IMF: Iran Economic Growth to Reach 3.1 Percent in 2021

EghtesadOnline: The International Monetary Fund predicts Iran's economy to bounce back to growth in 2021.

News ID: ۷۴۹۸۶۲

18 April 2020

In its latest World Economic Outlook report entitled "Chapter 1: The Great Lockdown", IMF expects the real GDP to register a 3.1% growth next year after a contraction of -6% in 2020, Financial Tribune reported.

According to the fund, the Iranian economy shrank by -7.6% in 2019.

"The COVID-19 pandemic is inflicting high and rising human costs worldwide. Protecting lives and allowing health care systems to cope have required isolation, lockdowns and widespread closures to slow the spread of the virus. The health crisis is, therefore, having a severe impact on economic activity," reads the report's executive summary.

“As a result of the pandemic, the global economy is projected to contract sharply by –3% in 2020, much worse than during the 2008–09 financial crisis. In a baseline scenario, which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound, the global economy is projected to grow by 5.8% in 2021 as economic activity normalizes, helped by policy support.”

IMF says it will release a full version of its World Economic Outlook report in May.

"There is extreme uncertainty around the global growth forecast. The economic fallout depends on factors that interact in ways that are hard to predict, including the pathway of the pandemic, the intensity and efficacy of containment efforts, the extent of supply disruptions, the repercussions of the dramatic tightening in global financial market conditions, shifts in spending patterns, behavioral changes (such as people avoiding shopping malls and public transportation), confidence effects, and volatile commodity prices,” the report said.

The fund noted that many countries face a multilayered crisis comprising a health shock, domestic economic disruptions, plummeting external demand, capital flow reversals and a collapse in commodity prices, adding that risks of a worse outcome predominate.

Inflation

As for inflation, the report predicts it to decrease slightly to 33.5% in 2021 from 34.2% this year.

According to IMF, the inflation rate in Iran stood at 41.1% in 2019.

"The lifting of containment measures is likely to be gradual, and even after containment measures are unwound, economic activity might take a while to normalize. Uncertainty about contagion could lead to persistent voluntary social distancing and subdued consumer demand for services,” it said.

The fund also said firms may only slowly start hiring workers and expanding payroll because they remain unsure about the demand for their output and about securing parts and components, and if they worry about attrition of workers’ skills following a spell of unemployment. It added that clear and effective communication about the state of the pandemic and the decline of new infections will be essential.

“As discussed above, broad monetary and fiscal stimulus where space permits—coordinated internationally to maximize impact—would be most effective to boost spending in the recovery phase. Hiring subsidies may need to be an important component of the fiscal strategy to encourage firms to hire unemployed workers. Worker retraining programs and active labor market policies would help ease the matching of unemployed workers to vacancies,” IMF said.

“More generally, strong policy frameworks and ensuring that inflation expectations remain well anchored will be essential through a recovery period likely to feature a range of inflation outcomes [in some countries, supply chain disruptions and shortages can lead to prolonged price increases and trigger expectations of rising inflation; in others, persistently weak demand may lead to drastically lower inflation expectations and worries about entrenched debt-deflation spirals]."

Unemployment

IMF also predicts a 16.7% unemployment rate in Iran in 2021, slightly up from 16.3% this year.

It estimates that the jobless rate stood at 13.6% in 2019.

"It is very likely that this year, the global economy will experience its worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago. The Great Lockdown, as one might call it, is projected to shrink global growth dramatically. A partial recovery is projected for 2021, with above trend growth rates, but the level of GDP will remain below the pre-virus trend, with considerable uncertainty about the strength of the rebound,” it said.

“Much worse growth outcomes are possible and maybe even likely. This would follow if the pandemic and containment measures last longer, emerging and developing economies are even more severely hit, tight financial conditions persist, or if widespread scarring effects emerge due to firm closures and extended unemployment."

The report stressed that rising unemployment increases the risk of widespread defaults.

“Lenders—worried that consumers and firms will not be able to repay—hold back on extending credit. Asset fire sales may ensue, as financial intermediaries liquidate their holdings to meet funding withdrawal requests from their investors, exacerbating the market turmoil. The effects can be further magnified through international financial linkages. In particular, countries reliant on external financing experience sudden stops and disorderly market conditions,” it said.

“As weaker global demand drives down commodity prices, commodity exporters face pressure on their public finances and on real economic activity. These additional layers add to the direct economic fallout of the health crisis, and the full extent of disruptions to economic activity can be particularly severe as a result."

The International Monetary Fund expects Iran's current account balance to stand at -3.4% of GDP in 2021 from –4.1 this year and -0.1% last year.