The Iranian economy grew by 3.3% in the first half of the current Iranian year (March 21-Sept. 22) compared with the similar period of last year, while GDP growth stood at 3.4% excluding crude oil production, the Statistical Center of Iran announced in its new report.
A sectoral breakdown of GDP shows agriculture registered -2.2%, industries and mines 5% and services 2.6% in growth rates during the period under review.
The industries and mines group includes the subcategories of crude oil and natural gas extraction, other mines, industry, energy and construction, which saw the respective growth rates of 3.2%, 0%, 4.9%, 12.9% and -1.6%.
SCI had earlier put last Iranian year’s (March 2021-22) growth at 4.3%, saying the GDP saw a 3.5% rise without taking crude oil production into account, and that the sectors of agriculture, industries and services experienced -3.7%, 6% and 4.5% growth respectively.
World Bank, IMF Forecasts
The World Bank lowered its forecasts for Iran’s economic growth in October.
The MENA Economic Update report expects the country’s real GDP to rise by 2.9% in 2022 and 2.2% in 2023.
Previously, the World Bank had forecast a growth of 3.7% for this year and 2.7% for the next. The bank, however, revised its estimates and put growth rates at 4.7% for 2021 (up from 4.1% in the previous report) and 3.3% for 2020 (down from 3.4% in the previous report).
The new report goes on to forecast Iran’s real GDP per capita growth at 1.7% in 2022 and 1.1% in 2023.
Estimates for 2021 and 2020 are at 3.4% and 2% respectively.
Iran’s current account balance is expected to rise from 3.5% of GDP in 2021 to 3.8% this year.
Fiscal balance is forecast to stand at -4.5% of GDP this year and -4.7% in 2023 from -5.8% in 2020 and -5.3% in 2021.
Output in Iran was boosted in 2022 by “the waning of the pandemic and higher oil prices. Growth is expected to slow subsequently, however, as unresolved structural challenges and feeble fixed investment limit the country’s growth potential,” read part of the group’s flagship World Economic Prospects report published for June.
Meanwhile, the International Monetary Fund is expecting Iran’s economy to grow by 3% in 2022.
In its World Economic Outlook report titled “War Sets Back Global Recovery”, IMF said the economy expanded by 4% in 2021 and predicted 2% for 2023 and 2027.
IMF has put Iran’s 2014-20 GDP growth at 5%, -1.4%, 8.8%, 2.8%, -2.3%, -1.3% and 1.8% respectively with the 2004-13 average at 2.5%.
In the oil-driven Iranian economy, when more oil is sold, economic growth increases, but as soon as oil sales drop as a result of sanctions or pandemic, economic problems crop up. Therefore, positive economic growth is not being felt by the general public.
The first question that comes to mind when reports on positive economic growth are released is that whether the economic growth is synonymous with increase in the production of goods and services and improvement of markets and people’s livelihoods. What factors contribute to economic growth? How can the country achieve sustainable growth?
Economist Vahid Shaqaqi-Shahri, who serves as advisor to Economy Minister Ehsan Khandouzi, believes that the reported growth is not the result of investment and has nothing to do with government performance.
“It [the growth] stems from two external factors. Firstly, the global prices of oil have increased … thanks to post-Covid era, higher demand and the war between Russia and Ukraine as well as the US expansionary monetary policies. As a result, the prices of our oil-driven products have increased. Secondly, the resumption of activities of businesses, particularly those of the services and manufacturing sectors, which were not active during the pandemic, has contributed to the economic growth,” he was quoted as saying by the Persian daily Etemad.
Noting that these developments were similar to those of fiscal 2016-17 when economic growth suddenly hit 12.5%, of which 9.5% were attributed to the oil sector, he said, “Such growth is nothing to be happy about and not worthy of analysis either because it does not include sustainable growth and employment. You cannot rely on such figures. This type of growth is not the outcome of investment or structural economic reforms. The economy could probably register high positive growth next year, once the nuclear agreement with world powers is reached. But it will mostly be the result of external developments and the oil and gas sector.”
Referring to the 12.5% economic growth of fiscal 2016-17, Shaqaqi-Shahri said, “Iran’s economy registered a real economic growth of 3% in the following year [March 2017-18]. I believe the economic growth of fiscal 2023-24 will be real. You can only be content about the country’s economic growth when investments increase, structural reforms are implemented, problems regarding production are resolved definitively, economic predictability is enhanced, investment security and competitiveness improve and the private sector expands.”
Impact of Sanctions
UN Special Rapporteur Alena Douhan’s report on the negative impact of sanction against Iran was published in September.
The report follows her visit to Iran from 7 to 18 May 2022 at the invitation of the Iranian government. On May 18, she presented her preliminary observations to the government, followed by a press conference.
Below are some of her findings noted in the report about the impacts of sanctions on Iran’s economy:
The changing environment around the unilateral sanctions regime against Iran since the mid-2000s, the designations of third country nationals and companies, as well as the complexity and vagueness of provisions and regulations have led to increased uncertainty among financial institutions and businesses, resulting in overcompliance and de-risking, or even the complete disengagement from any activity related to Iran. This is exacerbated by the lack of capacity and the high costs required to navigate the imposed financial and trade restrictions, which constitute a major disincentive, even for businesses and financial institutions that may engage in otherwise authorized transactions and trade.
The special rapporteur received numerous accounts of refusals by foreign financial institutions and businesses to process payments and deliver goods and services, out of fear of financial, reputational and other consequences. Even after the signing of the Joint Comprehensive Plan of Action [the formal name of the Iran nuclear deal], there were reports of foreign financial institutions being reluctant to restore ties with Iran and to engage in investments in the country, given the history of hefty financial penalties for alleged breaches of US sanctions.
As with other sanctioned countries, Iran has suffered from the extension of US jurisdiction in international banking transactions, due to the involvement of US correspondent banks or payments in USD, which has not only caused serious disruptions and delays in the provision of basic goods, including food, medicines, medical and other equipment and raw materials, but has also seriously impeded Iran’s engagement in international cooperation, including payments of membership fees to international organizations and associations, access to funding opportunities and participation of Iranians and Iranian institutions in academic and scientific programs, cultural and sports activities.
Macroeconomic Performance
International statistical information on macroeconomic indicators from 2010 until today has demonstrated a correlation between the imposition and intensification of unilateral sanctions and Iran’s macroeconomic performance, in particular due to the trade and financial restrictions on Iran’s energy sector, the country’s most significant source of income, with around half of the government’s fiscal budget depending only on petroleum and other liquids exports.
According to the World Bank, while Iran’s economy is relatively diversified, oil proceeds play a crucial role in public finances and external accounts.
Iran is the world’s fifth-largest crude oil producer and third-largest natural gas producer.
From 2010 to 2015, Iran exported between 700,000 and 1.4 million barrels per day of crude oil and condensate. With sanctions being lifted following JCPOA, daily exports topped 2.5 million barrels between May 2016 and May 2018. With the reimposition of the US sanctions, exports dropped to under 500,000 barrels per day in July 2020. In 2018 and 2019 alone, oil exports declined by 57%, according to official government figures, leading to significant shortfalls in the annual budget due to the loss of revenue. Between 2019 and 2021, the annual loss from the drop in oil exports is estimated at around $56 billion. To compensate, the government has greatly expanded the money supply.
Furthermore, the estimated annual foreign exchange revenue prior to sanctions, about $66 billion between 2005 and 2011, fell to $25 billion during 2019-21, affecting government expenditures on development and other projects.
Similar trends are observed in Iran’s overall trade, with the value of exports and imports slashed almost in half between 2010 and 2019, with further significant deterioration until 2021. Trade between the EU and Iran declined by more than 50% during 2017-21.
These developments significantly impacted Iran’s economy. Annual GDP growth averaged 4.6% between 2000 and 2010, but GDP then shrank by an average of 1.7% between 2011 and 2015 as unilateral sanctions intensified. GDP grew by a record 13.6% in 2016, following JCPOA and the lifting of sanctions, and 3.7% in 2017, while in 2018 and 2019 the economy contracted by 6% and 6.8% respectively.
Inflation has also been affected by the changing environment induced by unilateral sanctions and by the effects of the Iranian currency devaluation due to financial restrictions and foreign assets freezes. Annual inflation between 2000 and 2010 averaged approximately 14.6%, and rose to approximately 23.8% between 2011 and 2015. In 2016 and 2017, it dropped to 7.2% and 8% respectively before rising again to alarming levels after the reimposition of US sanctions: 18% in 2018 and 39.9% in 2019. Since the reimposition of sanctions in 2018, general prices in Iran rose 85% and food prices doubled.
While Iran has been ranked 127 out of 190 economies in business environment indexes, the combined trade and financial restrictions between 2011 and 2015, and after 2018, coupled with businesses’ overcompliance and general reluctance to engage in any economic activity with the country, have affected foreign direct investment, which dropped to around $1.3 billion in 2020, representing only around 0.15% of Iran’s GDP.
Data from the Iranian Organization for Investment, Economic and Technical Assistance, covering the period between Autumn 2017 and Spring 2018 showed the number of approved foreign investments plummeted from 72 to 20, as did their total monetary value (from approximately $4.4 billion to $154 million).
The imposed trade and financial restrictions have had a direct impact on Iran’s job market, particularly in sectors directly linked to international markets, and on the lives of Iranian expatriates involved in business activities. The changing environment in the sanctions regime has resulted in job market instability and insecurity, and heightened risks for employment in the informal economy without access to social protection coverage.
