Iran Economic Conditions and Development Plan: World Bank Report Update

Jakarta –

Tensions in the Middle East are increasing. Iran launched air strikes on Israel after its consulate in Damascus, Syria was attacked.

As a country involved in war, Iran’s economic conditions attract attention to study. What’s the condition?

Quoted from the World Bank report updated on October 20 2022, Iran’s economy is supported by the hydrocarbon, agriculture and services sectors, as well as the state’s presence in manufacturing and financial services.

“Iran ranks second in the world in terms of natural gas reserves and fourth in terms of proven crude oil reserves,” said the report, quoted on Sunday (14/4/2024).

Although relatively diversified for an oil exporting country, economic activity and government revenues still depend on oil revenues. Therefore, it is volatile.

Currently, a new five-year development plan is being prepared. The previous plan for 2016/17 to 2021/22 consisted of three pillars, namely developing a resilient economy, advancing science and technology, and increasing cultural excellence.

Priorities include reform of state-owned enterprises and the financial and banking sector, as well as the allocation and management of oil revenues. The plan estimates annual economic growth of 8%.

External shocks, including sanctions and commodity price volatility, led to a decade of stagnation that ended in 2019/2020. The major contraction in oil exports put significant pressure on government finances and pushed inflation to more than 40% for four consecutive years.

“Sustained high inflation is causing a significant decline in household purchasing power. At the same time, job creation is insufficient to absorb the large number of young and educated workers entering the labor market,” the report further said.

Over the past two years, Iran’s economy has begun to recover, supported by post-pandemic service recovery, increased oil sector activity, and policy accommodation. Economic activity has also adjusted to the sanctions, including through exchange rate depreciation which helps domestically produced trade goods become competitive with international prices.

The decline in oil exports encourages additional processing of crude oil and hydrocarbons which are then exported as petrochemicals. Under sanctions, trade is increasingly shifting to neighboring countries and China. Bilateral currency swaps, bartering, and other indirect payment channels are increasingly used to complete international transactions as most overseas assets are inaccessible due to sanctions.

The government expanded cash transfers and subsidies to mitigate the impact of high inflation on welfare, but this also added to fiscal pressures as most interventions were poorly targeted.

Iran faces intensifying climate change challenges, including severe droughts that limit agricultural production at a time when global food prices and food insecurity are on the rise. While higher oil prices resulting from a recovery in global demand and the war in Ukraine have increased oil export revenues, higher prices of other commodities, including food, have increased the import bill significantly.

This increase puts additional pressure on government finances because direct food price subsidies reached 5% of GDP even before the price spike occurred.

In the medium term, GDP growth is not expected to be too large if economic sanctions remain in place. Weaker global demand and new competition from discounted Russian oil exports to China are expected to moderate Iran’s oil sector expansion.

(acd/that)