Years of sanctions and the COVID-19 pandemic have mounted pressures on the Iranian economy. Fiscal space remains constrained due to a decline in oil revenues and the cost of COVID-19 mitigation measures, which caused a surge in government debt. Restricted access to foreign reserves due to U.S. sanctions led to a sharp exchange rate depreciation, which in turn heightened inflation. Job losses through the pandemic and high inflation deteriorated welfare, particularly that of already vulnerable households.
Despite an initial COVID-19 induced shock to GDP, a strong rebound in mid-2020 led to a modest economic expansion in 2020/21. The COVID-19 output loss since Feb 2020 was less pronounced than in other countries as Iran’s economy had already contracted by 12% over the previous two years. The economic recovery in Q3 and Q4-2020 was stronger than expected both in oil and non-oil sectors, which grew by 16% and 3.1% YoY, respectively.
Iran’s economic outlook hinges on the evolution of the COVID-19 pandemic and the pace of global economic recovery. The GDP recovery is projected to be slow and gradual due to a slow vaccination rollout and weak demand from regional trading partners. Inflation is forecast to decrease but remain above 20% on average in the medium term. With limited fiscal space and high inflation, economic pressures on poor households will continue. Better targeting of cash transfers can help reduce mitigation costs.