Iran’s economic growth stood at 3.7% during the nine months ending Dec. 21, 2022, which is lower than that registered in the preceding year’s corresponding period.
Where did this economic growth come from? Will the same sources bring about positive economic growth for the country in the current fiscal year [started March 21]?
Sajjad Barkhordari, associate professor of economics in the University of Tehran prefaced his write-up for the Persian daily Donya-e-Eqtesad with these questions. A translation of the text follows:
The Central Bank of Iran’s report shows that the economy expanded by 3.7% in the Q3 of the fiscal 2022-23 with oil and 3.2% without oil, which is lower than that in the same period of the previous year, when the economy grew by 4.4% with oil and 3.9% without oil.
We need to study the supply and demand side to understand the origin of this growth.
Supply Side
From the supply side, economic growth reflects the total growth of production in agriculture, oil, industries and mines, and the services sectors.
According to official statistics, oil sector expanded by 9.3%, industries and mines by 5.6% (the highest rate among all groups) and agriculture grew by 1.1% (the lowest rate) in Q3 of FY 2022-23.
Given the big share of services in the Iranian economy, the sector accounted for 1.6% of the 3.7% growth during the period under review; the industries and mines sector came in second with a 1.3% expansion. As you see, services and industries and mines were the main drivers of growth in Q3.
The key point is that “transportation and warehousing” subgroup and the “wholesale, retail and vehicle repair” subgroup accounted for 0.9% and 0.7% of the 1.6% growth in the services sector, respectively. Other subgroups of services such as “information and communication”, “financial and insurance” and “real-estate activities” saw positive growth, but the negative growth of the sub-groups, namely “public administration”, “defense and social security” and “education” accounted for 1.6% of the total growth via services.
Demand Side
On the demand side, the growth of final consumption costs of the private sector, final consumption costs of the public sector, gross fixed capital formation (machinery, construction and other capital formation) and changes in inventory and net exports of goods and services (exports and imports of goods and services), determine economic growth.
By studying the components of the demand side, we observe that the final consumption costs of the private sector and the formation of gross fixed capital both grew by 7.7% in the nine-month period of 2022-23. Fixed capital formation registered a positive growth of 7.7% in Q3 of 2022-23 compared with the negative growth of 5.2% in Q3 of 2021-22.
The final consumption expenses of the public sector in the nine months of 2022-23 posted a negative growth of 0.7%. In Q3 of 2022-23, the export and import of goods and services both increased by 9.2% year-on-year. The net growth of exports of goods and services was 9.1%, suggesting that the net growth of exports of goods and services, private sector consumption and of gross fixed capital formation were the main drivers of economic growth in Q3 of last year.
The growth of gross fixed capital formation in the machinery sector was 28.3% in Q3, higher than the same period of the year before. The growth of gross fixed capital formation in the construction sector, despite being positive, was less than 1%.
Sources of Economic Growth in 2023-24
Granted the performance of the economy in the nine-month period of 2022-23 and the likelihood of a decline in Q4, we expect the industries and mines sector, as well as the subsectors of industry in particular, to register economic growth if forex and raw materials markets and laws and regulations were to remain stable.
Note that last year’s expansion of this sector was thanks to the growth of large industries, following the increase in global demand and improvement of the global economy after the Covid-19 pandemic. International institutions have predicted the continuation of positive economic growth for Iran’s economy in the current year, putting it at 2%. However, the realization of high economic growth in the current year will be affected by the growth of the services sector and that of industries and mines.
In view of limitations on the development of new services, you can’t expect to see high growth in this subgroup like last year, but the growth of services in the transportation and brokerage subgroups is likely this year.
The growth of other subgroups of the service sector, including financial and insurance and real-estate activities, will be impacted by the country’s interaction with the world. If foreign relations improve, the growth of financial and insurance activities in the current year will be likely. But if the current situation persists and the asset market becomes more unstable, the recession in real-estate sector is probable.
In the industries and mines sector, the growth of subgroups such as metal production, motor vehicle manufacturing and chemical production have registered higher growth compared with other subgroups. Given the domestic and global economic developments, these subgroups will continue to expand in the current year but their growth will be less than last year’s.
The economic growth of the agriculture group in the current year will be affected by domestic policies and rainfall. Agricultural products are likely to register marginal growth given the lack of compatibility in the economic planning of the Agriculture Ministry and the uncalled-for intervention policies in the agricultural market.
Water shortage in the country poses a serious threat to agricultural production. On the demand side, you can’t expect to see a significant increase in the consumption costs of the private sector this year because of the increase in inflation and the decline in people’s purchasing power.
The growth of public sector expenses is estimated to be less than 1% due to the government’s financial limitations. The growth of gross capital formation, especially in the machinery sector, can pave the way for economic growth on the demand side in the current year.
If the asset market becomes stable and unproductive activities reduce, the growth of gross fixed capital formation in the machinery sector is also predictable.
Economic policies and interactions with the world play a key role in the materialization of investment.
Finally, economic growth in the current fiscal year is expected to hover around 2-2.5% when we weigh the performance of different groups from the supply side and the factors that impacted the demand side last year. This is while the country needs to register a growth of above 8% to improve the wellbeing of its people and achieve economic progress.
