s eight biggest oil buyers to continue importing limited volumes, Reuters reported.

"Iran, a large oil producer, saw its oil revenues surge after a 2015 nuclear pact agreed with six major powers that ended the sanctions regime imposed three years earlier over its disputed nuclear program. But new sanctions brought in after US President Donald Trump withdrew from that deal in 2018 are the most painful imposed by Washington, targeting nearly all sectors of Iran’s economy," Reuters wrote.

The fund said Iran, along with other emerging market economies, continues to experience “very severe macroeconomic distress”.