The World Bank expects Iran’s economy to grow by 2.2% in 2023.
The newly-released June edition of Global Economic Prospects report has put last year’s growth rate at 2.9%.
“Growth is expected to slow in the Islamic Republic of Iran to 2.2% in FY 2023-24, from 2.9% the previous fiscal year, as oil exports and government consumption growth slows,” the report reads.
It goes on to forecast real GDP growth in 2024 and 2025 at 2.1% and 1.9% respectively.
The data show projection for 2024 has been revised up by 0.1% while it remains the same in 2023 compared to the January edition of the report.
According to the World Bank, Iran’s economy grew by 1.9% and 4.7% in 2020 and 2021 respectively.
The quarterly estimates read 6.7%, 5%, 2.5%, 3.4% and 4.7% in Q4 2021, Q1 2022, Q2 2022, Q3 2022 and Q4 2022.
The January report said: “In the Islamic Republic of Iran, growth in FY 2023-24 has been revised down by 0.5 percentage point, to 2.2%, on account of slower growth in key trading partners and new export competition from discounted Russian oil. Domestic demand is also likely to be curbed by the effects of high inflation on real incomes, which is expected to average 44% in FY 2023-24. Growth is projected to slow further, to 1.9%, in FY 2024-25.”
The new report shows improvement in forecast compared to World Bank’s more recent publication, the MENA Economic Update for April, which said: “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.”
Global Outlook
On the global front, the report has the following to say:
The global economy remains in a precarious state amid the protracted effects of the overlapping negative shocks of the pandemic, the Russian Federation’s invasion of Ukraine and the sharp tightening of monetary policy to contain high inflation. Global growth is projected to slow significantly in the second half of this year, with weakness continuing in 2024.
Inflation pressures persist and tight monetary policy is expected to weigh substantially on activity. Recent banking sector stress in advanced economies will also likely dampen activity through more restrictive credit conditions. The possibility of more widespread bank turmoil and tighter monetary policy could result in even weaker global growth. Rising borrowing costs in advanced economies could lead to financial dislocations in the more vulnerable emerging market and developing economies (EMDEs).
In low-income countries, in particular, fiscal positions are increasingly precarious. Comprehensive policy action is needed at the global and national levels to foster macroeconomic and financial stability.
Among many EMDEs, and especially in low-income countries, bolstering fiscal sustainability will require generating higher revenues, making spending more efficient, and improving debt management practices. Continued international cooperation is also necessary to tackle climate change, support populations affected by crises and hunger, and provide debt relief where needed. In the longer term, reversing a projected decline in EMDE potential growth will require reforms to bolster physical and human capital and labor-supply growth.
After growing 3.1% last year, the global economy is set to slow substantially in 2023, to 2.1%, amid continued monetary policy tightening to rein in high inflation, before a tepid recovery in 2024, to 2.4%. Tight global financial conditions and subdued external demand are expected to weigh on growth across EMDEs. Projections for many countries have been revised down over the forecast horizon, with upgrades primarily due to stronger-than-expected data at the beginning of 2023 more than offset by downgrades thereafter.
Inflation has been persistent but is projected to decline gradually as demand weakens and commodity prices moderate, provided longer-term inflation expectations remain anchored.
Global growth could be weaker than anticipated in the event of more widespread banking sector stress, or if more persistent inflation pressures prompt tighter-than-expected monetary policy. Weak growth prospects and heightened risks in the near term compound a long-term slowdown in potential growth, which has been exacerbated by the overlapping shocks of the pandemic, the Russian Federation’s invasion of Ukraine and the sharp tightening of global financial conditions. This difficult context highlights a multitude of policy challenges.
Recent bank failures call for a renewed focus on global financial regulatory reform. Global cooperation is also necessary to accelerate the clean energy transition, mitigate climate change and provide debt relief for the rising number of countries experiencing debt distress.
At the national level, it is imperative to implement credible policies to contain inflation and ensure macroeconomic and financial stability, as well as undertake reforms to set the foundations for a robust, sustainable and inclusive development path.
Regional Prospects
From regional perspective, the report has the following to say:
Growth is projected to diverge across EMDE regions this year and next. It is expected to pick up in 2023 in East Asia and Pacific (EAP) and Europe and Central Asia (ECA), as China’s reopening spurs a recovery and as growth prospects in several large economies improve. In contrast, growth is forecast to moderate in all other regions, particularly in Latin America and the Caribbean (LAC) and the Middle East and North Africa. Headwinds from weak external demand, tight global financial conditions and high inflation will drag on activity this year, especially in LAC, South Asia (SAR) and Sub-Saharan Africa. The lingering impact of Russia’s invasion of Ukraine will continue to weigh on growth across regions, particularly in ECA.
Next year, growth is projected to moderate in EAP and SAR but to pick up elsewhere as domestic headwinds ease and external demand strengthens. Downside risks to the outlook for all regions include possible further global financial stress and more persistent domestic inflation than projected in the baseline. Geopolitical tensions, conflict and social unrest, and natural disasters stemming from climate change also present downside risks, to varying degrees. The materialization of such risks could further weaken potential growth, leading to a prolonged period of slower growth in all EMDE regions.
Oil-Driven Growth in Iran
More detailed reports about Iran’s economic growth coming from inside the country show much of growth owes to surge in oil sales.
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 1.1%, 9.3%, 5.6% and 2.8% growth 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 “industries 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 growth rates of 5.6%, 0.9%, 5.1%, 9.5% and -2.2%, 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 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.
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 “services”, “oil and gas”, “industries and mines” and “agriculture” groups saw respective growth rates 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, that 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 subjects 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 and university professor, in a write-up for the Persian-language 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 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 realize the dream of ending 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, given the 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 changes in the industry, agriculture 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 lifted, 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.
