production level. However, data for the IRAN, ISLAMIC first 10 months of the current year regard- Recent developments ing non-oil trade balance indicate a con- siderable deficit of around US$5.7 billion REPUBLIC Real GDP growth at factor prices is ex- pected to moderate from 12.5 percent in as imports increased by 22 percent and exports by 1.7 percent on an annual basis. 2016/17 to 4.3 percent in 2017/18 as oil Following the street protests in Tehran production stabilizes. Unlike in 2016/17, and a number of other cities at the end of Table 1 2017 the non-oil sector was the main contribu- December 2017 and early January 2018, P o pulatio n, millio n 80.6 tor to the overall growth in the first half of sparked by economic concerns, the ex- 2017/18 (by 3.2 percentage points of the change rate depreciated significantly as GDP , current US$ billio n 439.5 overall 4.5 percent). Gross fixed capital uncertainty increased speculative demand GDP per capita, current US$ 5452 a formation recorded a positive growth rate for foreign currency. By mid-February Upper middle-inco me po verty rate ($ 5.5) 10.5 for the first time since the second half of Rial’s parallel market exchange rate a Gini co efficient 38.8 2014/15, driven mainly by a pickup in against the US dollar was around 16 per- b Scho o l enro llment, primary (% gro ss) 108.9 investments in the construction sector. cent lower than end-December 2017. In b Life expectancy at birth, years 75.7 This was supported by a 20 percent response, CBI announced a temporary Source: WDI, M acro Poverty Outlook, and official data. growth in outstanding loans as of Decem- increase on bank deposit return rate ceil- Notes: ber 2017, compared to December 2016. ing to 20 percent (up from 15 percent). As (a) M ost recent value (2014), 2011 PPPs. (b) M ost recent WDI value (2015) The fiscal deficit is estimated to slightly of end-February Rial stood at 6.4 percent widen to 2.4 percent as government ex- lower than its end-December value penditures growth outpaces the increase against the US dollar in the parallel mar- in revenues. In the first nine months of kets. As the gap between the parallel and As the impact of the previous year’s boost 2017/18 tax revenues increased by only 4.4 official exchange rate widened, some crit- in oil production and exports dissipates, percent and oil exports receipts surged by ics argued that the government, as the overall growth rate is expected to stabilize 52 percent compared to 25 percent and - largest supplier of foreign exchange, bene- 6.7 percent respectively in the same period fitted from this rate premium as a quasi- at around 4.2 percent, with a larger con- in 2016/17. On the expenditures side, cur- fiscal tool to cover the mounting cost of tribution from the non-oil sector. Yet, rent expenditures increased by 16.8, while problems with pension funds and cash continued high unemployment rate and capital expenditures surged by 91 percent handouts. Despite the exchange rate tur- an expected upward trend in prices are on the back of a considerably low base moil, pass-through remained limited and and two subsequent years of contraction. CPI inflation stayed just below 10 percent likely to put pressure on household in- The current account surplus is estimated in the 12-months prior to February 20th. comes and complicate the space to imple- to slightly improve to 4.1 percent of GDP Recent Statistical Center of Iran data puts ment further economic reforms, particu- in 2017/18 (up from 3.9 percent in 2016/17) the unemployment rate for the third quar- larly in the aftermath of widespread pro- as oil prices increase while export vol- ter of the year (October -December 2017) at tests in January 2018. umes remain stable around the country’s 11.9 percent and the labor force participa- 2.4 million barrels per day and production tion at 41 percent, which marks a moder- remains at the amount agreed under the ate improvement compared to the same OPEC production cut and 2011/12 daily quarter a year earlier (12.3 and 38.9 per- FIGURE 1 Islamic Republic of Iran / Supply side contribu- FIGURE 2 Islamic Republic of Iran / Recent Rial to US tion to GDP dollar exchange rates % growth based 2011 prices 50,000 Protests 43,000 15 49,000 (Dec, 28th - Jan, 7th) 42,000 48,000 41,000 10 47,000 40,000 5 46,000 39,000 45,000 38,000 0 44,000 37,000 43,000 Parallel market 36,000 -5 rate (LHS) 42,000 Official rate (RHS) 35,000 -10 41,000 34,000 Agriculture Industry Services GDP growth Sources: CBI and World Bank staff calculations. Sources: CBI, Donya-e-Eqtesad and World Bank staff calculations. MPO 1 Apr 18 cent respectively). This is in line with a ponement by the Parliament of some re- The lack of job creating growth will con- gradual improvement in non-oil sector form measures (such as the initially envi- tinue to be an important challenge. As the production. sioned cash transfer targeting under the unrest in early January 2018 demonstrated Poverty is estimated to have fallen from initial draft of the 2018/19 budget). Fur- there is widespread concern about pov- about 13 percent to 8 percent between thermore, increased leveraging of govern- erty, corruption and lack of jobs, particu- 2009 and 2013 (US$5.5 a day line in 2011 ment budget through bonds and other larly for the youth. In the aftermath of PPP). This was likely due to the introduc- financial instruments and the subsequent events and the presence of continued yet tion of the universal cash transfer pro- higher servicing of debt are likely to add more scattered demonstrations, the policy gram in late 2010, contributing to positive upward pressure on expenditures. environment in the county has become consumption growth of the bottom 40 The current account surplus is expected to more challenging for the government’s percent of the population, with overall further strengthen and hover around 5 reform agenda, with significantly different consumption growth between 2009 and percent of GDP, mainly due to the steady views regarding the country’s develop- 2013 being negative. Poverty increased in increase in global energy prices based on ment model. Banking sector reforms are 2014 to 10.5 percent though and this may current projections and gradual improve- largely pending, which, combined with be associated with a declining social assis- ment in non-oil trade balance. uncertainties around global banks re- tance in real terms. In the medium term, inflationary pres- engagement with Iranian banks put pres- sures are likely to increase due to widen- sure on inward investment. The unifica- ing output gap and further currency de- tion of the official and market exchange Outlook preciation, pushing CPI inflation into dou- ble-digit territory again. rates has been further postponed and the gap between the two rates currently Given political and economic uncertainty stands higher at close to 28 percent. The The economy is expected to maintain a Iran has been facing since 2009, poverty increasing reliance on issuance of debt steady growth of slightly over 4 percent, has been volatile, making forecasts less instruments for financing government increasingly based on non-oil sectors, and precise. Nevertheless, falling real value of arrears and current expenditures can put fueled by a recovery in consumption and cash transfers may continue to have nega- additional pressure for rollover of matur- investment demand and overtaking the tive impact on poverty, while moderate ing debt, increase borrowing costs and contribution of net exports. Some signs of economic growth and planned improved undermine the sustainability of govern- pick up in construction sector, historically targeting of benefits may contribute to ment finances in the coming years. a lead indicator of economic activity, also lower poverty after 2017. appear to confirm this trend. The fiscal deficit is estimated to remain above 2.5 percent of GDP through 2020 as expenditures increase due to the post- Risks and challenges TABLE 2 Islamic Republic of Iran / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2015/16 2016/17 2017/18 e 2018/19 f 2019/20 f 2020/21 f Real GDP growth, at constant market prices -1.3 13.4 4.3 4.1 4.1 4.2 Private Consumption -3.5 3.8 5.3 5.0 5.1 4.9 Government Consumption 4.8 3.7 4.0 4.4 3.8 3.6 Gross Fixed Capital Investment -12.0 -3.7 2.2 1.9 2.4 3.2 Exports, Goods and Services 12.1 41.3 7.3 7.0 6.7 6.9 Imports, Goods and Services -20.2 6.1 7.8 8.1 8.3 8.5 Real GDP growth, at constant factor prices -1.6 12.5 4.3 4.1 4.1 4.2 Agriculture 4.6 4.2 4.0 4.0 3.9 3.9 Industry -1.4 24.7 4.7 4.7 4.8 4.9 Services -2.5 3.7 3.9 3.5 3.4 3.6 Inflation (Consumer Price Index) 11.9 9.0 9.8 11.4 11.0 10.8 Current Account Balance (% of GDP) 2.3 3.9 4.1 5.4 5.1 4.7 Fiscal Balance (% of GDP) -1.7 -2.2 -2.4 -2.5 -2.7 -2.6 Gross Public Debt (% of GDP) 41.2 49.0 40.9 53.9 49.2 45.6 Primary Balance (% of GDP) -1.6 -2.1 -2.3 -0.6 0.0 -0.1 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. MPO 2 Apr 18