World Bank Anticipates Iran’s Economic Growth to Decelerate

The World Bank expects Iran’s economic growth to decelerate, amid intensifying sanctions and decline in oil prices. 
“Because of intensifying economic sanctions, Iran’s growth will likely remain at low levels. As oil prices decline, Iran’s GDP is forecast to grow 2% in 2023. This represents a deceleration from 2.7% growth in 2022 which was constrained by water and electricity shortages as well as political instability,” reads the new MENA Economic Update for April.
The report forecasts Iran’s GDP to decline further to 1.8% in 2024.
As for real GDP per capita, World Bank also expects the growth to decline from 3.9% in 2021 to an estimated 2% in 2022. It is forecast to drop to 1.3% in 2023 and further to 1% in 2024.

Decline in Oil Prices

Oil prices dropped over 4% to a three-month low on March 13 after a US inflation report and the recent US bank failures sparked fears of a fresh financial crisis that could reduce future oil demand, Reuters reported.
Brent futures fell $3.32, or 4.1%, to settle at $77.45 a barrel, while US West Texas Intermediate crude fell $3.47, or 4.6%, to settle at $71.33.
They were the lowest closes for both benchmarks since Dec. 9 and their biggest one-day percentage declines since early January. In addition, both contracts fell into technically oversold territory for the first time in weeks.
Shockwaves from Silicon Valley Bank's collapse triggered big moves in bank shares, as investors fretted over the financial health of some lenders, in spite of assurances from US President Joe Biden and other global policymakers.
"The market is either anticipating a recession in the future or it could be that one or more funds had to raise cash and reduce the risk on their books because they are concerned about liquidity after the bank failures," said Phil Flynn, an analyst at Price Futures Group. He has not heard of any fund in trouble.
US consumer prices increased solidly in February, as Americans faced persistently higher costs for rents and food, posing a dilemma for the US Federal Reserve whose fight against inflation has been complicated by the collapse of two regional banks.
"Crude prices are falling after a mostly in-line inflation report sealed the deal for at least one more Fed rate hike," said Edward Moya, senior market analyst at data and analytics firm OANDA.
Data showed the US Consumer Price Index rose 0.4% in February from 0.5% in January. That slight slowdown in consumer price growth prompted investors to price in a smaller rate hike by the Fed in March.
The Fed is now seen raising its benchmark rate by just a quarter of a percentage point next week, down from a previously expected 50-basis points, and delivering another hike of the same size in May. The Fed's next two-day meeting starts next Tuesday.
"The Fed’s tightening work is not done just yet and the chances are growing that they will send the economy into a mild recession, and risks remain that it could be a severe one," OANDA's Moya said.
The US central bank uses higher interest rates to curb inflation. But those higher rates increase consumer borrowing costs, which can slow the economy and reduce demand for oil.
The crude price decline also came ahead of US data expected to show energy firms added about 1.2 million barrels of oil to crude stockpiles during the week ended March 10. 
Limiting crude's price decline was a monthly report from the Organization of Petroleum Exporting Countries projecting higher oil demand in China, the world's biggest oil importer, in 2023.
Chinese consumers, unshackled from Covid-19 restrictions, are returning to hotels, restaurants and some shops, but they are choosy about what they buy, disappointing hopes for an immediate post-pandemic splurge.
OPEC, however, left unchanged its forecast for world oil demand to increase by 2.32 million barrels per day, or 2.3%, in 2023.

Oil-Driven Growth

The decline in oil prices come as much of economic growth in Iran owes to surge in oil sales, domestic reports indicate.
Latest data released by the Central Bank of Iran show oil registered the highest growth among economic sectors during the first three quarters of last fiscal year (March 21-Dec. 21, 2022).
According to CBI, Iran’s gross domestic product grew by 3.7% during the period compared with the preceding year’s corresponding period.
Without taking oil production into account, the growth rate stood at 3.2%.
The economic sectors of “agriculture”, “oil”, “industries and mines”, and “services” registered a growth of 1.1%, 9.3%, 5.6% and 2.8% during the period respectively.
According to CBI, Q1, Q2 and Q3 rates stood at 2.2%, 3.6% and 5.3% respectively.
The central bank report came a few days after the Statistical Center of Iran put Q1-3 economic growth at 3.3%, saying without oil, it stood at 2.9%.
According to SCI, the “industry and mines”, and “services” groups registered 5.3% and 2.6% growth respectively as “agriculture” contracted by 4.3%.
The broad “industries and mines” group has five sub-categories of “crude oil extraction”, “other mines”, “industry”, “energy” and “construction”, which registered 5.6%, 0.9%, 5.1%, 9.5% and -2.2% in growth rates, the center added.
According to SCI, Q1 and H1 growth were at 5.3% and 3.6% respectively.
SCI earlier put last Iranian year’s (March 2021-22) growth at 4.3%, saying 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.   
According to the Central Bank of Iran, the economy grew by 4.4% in the fiscal 2021-22. It said GDP growth stood at 3.9% without taking crude oil production into account. And that the “services”, “oil and gas”, “industries and mines”, and “agriculture” groups saw a respective growth rate of 6.5%, 10.1%, 1.1% and -2.6%.

According to CBI, Iran’s gross domestic product in the fiscal 2020-21 saw 3.6% growth. Economic growth, excluding oil, expanded by 2.5%. 
According to SCI, the year’s GDP expanded by 0.7% compared with the year before. 
Economic growth, excluding oil, saw an economic growth of near zero, SCI reported.

Iran Remains Dependent on Oil Revenues

Reducing the reliance of Iran’s economy on oil revenues and increasing the share of non-oil sector in economic growth have been one of the most frequently discussed topics among experts. Statistics, however, show that the growth of Iran’s economy in recent years, particularly in the 2010s, was mainly due to the sale of oil. 
These were stated by Vahid Shaqaqi-Shahri, an economist, in a write-up for the Persian daily Jahan-e Sanat. The full text follows:
Oil sale has been the most effective factor in boosting economic growth whether in the fiscal 2016-17 when Iran’s economy grew by 12.5% following the conclusion of the Joint Comprehensive Plan of Action and international interactions with the West, or in recent years when we saw negative or close to zero economic growth due to sanctions. 
Data show that the value added growth of the oil sector contributed 9.8% of the 12.5% growth in 2016-7. Therefore, we can say with conviction that in the 2010s, Iran’s economic growth was completely dependent on the oil sector, the added value of the oil sector and oil revenues. The higher economic growth registered in the fiscal 2021-22 compared with last year was thanks to the higher growth of oil revenues last year. In other words, the government managed to sell more oil last year.
In the 2010s, other economic sectors, including agriculture, industry and even services, did not have a significant impact on economic growth. This is worrying because government officials have not been able to end the economy’s dependence on oil.
For making predictions for the economy, we need to bear in mind that the agriculture sector will not be able to expand significantly, in view of the prevailing water crisis. As a result, the agriculture sector is bound to have a negative impact on economic growth in the 2020s. 
Fundamental development and structural changes indicating a real growth in the industrial and services sectors, or their added value, are unlikely. As a result, Iran’s economy will remain dependent on oil revenues; there will be no special change in the country’s economic structure. 
This makes us realize that the positive numbers of economic growth are only the result of the increase in oil prices and the sale of oil and oil products. When we speak of positive economic growth in the country, we are in fact referring to the changes in the industrial, agricultural and services sectors. 
As structural and institutional reforms are nowhere to be seen in these sectors, we can conclude that any positive growth is contingent on oil sales. Therefore, if the sanctions are lifted and oil sales increase, the economy will register growth.
In closing, if the sanctions persist, Iran’s economic growth will hover between 2-3% next year. But if the sanctions are unraveled, the economy will expand by up to 6% owing to the added value of the oil sector. Structural and institutional changes in knowledge-based, services and industrial sectors are vital for Iran’s economy. 
Unfortunately, we don’t see any signs of change and reform in the country and this signals the continuation of the economy’s dependence on oil and its sales.