World Bank’s prediction of Iran’s economy Part 2

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World Bank's prediction of Iran's economy Part 2

World Bank’s prediction of Iran’s economy

According to Iran Gate’s report, the World Bank’s recent report on Iran’s economic situation differs significantly from the official government reports by President Rouhani regarding the living conditions of the people. The outlook presented in this report contradicts the official interpretation of the Islamic Republic and indicates a worsening situation for Iranian citizens in the coming years.

Iran Gate has translated and published the recent World Bank report on Iran’s economic situation in a two-part dossier. This current report is the second part of the dossier, providing an outlook on the future of the country’s economy, which speaks of the severity of the situation for the middle class and low-income households in the years ahead. The first part focused on describing the current economic situation in Iran, which had significant differences from the official narrative of the Islamic Republic regarding the living conditions of the people.

Increase in oil revenue and intensified provincial taxes

The increase in oil revenues of the Islamic Republic of Iran is due to the negligence of the Democratic government in the White House, which has led to a decrease in the budget deficit in Tehran. Of course, the increase in oil prices in global markets in the past two years has also resulted in a significant increase in the oil revenues of the Iranian government. However, according to statements by officials of the Iranian government, the projected revenues in the 2023 budget have not been realized so far. But overall, oil revenues have been higher than what independent economists expected.

However, the government of Ebrahim Raisi has exerted heavy and unprecedented pressure on various sectors to cover the budget gaps with tax revenues. This unprecedented pressure has covered 40% of the government’s revenues in the past year, which has not been seen before.

Inflation outlook

Consumer price inflation in the past solar year has intensified due to policies of increasing food imports and further depreciation of the Iranian rial, along with inflationary expectations. Inflation in 2022 increased significantly and approached the 50% range.

This was the fourth consecutive year that consumer inflation exceeded 40 percent. It should be noted that despite the increase in imports, the rise in food prices was the main factor exacerbating inflation, accounting for approximately 40 percent of the overall inflation. The removal of subsidies for essential imports and the global increase in food prices following Russia’s attack on Ukraine have also contributed to the intensified consumer inflation.

The rise in food prices worsens the situation for low-income Iranian households as well as middle-class citizens. However, it is highly likely that this situation will become even more challenging in the coming year, and it is expected that the government and the central bank will be unable to effectively curb high consumer inflation.

Furthermore, the continuous depreciation of the Iranian rial compared to the US dollar and other major currencies has intensified this situation and added to the pressure caused by the rise in food prices. It should be noted that a significant portion of the expenses of low-income families and the middle class in Iran is spent on purchasing food. Therefore, it is expected that the table of this segment of society, which includes approximately 85 percent of the Iranian population, will be smaller than in 2022 and 2023.

Economic forecast for Iran in 2024

Economic sanctions, along with a decrease in global demand for fossil fuels, will result in limited and slow growth in Iran’s gross production in the coming years. Inflation may partially fill this gap, but due to the imbalanced growth of inflationary economies, sustainable growth cannot be expected in the following years. Furthermore, there is currently no prospect for the comprehensive lifting of banking sanctions against the Islamic Republic of Iran, which would allow the government to have unrestricted access to the country’s oil and non-oil revenues.

On the other hand, the attraction of foreign and even domestic investment has almost reached zero due to the limitations caused by sanctions. Therefore, sustainable growth in Iran’s gross production in both the oil and non-oil sectors cannot be expected. Additionally, drought and climate change have also posed challenges to the agricultural sector, making it unlikely for this sector of Iran’s economy to experience growth.

On the other hand, it should be noted that the continuous growth of inflation will lead to an increase in government budget expenses, which can exacerbate inflation in this country. It is predicted that the growth of government expenses, including salaries, pensions, and living expenses to compensate for the effects of high inflation and the rising cost of living, will increase. It is expected that the decrease in oil prices will also increase budget pressures. The employment outlook is concerning due to water shortages in the agricultural sector and uncertainty in investment environment.

Therefore, it is expected that inflation expectations, exchange rate pressures, and budget deficits will increase. This will also cause inflation to fluctuate between 40% to 50% in the medium term. The slow pace of job creation will in turn affect the well-being of Iranian households. This worsening situation comes at a time when the government of Ebrahim Raisi had increased cash subsidies in 2021. However, this increase has been ineffective due to inflation and budget deficits, currently covering less than one twelfth of the expenses of a three-person household.

In the external sector, it is expected that the current account balance will remain weak due to the decrease in oil prices, along with the global decrease in demand and increasing competition for oil exports, especially from Russia, to Iran’s main export destinations. At the same time, the outflow of capital and limited access to international reserves will put pressure on Iran’s foreign exchange reserves.

Medium-term outlook for Iran’s economy

The medium-term outlook is exposed to significant internal and external risks. Within the country, there is a risk of escalating social tensions and strikes in the industrial sector. Continued disruptions in the internet can have long-term adverse effects on employment and economic activities, especially in the services sector. Additionally, Iran is exposed to significant challenges of climate change, including severe weather events, floods, reduced rainfall, and recurring droughts, which can have a greater impact on agricultural production, employment, and food security with larger shocks.

Meanwhile, the extreme weather conditions have increased the demand for energy within the country, while reduced rainfall has decreased the supply of hydroelectric power. Without the necessary investment and energy price reforms, this could lead to energy shortages and undesirable effects on industries. External risks include the possibility of a further decline in global demand, a sharp decrease in oil prices, and intensified US sanctions.

On the other hand, limited exemptions from sanctions or broader relations with neighboring countries and China can help support Iran’s oil and non-oil economy. To ensure sustainable growth in the face of multiple crises, significant reforms are necessary, including budgetary and banking system reforms. Structural budget reforms should involve cost adjustments within the budget, reducing off-budget expenses, gradual energy price reforms, and creating more sustainable revenues through improved tax collection and reduced tax exemptions. This applies particularly to religious and military governing institutions, especially the Islamic Revolutionary Guard Corps.

Source: World Bank

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