Domestic Economy

Iran’s Economy in 2022 Volatile: USIP Report

Iran’s Economy in 2022 Volatile: USIP Report
Iran’s Economy in 2022 Volatile: USIP Report

Iran’s economy was stuck in a period of low growth, high inflation and volatility, which hurt the economic prospects for millions of Iranians. 
The Islamic Republic’s foreign, fiscal and monetary policies combined have weakened its economy in 2022. These policies included the failure to revive the 2015 nuclear deal, the misguided implementation of subsidy reforms for essential goods, unrealistic budgeting and an overreliance on the Central Bank of Iran to indirectly support government spending, reads a report published by the United States Institute of Peace (USIP). Excerpts follow:
The protests and the government’s reaction had their own economic effects. Periodic internet shutdowns affected small businesses that rely on social media for advertising and sales, and the overall turmoil appeared to hurt consumer demand and the broader business climate.



Meeting Budget Projections 

Iran was on pace to miss its budget expectations by a wide margin. 
In the first seven months of the Iranian year that began in March 2022, the government earned just two-thirds of the revenue it had expected by that point, and said that it expected that trend to continue. The release of the data triggered a clash in parliament in November. 
The chief of the Iranian budget organization blamed the shortfall on the parliament’s insistence on social spending, an accusation that lawmakers rejected.
The government was expected to come close to its targets for tax revenue, which Tehran tends to project accurately, and it exceeded expectations for bond sales. But oil export revenue fell short of expectations. 
In the first six months of the Iranian year, Iran earned just 56% of the oil revenue it expected. This shortfall was not surprising; the government loses as much as half of expected oil revenue through discounts, smuggling costs and banking restrictions. It also fell short on customs revenue, earning just one-third of the expected revenue in the first six months, and in selling state-owned companies, where it earned almost nothing. To cover some of the shortfall, the government requested further withdrawals from the National Development Fund, the state’s sovereign wealth fund.



Raisi’s New Economic Policies 

President Ebrahim Raisi’s most important economic policy decision in 2022 was reforming the system for subsidized import of essential goods, including wheat. 
Dubbed “economic surgery,” the plan aimed to halt a longstanding policy of providing a more advantageous foreign exchange rate to some importers, which fostered corruption and depleted government coffers. The government said that it would pair the removal of the subsidy with a coupon system, theoretically alleviating the price increases that would follow the subsidy removal.
Yet, the reform was botched. The policy was announced abruptly in May, potentially motivated by the surge in global food prices after the Russian invasion of Ukraine… 
The coupon system was not ready. Inflation soared, with consumer prices rising more than 12% from May to June – the highest monthly rate since such statistics were published. The government deposited cash into people’s bank accounts as a temporary measure; this strategy was expected to be inflationary and widen the budget deficit. As of December, the coupon system had yet to be rolled out.
Raisi and his economic team promote the “resistance economy” model, which prioritizes self-sufficiency. A key component of the strategy is to boost exports of high-value, non-oil products; Leader Ayatollah Ali Khamenei declared 2022 “the year of knowledge-based production and job creation.” Iran could claim some progress here. The industrial sector grew by 5.1% in the spring, led by the automotive and steel industries.



Non-Oil Trade

In the eight months between the end of March and the end of November, Iran exported about $32 billion worth of non-oil goods and imported about $37 billion – resulting in a sizable trade deficit of almost $5 billion. The import-export gap was also reflected in a comparison to the 2021 period, with the growth in import value (15%) exceeding the growth in export value (4%). While the overall value of trade was higher than in 2021, the amount of goods, as measured by weight, fell.
Iran’s top trade partners were China, the UAE, Turkey, Iraq, India and Germany. Its largest exports included petroleum products, petrochemical products and steel. Gas condensate was likely among its top export products, although the specific data for those exports was not released on a national level.
Iran imported primarily food products and cell phones.



Biggest Economic Challenges in 2023

Raisi’s overarching challenge is addressing the government’s lack of credibility and capacity in tackling systemic issues, such as harnessing inflation, reviving the nuclear agreement or reforming the banking sector. This will be difficult for Raisi and his aides, who have shown little willingness to deal with such chronic issues. The… protests… probably further eroded public confidence in the state to pursue meaningful reforms. 
Without prospects for improvement, businesses and investors will likely continue to cut back on investment that the economy needs, and capital and people will continue to leave Iran.
Three other issues stand out. First, a significant decline in oil prices – driven, for example, by a worse-than-expected global recession or a decrease in China’s appetite for Iranian crude oil – would reduce the availability of hard currency needed to pay for imports. This, on top of an already widening trade deficit, could be difficult for the government to manage.
Second, competition with Russia may pose an added challenge. Despite their close political and security alignment, economic competition has intensified between Moscow and Tehran since the Russian invasion of Ukraine. As global oil markets adjust to new EU sanctions, including a cap on the price of Russian crude oil, Iran’s rivalry with Russia could become even more acute in Asia, potentially cutting into export revenues.
Third, Iran is poised to face a series of energy-related challenges in 2023. Natural gas consumption in 2022 increased by 60 million cubic meters per day compared to 2021, while production grew by only 25 million cubic meters per day. In December, the government began warning some factories to reduce usage and urged citizens to consume less gas to heat homes and offices. 
Iran experienced a similar shortage last winter, but amid the ongoing nationwide protests, disruptions in 2023 could be more politically sensitive. Gasoline consumption is also surging and investment in new refining capacity has lagged, so much so that officials have warned that Tehran may have to resume importing fuel. Iran announced it was a net exporter of gasoline in 2019 and reversing this would cut into government revenue. 
Gasoline is heavily subsidized in Iran, but raising the prices to cool demand would be politically explosive.

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