Iran’s Gross Domestic Product (GDP) is estimated at US$440 billion for the Iranian calendar year 2019/20, for a population of about 82.8 million. Iran’s economy is characterized by its hydrocarbon, agricultural, and service sectors, as well as a noticeable state presence in the manufacturing and financial services. Iran ranks second in the world for natural gas reserves and fourth in proven crude oil reserves. While its economic base is relatively diversified for an oil exporting country, economic activity and government revenues still rely on oil revenues and have, therefore, been volatile.
The Iranian authorities have adopted a comprehensive strategy of market-based reforms in their 20-year economic vision document and sixth, 5-year development plan for the 2016/17 to 2021/22. The plan is comprised of three pillars, namely: the development of a resilient economy, progress in science and technology, and the promotion of cultural excellence. On the economic front, the development plan forecasts annual economic growth of 8%. Among the main priorities of the government during the five-year period are the reform of state-owned enterprises, financial and banking sectors, and the allocation and management of oil revenues.
Iran’s real GDP contracted by 6.8% in 2019/20; in addition, the oil sector shrank by 38.7%. Non-oil GDP grew by 1.1%, driven by agriculture and manufacturing as exchange rate depreciation made domestic production more competitive. Expenditure-side components of 2019/20 GDP declined. The decline in GDP continued in Q1/2020/21 as COVID-19 border closures and containment measures in March and April contributed to GDP contracting by 3.5% (year-on-year), a modest contraction compared to many other countries. In contrast to past recessions, services were much more impacted; a reflection of the huge impact COVID-19 has had on service sectors around the globe. Higher government consumption expenditure in Q1 partly offset the contraction of other sectors.
The economic situation led to a deterioration in labor force participation and employment rates. Employment had increased by 1.8% to reach 24.3 million in 2019/20, before falling by 1.5 million (y-o-y) in Q1/2020/21 as COVID-19 led to a decline across all sectors. Labor force participation dropped by 0.4 percentage points in 2019/20 to 44.1% and, in Q1-2020/21, the labor force shrank by 1.3 million (y-o-y). Unemployment rates in 2019/20 and Q1/2020/21 fell to 10.7% and 9.8%, respectively. Recession and COVID-19 have made gender gaps in the labor market worse, with only 14% of (working age) women working in 2019/20, down 0.6 percentage points from the previous year.
The fiscal deficit-to-GDP ratio deteriorated in 2019/20 as oil revenues fell to 2.2% of GDP. Current expenditure grew faster, due to a higher wage bill and transfers. The government resorted to issuing bonds and selling assets to compensate for smaller oil revenues and a lower tax base. To meet its financing needs, bond issuance jumped to 6.9% of GDP, following amendments to the country’s budget law. In 2020/21, the government began to sell shares in State-Owned Enterprises via the stock market and issued additional bonds through auctions held by the Central Bank of Iran.
The current account surplus declined as trade restrictions led to real net exports falling by 26.9%. Oil exports fell below 0.7mbpd in 2019, after the end of US sanction waivers for major importers of Iran’s oil in April. Import contractions were large (38.1%) due to the rationing of foreign exchange reserves and US secondary sanctions on banking transactions related to trade with Iran. The contraction of non-oil trade accelerated to 30% (y-o-y, nominal) in April to August 2020, due to COVID-19 and expansion of the list of goods subject to import prohibition.
Inflationary pressures were high in 2019/20, resurging in the first five months of 2020/21 as the Iranian rial depreciated. Inflation increased by 10 percentage points to 41.2% in 2019/20, due to inflationary expectations and higher cost push factors, including higher trade costs and a sharp exchange rate depreciation of 45.7%. Inflation was led by the cost of food and household rent, disproportionately impacting low-income deciles. In tandem with the trend in the exchange rate, inflation jumped to 6.4% (month-on-month) in July 2020, a 21-month high.
Poverty in Iran—measuring in the World Bank’s upper-middle-income threshold of US$5.5 per day (2011 PPP)—fell between 2009 and 2013 by 5 percentage points to about 8%, before increasing in 2017 to 10.9%. There are stark urban/rural differences, with much higher poverty headcount rates of about 27% in rural areas, compared to about 6% in urban areas. Inequality, measured by the Gini index in per capita expenditure, fell sharply between 2009 and 2013—from 42.0 points to 37.4 points—but increased to 40.8 points in 2017.
High inflation, increased gasoline prices in 2019, economic slowdown, and the economic shock caused by COVID-19 have given rise to concerns about household welfare and poverty. In the short-term, the fall in labor market incomes alone may lead to a 7-percentage point increase in poverty. There is an expectation of regional differences in rising poverty levels, as well as the likelihood that households self-employed in the service sector, will be being more severely affected. And though government cash transfers, which were instrumental to reducing poverty during the period 2009 to 2013 can partly help compensate for lost earnings, their mitigation impact is hindered by high inflation continuing to erode the real value of the benefits.
The government’s fiscal constraints may limit its scope for a wider response to the economic crisis, but the better targeting of cash transfers can help reduce their fiscal cost. Fiscal pressures are projected to increase because of the higher issuance of bonds and the increasing cost of COVID-19 in 2020/21. Government revenues are projected to reach a trough in 2020/21, before improving amid a moderate recovery of the economy overall. Inflationary pressure is expected to remain high due to economic uncertainty and economic recovery pressures.
Last Updated: Oct 01, 2020
