World Bank’s Forecast on Iran’s Economy Part Two

World Bank’s Forecast on Iran’s Economy

According to Iran Gate, the World Bank’s recent report on Iran’s economic situation shows significant differences from the official reports of Raisi’s government regarding the living conditions of the people. The outlook presented in this report contrasts with the official narrative 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 series. This present report is the second part of this series, offering an outlook on the future economy of the country, which suggests worsening conditions for the middle class and lower-income deciles in the coming years. The first part described the current state of Iran’s economy, which had many differences from the official narrative of the Islamic Republic regarding the living conditions of the people.

Increase in Oil Revenue and Intensified Tax Collection

The increase in the Islamic Republic’s oil revenues due to the Democratic government’s leniency in the White House has reduced the budget deficit burden in Tehran. Additionally, the rise in global oil prices over the past two years has significantly increased the oil revenues of the Islamic Republic’s government. However, according to statements from the Islamic Republic of Iran’s government officials, the revenues projected in the 2023 budget have not yet been realized. Overall, oil revenues have been higher than what independent economists expected.

Moreover, Ebrahim Raisi’s government has exerted unprecedented heavy pressure on various sectors to cover budgetary gaps with tax revenues. This unprecedented pressure accounted for 40% of the government’s revenues last year, which is unprecedented.

Inflation Outlook

Consumer price inflation intensified significantly last solar year following policies to increase food imports, further depreciation of the Iranian rial, and inflation expectations. Inflation in 1401 increased notably, approaching the 50% range.

This was the fourth consecutive year that consumer inflation exceeded 40%. It should be noted that despite increased imports, the rise in food prices was the main driver of inflation, constituting about 40% of the overall inflation. The removal of subsidies on essential goods imports and the global increase in food prices following Russia’s invasion of Ukraine also intensified consumer inflation.

The rise in food prices worsens the situation for low-income Iranian households and middle-class citizens. This situation is likely to become even more challenging next year, and it is expected that the government and the central bank will be unable to control the heavy consumer inflation.

Furthermore, the continuous depreciation of the Iranian rial compared to the dollar and major world currencies has exacerbated this situation and added to the pressure from rising food prices. It should be noted that a significant portion of the expenses of low-income and middle-class Iranian families goes towards food. Therefore, it is expected that the table of this section of society, which constitutes about 85% of the Iranian population, will shrink compared to 2022 and 2023.

Iran’s Economic Forecast for 2024

Economic sanctions, along with a decrease in global demand for fossil fuels, will result in Iran’s gross domestic product experiencing limited and narrow growth next year. Meanwhile, inflation could partly fill this gap, but given the unbalanced growth of inflationary economies, sustainable growth in subsequent years cannot be expected. Moreover, there is currently no prospect for the widespread and comprehensive lifting of banking sanctions against the Islamic Republic of Iran, allowing the government unlimited access to the country’s oil and non-oil revenues.

On the other hand, foreign and even domestic investment attraction has nearly reached zero due to sanctions-related restrictions. Therefore, sustained growth in the oil and non-oil sectors of the Islamic Republic cannot be expected. Additionally, drought and climate change have posed challenges to the agricultural sector, making growth in this part of Iran’s economy unlikely.

Furthermore, the relentless growth of inflation will increase the government’s budgetary expenses, potentially exacerbating inflation in the country again. It is predicted that the growth of government expenses, including wages, pensions, and living allowances to offset the effects of high inflation and rising living costs, will increase. It is expected that a drop in oil prices will also add to the budgetary pressures. The employment outlook is unfavorable and concerning due to water shortages in the agricultural sector and uncertainty in the investment environment.

Therefore, it is predicted that inflation expectations, currency pressures, and the budget deficit will increase. This situation will cause inflation to fluctuate between 40% and 50% in the medium term. The low speed of job creation, in turn, affects the welfare of Iranian households. This deterioration of conditions occurs despite the fact that Ebrahim Raisi’s government increased cash living subsidies in 2021, but this increase has been rendered ineffective due to rising inflation and persistent budget deficits, currently covering less than one-twelfth of the expenses of a three-person household.

In the external sector, the current account balance is expected to remain weak due to a decline in oil prices, along with reduced global demand and increasing competition for oil exports, particularly from Russia in Iran’s main export destinations. At the same time, increased capital outflow and limited access to international reserves will add pressure on the Islamic Republic’s foreign exchange reserves.

Medium-Term Economic Outlook for Iran

The medium-term outlook is exposed to significant domestic and external risks. Domestically, there is a risk of escalating social tensions and strikes in the industrial sector. Continued internet disruptions could have long-term detrimental effects on job creation and economic activities, especially in the services sector. Additionally, Iran faces significant climate change challenges, including extreme weather events, reduced rainfall, and frequent droughts, whose impact on agricultural production, employment, and food security could be severe.

Meanwhile, extreme temperatures have increased domestic energy demand, while reduced rainfall decreases hydroelectric energy supply, which, in the absence of necessary investment and energy price reform, could lead to energy shortages and adverse impacts on industries. External risks include the potential for reduced global demand, sharper declines in oil prices, and intensified U.S. sanctions.

Conversely, limited exemptions from sanctions or broader relations with neighboring countries and China could aid in the oil and non-oil growth of Iran’s economy. To ensure a sustainable growth rate in the face of multiple crises, significant reforms, including budgetary and banking system reforms, are essential. Structural budget reforms should include cost adjustments in the budget, reduction of off-budget expenses, gradual energy price reforms, and creation of more sustainable revenues through improved tax collection and reduction of tax exemptions, particularly concerning religious and military governance institutions, especially the Islamic Revolutionary Guard Corps.

Source: World Bank