Tehran (PBO) - The World Bank, in its latest “Iran’s Economic Outlook” report released on its website earlier this month, says Iran's economy is set to experience a downward trajectory following the phased reintroduction of US sanctions culminating in November 2018.
What follows are excerpts from the report.
Overall growth moderated to 3.8 percent in 2017/18 as the contribution of oil to growth diminished. With depreciating exchange rate, rising inflation and the looming sanctions, the economy is expected to be negatively affected, contracting annually by 1.4 percent between 2018/19 to 2020/21 on average. There are considerable risks to the outlook depending on the scope of trade disruptions and the impact of domestic economic reforms.
Iran’s GDP growth in 2017/18 dropped to 3.8 percent as the effect of a large surge in oil revenues in the previous year dissipated. The overwhelming majority of growth came from the nonoil sectors out of which more than half can be attributed to services growing by 4.4 percent. Oil, agriculture and services sectors are now back above the levels of activity they were prior to UN sanctions in 2012. But in the past two years, there has not been a strong bounce back in key sectors such as construction and trade, restaurant and hotel services following their post-2012 stagnation and the overhang from the problems of the banking sector. The oil and gas sector witnessed a growth of 0.9 percent, limited by the OPEC+ quota for the agreed period.
The current account surplus fell from 3.9 percent of GDP in 2016/17 to 3.5 percent of GDP in 2017/18, as Iran’s oil production initially slowed in 2018. Real export growth of goods and services was 1.8 percent in 2017/18, down from 41.3 percent, while real import growth was 13.4 percent in 2017/18. Iran’s non-oil exports have risen in recent years from 6 percent of GDP in 2012/13 to 10 percent of GDP in 2017/18.
In April, the government’s unification of the official and parallel rates has short-lived impact. The parallel market rate has fluctuated on expectations of dollar shortage as the U.S. pulled out of the Joint Comprehensive Plan of Action (JCPOA) in May. By August, the rial had devalued by 172 percent over the past 12 months, rising above 100,000 rials per dollar. This has contributed to the measured inflation rate returning to 18 percent in July, a rate last seen in March 2014.
For the quarter ending in June 2018, the unemployment rate improved to 12.1 percent1 as employment growth has remained above 3 percent year on year for 6 consecutive quarters, leading to more than 790 thousand jobs being created in 2017/18. The labor force participation rate edged up to 41.1 percent in June quarter 2018, its highest level in more than 10 years, while the underemployment rate was 10.4 percent.
In the medium term, the economy is set to experience a downward trajectory as oil exports are expected to fall to half of their 2017/18 levels following the phased reintroduction of US sanctions culminating in November 2018. The economy is expected to contract by 1.4 percent on average between 2017/18-2020/21, experiencing a fall in exports and consumption on the demand side and a contraction of the industry sector on the supply side.
Government balances are also expected to deteriorate as oil revenues account for more than 40 percent of central government revenues. With exports disrupted, the demand for the U.S. dollar to finance imports and savings is expected to rise and the parallel premium is likely to increase further than the current 150 percent gap between the official rate and parallel rate.
Higher import prices from the devaluation are expected to push inflation back above 30 percent in the coming years as inflationary expectations spiral and consumer sentiment falls leading to once again a period of stagflation for Iran. Despite the depreciation and drop in imports, the reduction in oil exports is estimated to almost eliminate the current account surplus which is lower than the earlier UN sanctions episode as oil prices are almost half of the levels they were in 2012-2013. The economy’s downward trajectory is also likely to put further pressure on the labor market and reverse recent job creation gains.
Risks and Challenges
On the external side, there is uncertainty of the impact of US sanctions, depending on the adaptations of other trade partners. Domestically, the government faces the economic and social challenges of completing adjustment to previous shocks, notably the financial sector restructuring, as well as mitigating the evolving impact of oil export decline. Weathering these challenges will be key in continuation of the course of domestic reforms, especially to tap potential in modern services. Combating rent-seeking is now directly linked to macroeconomic challenges given the scarcity of foreign exchange and the administrative complexities of formal sector trade and payments systems.