World Bank Examines Risks Facing Iran’s Economy

Iran’s GDP in 2020-21 is estimated to contract by 3.7% due to a dual contraction of the non-oil and oil sectors. 
The World Bank’s growth forecast remains moderate compared to regional comparators due to a shorter initial period of domestic containment measures. 
Oil production is projected to remain close to the Q1-2021 level (2 mbpd). Overall economic contraction is projected to intensify in the second half of 2020-21 (Oct. 2020–March 2021) as stricter health measures are enforced due to a resurgence of cases in the colder season. 
In the absence of a vaccine widely adopted in the country until end-2021, recovery in 2021–22 is projected to be weak and be driven primarily by the non-oil sector, reads a new World Bank report titled “Iran Economic Monitor, Fall 2020: Weathering the Triple-Shock”. Parts of the report follow:
On the external side, Iran’s current account balance (CAB) is projected to remain at low levels as exports slowly recover. The 2020-21 CAB is estimated to register a small deficit for the first time in 15 years due to a decline in exports. The magnitude of the external deficit is partly mitigated by the simultaneous sharp decline in imports, as access to international reserves remain limited.
As exports begin to recover, CAB is projected to remain at a small surplus in 2021–22. In the absence of other sources of external financing (e.g., foreign direct investment and remittances) and a rebound in oil prices, external pressures are expected to continue.

Fiscal Pressures and Inflation

Fiscal pressures are forecast to increase due to higher financing costs and lower revenue growth. 
Government revenues are projected to reach a trough in 2020-21, as economic activity contracts before improving in the outer years with the moderate economic recovery and gradual pickup in oil revenues. 
Covid-19 healthcare cost and social assistance transfers are forecast to add to government expenditure growth, which will be dominated by subsidies and labor compensation in 2020-21 and beyond. 
Extensive bond issuance in 2020-21 is forecast to continue and the higher interest payments are projected to lead to a growing overall fiscal deficit in the medium term while the primary fiscal deficit GDP ratio marginally declines.
Inflation is forecast to remain elevated in the medium term while job creation remains weak, especially as labor force participation increases. Despite the government’s abstinence from direct monetization of the fiscal deficit inflation is estimated to increase to 39% in 2020-21. 
Notwithstanding the large output gap in the economy, inflationary pressures are expected to remain high due to the scope of economic uncertainties and high liquidity growth, as external account pressures continue. 
Iran’s current economic structure undermines the private sector’s role as the main engine of job creation and jobs prospects even under a modest rebound in 2021–22 will remain insufficient to meet the growing labor supply in absolute terms.
The Covid-19 outbreak will impact households’ welfare through reduced labor market incomes and high inflation. The fall in labor market incomes is estimated to increase poverty in the short-term significantly, with households in more affected parts of the country and working self-employed in services sectors being more severely affected. 
Government cash transfers partly help compensate for the shock, but their mitigation impact is hindered by high inflation continuing to erode their value in real terms. Fiscal constraints may limit the scope for a wider response, but better targeting of cash transfers can help reduce the fiscal cost of mitigation measures. 

Risks and Opportunities

Risks to Iran’s economic outlook relate to the evolution of Covid-19 pandemic and geopolitical developments. The economic outlook is subject to significant risks if large resurgences of Covid-19 outbreak force stringent lockdown measures or a reliable vaccine is not distributed in 2021. 
Economic recovery in the longer term could be weaker if the pandemic leads to a permanent reduction of Iran’s productive capacity. Higher government reliance on debt issuance and stock market sales of assets increases financial contagion risks and could place additional stress on the undercapitalized banking sector. 
External balances could worsen, if further trade restrictions are imposed (e.g., on exports to Iraq) or demand in China and other main export partners do not recover in the medium term. With the economy operating at a lower base and below potential output, recovery in the outer years could be stronger. 
Limited integration of Iran’s economy with the rest of the world reduces the magnitude of exposures to external shocks.
Upside risks to Iran’s economic prospects include a stronger recovery in the oil market which could help
Iran’s exports through both volume and price channels. The lifting of a significant part of US sanctions would have a large positive impact, as it did following the Joint Comprehensive Plan of Action in 2015.
The multitude of crises facing Iran’s economy raises the urgency for further social protection mitigation strategies that are complemented with deeper economic reforms. 
The recent multiple years of recession have severely undermined the welfare of Iranians and put unprecedented strain on the most vulnerable, which raises the urgency of reforms more than before. Mitigation measures have managed to offset part of the pressures in the past but have largely been ad-hoc and unsustainable due to lack of accurate targeting mechanisms. 
The newly piloted Welfare Information Platform of Iranians could be a crucial tool in the implementation of future interventions and more effective social protection strategies. 
Sustainability of such measures and overall economic recovery will ultimately depend on a package of deeper economic reforms aimed at further economic diversification and private sector promotion.