Iran Economic Monitor Towards Reintegration Fall 2016 Global Practice for Macroeconomics & Fiscal Management Middle East and North Africa Region Iran Economic Monitor TOWARDS REINTEGRATION Fall 2016 Cover photo courtesy of Leonid Andronov | Shutterstock.com TABLE OF CONTENTS Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Chapter 1  Recent Economic and Policy Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Output and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Labor and Unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Public Finances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Monetary Policy and the Financial Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 External Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Chapter 2  Outlook and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Special Focus 1 Constructing and Understanding Poverty Trends in Iran . . . . . . . . . . . . . . . . . 17 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Stylized Facts on Poverty, Inequality, and Shared Prosperity in Iran for 2008–2014 . . . . . . . . . . . . . . . . . . . . . 18 Explaining Welfare Changes in 2008–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 Special Focus 2 Ambient Air Pollution in Iran . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 Urban ambient air pollution in Iran is severe and getting worse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 Decoupling of Air Pollution from Economic and Population Growth in Iran . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Health Effects from Air Pollution in Iran . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 Economic Cost of Ambient Air Pollution in Iran . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 List of Figures Figure 1:  GDP Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 2: Labor Market Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Figure 2.1: Labor Force Participation Rate by Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Figure 2.2: Unemployment Rate by Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Figure 3:  Central Government Expenditures, Revenues and Budget Balance, 2012–15 . . . . . . . . . . . 5 Figure 4:  Beneficiaries and Cost of Cash Transfer Subsidy Program 2011–15 . . . . . . . . . . . . . . . . . . . 6 Figure 5: Inflation (percent, Yoy) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 6: Inflation Subcomponents (percent, Yoy) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 iii Figure 7: Lending Rates and Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Figure 8:  The IranianRial/US$: Parallel and Official Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 9: Tehran Stock Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 10: The Current Account Surplus Has Declined in Recent Years . . . . . . . . . . . . . . . . . . . . . . . 10 Figure 3.1: Contributions of Key Variables to the CA Balance (as a Percent of GDP) . . . . . . . . . . . . . . 11 Figure 3.2: Change in Contributions to the CA Balance in Different Periods (as a Percent of GDP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Figure 11: Growth Under Two Different Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Figure 12: Average Annualized GDP Per Capita Growth Rates During 2008–2014 and GDP Per Capita in 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Figure 13: Annualized GDP Per Capita Growth Rates in Iran and Selected Comparators, 2008–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 Figure 14: Poverty Rate ($5.50 2011 PPP Line) and Gini Coefficient in Iran, 2008–2012 . . . . . . . . . . .19 Figure 15: CDF of Welfare Aggregate and Different Daily Poverty Lines in 2011 PPPs, % . . . . . . . . . . 19 Figure 16: Headcount Poverty Rates at $5.50 2011 PPP by Residence, 2008–2014 . . . . . . . . . . . . . . 20 Figure 17: Poverty Rates at $5.50 2011 PPP Poverty Line by Regions in 2014 . . . . . . . . . . . . . . . . . . . 20 Figure 18: Annualized Expenditure Per Capita Growth Rates for the Bottom 40 Percent and total Population in 2009–2012 and 2012–2014, % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 Figure 19: Poverty Rates in Iran and Selected Comparators at $5.50 2011 PPP daily Poverty Line Circa 2012, % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Figure 20: The Gini Coefficient in Iran and Selected Comparators Circa 2012 . . . . . . . . . . . . . . . . . . . 21 Figure 21: GDP Growth Rates and Poverty Rates in Iran, 2008–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . .22 Figure 22: Sources of Income Poverty Changes, 2009–2012, Percentage Points . . . . . . . . . . . . . . . . . 22 Figure 23: Sources of Income Poverty Changes, 2012–2014, Percentage Points . . . . . . . . . . . . . . . . . 23 Figure 24: Sources of Income Inequality Changes Measured by Gini, 2009–2012 . . . . . . . . . . . . . . . .23 Figure 25: Sources of Income Inequality Changes Measured by Gini, 2012–2014 . . . . . . . . . . . . . . . .23 Figure 26: PM2.5 Concentration Levels (Annual Mean of µg/m3) of the Forty Most Polluted Cities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Figure 27: PM2.5 Concentration Levels of Selected Iranian Cities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 Figure 28: PM10 Concentration Levels (Annual Mean of µg/m3) of of Global Megacities . . . . . . . . . . 27 Figure 29: Days in the Year 2014 by Air Quality Classification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Figure 30: Annual Changes of PM2.5 Concentration, from 1990 to 2013 . . . . . . . . . . . . . . . . . . . . . . . .29 Figure 31: Decoupling of Economic Growth from Air Pollution in Iran . . . . . . . . . . . . . . . . . . . . . . . . . . .29 Figure 32: Decoupling of Economic Growth from Air Pollution in Egypt, India, and China . . . . . . . . . .30 Figure 33: Health Impacts from Air Pollution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 List of Tables Table 1:  Islamic Republic of Iran: Selected Macroeconomic Indicators (2012–15) . . . . . . . . . . . . . . . 2 Table 1.1: Production and Export (in Thousands Units) and Share of Exports (%) . . . . . . . . . . . . . . . . . 3 Table 2: Global Growth Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 Table 3:  Iran: Selected Economic Indicators (2013–2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 List of Boxes Box 1: Iran’s Post Sanctions Automobile Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Box 2: Gender Paradox of Iranian Women’s Labor Force Participation Rate . . . . . . . . . . . . . . . . . . .5 Box 3: Determinants of Iran’s Current Account Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Box 4: Air Pollution is Reversible – Evidence from other Country Experiences . . . . . . . . . . . . . . . .31 iv IRAN ECONOMIC MONITOR: TOWARDS REINTEGRATION PREFACE T he Iran Economic Monitor provides an Special Focus on air pollution by Maria Sarraf (Lead update on key economic developments and Environment Specialist), Martin Heger (Economist) policies over the past six months. It examines and Jia Jun Lee (Consultant). Nahid Kalbasi Anaraki these economic developments and policies in (Consultant) and Milan Nedeljkovic (Consultant) also a longer-term and global context, and assesses contributed to the report, on the automotive sector in their implications for the outlook for the country. Iran and the determinants of Iran’s current account Its coverage ranges from the macro-economy to deficit, respectively. Muna Abeid Salim (Senior financial markets to indicators of human welfare Program Assistant) print-produced the report. and development. It is intended for a wide audience, The findings, interpretations, and conclusions including policy makers, business leaders, financial expressed in this Monitor are those of World Bank market participants, and the community of analysts staff and do not necessarily reflect the views of and professionals engaged in Iran. the Executive Board of The World Bank or the The Iran Economic Monitor is a product of the governments they represent. For information about World Bank’s Global Practice for Macroeconomics the World Bank and its activities in Iran, including & Fiscal Management team. It was prepared by Eric e-copies of this publication, please visit http://www. Le Borgne (Lead Economist), Kamer Karakurum- worldbank.org/en/country/iran Ozdemir (Senior Economist, Task Team Leader), To be included on the email distribution list Shahrzad Mobasher Fard (Economist), Fayavar of the Iran Economic Monitor series and related Hayati (Economist), Samer Matta (Economic Analyst) publications, please contact Nada Abou Rizk and Majid Kazemi (Economist) under the general (nabourizk@worldbank.org). For questions and guidance of Auguste Tano Kouame (Global Practice comments on the content of this publication, please Manager). The Special Focus on poverty was prepared contact Kamer Karakurum-Ozdemir (kozdemir@ by Tara Viswanath (Lead Economist), Aziz Atamanov worldbank.org) or Eric Le Borgne (eleborgne@ (Economist), Djavad Salehi-Isfahani (Consultant) worldbank.org). Questions from the media can be and Mohammad-Hadi Mostafavi (Consultant). The addressed to Mona Ziade (mziade@worldbank.org). v EXECUTIVE SUMMARY T he economy-wide positive impact of the increase in energy sector activity thanks to the JCPOA since January 2016 is proving to removal of sanctions; (ii) increased inflows of foreign be slower than expected. Iran’s economy investment; and (iii) lower trade and financing costs moderated to an estimated annual growth rate of 0.6 that will help the non-oil sector contribute significantly percent in 2015 ahead of the implementation of the to overall growth and job creation. The expected pick- Joint Comprehensive Plan of Action (JCPOA). Early up in economic activity is likely to translate into better signs of increased economic activity in 2016 suggest fiscal and external balances despite lower oil prices. it is primarily based on the oil sector’s quick rebound. In line with the recent published data from the CBI, Inflationary pressures continued to abate, with the 2016 inflation is expected to be 8.6 percent, its lowest Consumer Price Index falling to an annual pace of 11.9 reading for a quarter of a century. percent in 2015 and further to 9 percent in September However, there are significant downside 2016. The pace of job creation has remained insufficient risks to Iran’s medium-term outlook. The primary to absorb new entrants to the labor force and risks are an extended delay in the reintegration of unemployment rate worsened, by 0.4pp to 11 percent the Iranian banking sector with the rest of the world in 2015. The fiscal deficit of the central government due to (1) continued uncertainty about practical widened marginally (by 0.4 pp) to 1.6 percent of GDP implementation of the JCPOA; and (2) overarching in 2015, with the rise in current expenditures being only snap-back risk and remaining non-nuclear related partially offset by the decline in capital expenditures sanctions, as well as the weaknesses in the banking and the rise in government revenues. The latter was sector’s ability to fund productive firms. The ability driven by increases in non-oil revenues. At the same of new investments to obtain adequate sources of time, Iran’s current account surplus is estimated to have financing will therefore remain challenging, both for shrunk from 3.8 percent of GDP in 2014 to 2.3 percent domestic and foreign investments, and especially for of GDP in 2015, as the decline in oil exports was only those in the non-oil sectors. Weaknesses in external partially offset by the fall in imports. demand conditions as well as a downward movement Following the removal of nuclear-related in oil prices also pose a risk to the baseline scenario. sanctions in January 2016, the growth rate is While the January 2016 lifting of the projected to average 4.5 percent in 2016–2018, nuclear-related sanctions is expected to reveal up from a 0.5 percent average in 2013–2015. This the dynamism of the Iranian economy, a large projected recovery which will rely on favorable external structural reform agenda remains key in moving factors, is expected to be driven by (i) a significant towards the ambitious growth target under the 6th vii five year development plan. Iranian authorities have sustained transformation of the economy towards adopted a comprehensive strategy encompassing a resilient, stable, productive, open, knowledge- market-based reforms as reflected in the government’s based and just economy. The plan envisages the 20-year vision document, but implementation suffered implementation of reforms of state-owned enterprises, from the intensified sanctions. Most recent impetus to the financial and banking sector, and a greater the structural reform agenda is engrained in the sixth emphasis on the allocation and management of oil five-year development plan covering the 2017–2021 revenues to productive investments among the main period, which is yet to be ratified by the Parliament. priorities of the government during the five-year period. The sixth plan aims for an annual growth rate of 8 The implementation of these reforms will be key in percent and a reform agenda built on a gradual but generating private sector led growth and creating jobs. viii IRAN ECONOMIC MONITOR: TOWARDS REINTEGRATION 1 RECENT ECONOMIC AND POLICY DEVELOPMENTS Output and Demand consumption. Against the 1 percent drop in investment and close to 9 percent reduction in Expected benefits from the implementation of the government consumption with falling oil revenues, JCPOA have not yet materialized with the exception exports growth was the main contributor to growth of the oil sector’s ability to increase production in 2015 (Table 1). Following an increase in daily oil and exports. This delay is primarily due to the global production from 3.1 mbpd in 2014 to 3.2 mbpd in 2015, banks’ concerns regarding residual risks related to the production neared pre-sanctions level and reached removal of sanctions. These risks take several forms: 3.63 mpbd in August 2016. Exports of oil increased (i) lack of clarity on the practical implementation of the at an even faster rate and increased from 1.34 mbpd JCPOA; (ii) concerns about possible triggering of the in 2014 to 1.43 mbpd in 2015 and reached 1.8 mbpd snap-back clause; and (iii) complications arising from in August 2016 but is yet to reach pre-sanctions level the existence of non-nuclear related sanctions. of daily exports volume. As a result, according to Preliminary Figures for Spring 2016 the preliminary Figures for 2016, oil production and suggest the Iranian economy has recovered from exports continued to drive a robust growth rate in the last year’s weak growth, albeit narrowly based first half of 2016, estimated at 3.1 percent based on on the oil sector’s quick rebound. Following the the data available from the Statistical Center of Iran. contraction in 2012–13 period, by 6.8 percent and Iran’s non-oil sector could help unlock 1.9 percent, respectively, and a bounce back in 2014 its growth potential and create jobs; the (Figure 1), Iran’s economy moderated to an estimated automotive sector is well positioned to be one annual growth rate of 0.6 percent in 2015 ahead of the of the frontrunners. The automobile industry in implementation of the Joint Comprehensive Plan of Iran accounts for 10 percent of its GDP; and with Action (JCPOA). Economic indicators are pointing to total annual sales of USD12 billion, it makes up for 14 early signs of economic rebound, with the first quarter percent of the industry value added and 4 percent of of 1395 (corresponding to April–Jun 2016) growth at its workforce.2 At the same time, Iran’s car production 1 5.4 percent. This strong performance was largely due to the pick-up in oil production and accompanying oil exports, with the oil sector constituting about 19 1 5.4 percent is the first quarter 1395 estimate by the Central percent of GDP in 2011–15. Bank of Iran while details of this growth performance is Oil production and exports recovered in not available at the time of finalizing this report. 2015 and in the first half of 2016, counteracting 2 http://www.howtoinvestiniran.com/iran-automotive- the pull effect from investment and government industry-is-the-second-biggest-sector-in-country 1 FIGURE 1 • GDP Growth 12% 10% 8% 6% 4% Y/Y Chg. 2% 0% –2% –4% –6% –8% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 GDP Growth Non-oil GDP Growth Source: Iranian authorities. and World Bank staff calculations. Note: Iranian calendar years, running from March 21st to March 20th of the following year. accounts for 1.2 percent of the world’s production.3 in output during 2012–2014, accompanied by a Iran’s highly state-dominated automobile industry substantial fall in exports share from 6.7 percent in 2012 has suffered substantially from the adverse effects of to 2.5 percent in 2015, reflects the quandary of the car international sanctions since 2007. The sharp decline industry in Iran and is illustrative of the challenges the productive sectors face in the post-sanctions period. Yet, the vibrant sector is well poised to benefit from the Islamic Republic of Iran: Selected TABLE 1  •   removal of sanctions and for becoming internationally Macroeconomic Indicators (2012–15) competitive. Box 1 describes Iran’s post-sanctions 2012 2013 2014 2015E automobile industry and challenges associated Real GDP growth, at factor cost –6.8 –1.9 3.0 0.6 with bringing the sector back to its pre-sanctions performance and beyond. Agriculture 3.7 4.7 3.8 3.0 A number of agreements have been Industry* –18.3 –4.7 4.9 4.2 signed between Iran and international partners, Services 1.1 –1.5 2.4 –2.0 pointing to a positive outlook and increased Real GDP growth, at market prices –6.6 –1.9 4.3 1.7 future economic activity, particularly through Private Consumption –1.7 1.0 3.1 3.9 new FDI. There are three recent agreements towards attracting new foreign investments. First, a Government Consumption –7.2 1.6 2.7 –8.9 Memorandum of Understanding (MoU) has been Gross Fixed Capital Investment –23.8 –6.9 3.5 –1.0 signed by Sam Woo Engineering and Construction Exports, Goods and Services –20.5 0.0 12.0 6.3 (E&C), a South Korean conglomerate, to build a new Imports, Goods and Services –23.1 –18.7 –5.7 –5.6 refinery at the Zilaee economic zone in Khuzestan Prices province, which could potentially be worth USD 5.5 billion. The project intends to raise Iran’s refining Inflation (Consumer Price Index) 30.5 34.7 15.6 11.9 capacity for both crude and condensates from the Current Account Balance 4.0 5.7 3.8 2.3 (% of GDP) Fiscal Balance (% of GDP) –0.6 –0.9 –1.2 –1.6 Sources: Government data and World Bank staff calculations. 3 http://www.iberglobal.com/files/2016/iran_automotive. *Industry includes the oil and gas sector. pdf 2 IRAN ECONOMIC MONITOR: TOWARDS REINTEGRATION BOX 1  •  Iran’s Post Sanctions Automobile Industry The total domestic automobile production in Iran is dominated by two major producers; Iran Khodro (IKCO) and SAIPA, which account for more than 90 percent of the total domestic production. These two firms are subsidiaries of the state-owned Industrial Development and Renovation Organization. Both companies assemble European and Asian cars under the license, as well as their own brands. IKCO and SAIPA account for 44 percent and 43 percent of market share, respectively. Traditional export destinations for Iranian automobiles include Algeria, Azerbaijan, Cameroon, Ghana, Egypt, Iraq, Pakistan, Senegal, Syria, Sudan and Venezuela. Iran’s automobile industry has suffered substantially from the adverse effects of international sanctions since 2007; production in the industry fell by approximately 50 percent from USD 1.4 million in 2011 to USD 0.7 million in 2012.a The sharp decline in output accompanied by a substantial fall in exports share from 6.7 percent in 2012 to 2.5 percent in 2015, demonstrates the challenge faced by the car industry in Iran. TABLE 1.1 • Production and Export (in thousands units) and Share of Exports (%) 2007 2008 2009 2010 2011 2012 2013 2014 2015 Production 948 1058 1188 1351 1417 786 583,7 867,2 976.8 Exports 52.8 51.6 47.5 81,5 38,2 52,9 10 28 24.7 Export share (%) 5.6 4.9 4 6 2.7 6.7 1.7 3.1 2.5 Sources: http://donya-e-eqtesad.com/news/889508, and http://bruegel.org/wp-content/uploads/2016/06/Mohsen-Pakparvar-Iran-Automotive-Industry-Bruegel-Presentation.pdf. With the intensified sanctions on Iran’s economy since June 2013, the global ranking of the automobile industry in Iran fell from 17th in 2008 to 21st in 2015; however, Iran’s auto industry still produces more cars than countries such as Italy, Austria, Australia, and the Netherlands due to its large capacity. Iran’s auto industry ranked 13th in world sales of passenger cars in 2015. The massive currency depreciation in 2012–2013 adversely affected the competitiveness of the car industry because most intermediate inputs and technology are imported from abroad. The replacement of Chinese manufacturers for the western partners such as Peugeot and Renault under the sanctions could not reverse the sharp decline in the production. As a result, domestic production fell from 1.4 million in 2011 to 0.78 million in 2012, dropping below 1 million units for the first time in 2007. After the initial shock in 2012–13, the sector bounced back rapidly, with its 2014–15 growth at five times that of the industry average, explained partly by the reforms introduced in the sector. Currently, the industry substantially contributes to government’s revenues; almost 25 percent of the sales revenue of the industry is allocated to government-sponsored enterprises and organizations, mostly in the form of tax revenue. Against this background, with the lifting of sanctions in January 2016 and the opening up the markets to foreign investors, it is expected that car production and imports will rebound gradually and reach 1.6 million in 2016, leading to increased employment in the sector. The considerable layoff of 30–50 percent that had started in 2013 as a result of sanctions is expected to reverse with the lifting of sanctions. In fact, almost a week after the agreement with P5+1, PSA (French car manufacturer) signed a EUR 400 million (50:50) joint venture with IKCO, which allows Iran to produce 100,000 vehicles per year in 2017, and is expected to double within a year, while for Peugeot it could mean more than 450,000 vehicles.b Furthermore, Renault-Nissan is expected to restart its operations in the country and Fiat Chrysler Automobiles’ (FCA) Fiat division will set up a joint venture with IKCO. Currently, major producers in Iran suffer from lack of liquidity and need financing to expand and update their facilities. In response to this problem, measures have been taken to ease access of producers to trade finance through domestic commercial banks and the capital market. Access to international bank loans after the removal of sanctions will likely give a major boost to the industry too. In March 2016, President Rouhani announced plans to privatize the car industry and encourage joint ventures in order to make the Iranian automotive industry more technologically-advanced and internationally competitive. More importantly, Iran aims to remove government protection for domestic car producers. In addition, addressing complicated regulations, and fragmented supply networks would help attract foreign investment to the industry. a http://www.iberglobal.com/files/2016/iran_automotive.pdf b http://www.bloomberg.com/news/articles/2013-11-24/peugeot-likely-to-benefit-most-of-peers-from-iran-accord current level of 1.85 mbpd to 3.2 mbpd by 2020. that it would invest USD 500 million to develop Second, the Iranian-Guinean Société de bauxites the strategically significant Chabahar Port, which de Dabola–Tougué (SBDT) signed an agreement to represents an important transit route to Afghanistan begin the construction of a bauxite mine in Iran by and to Central Asia for Indian goods and which would end 2016. Third, the Government of India announced avoid the land route through Pakistan. In addition, Recent economic and policy developments 3 a potentially USD 50 billion agreement to purchase FIGURE 2 • Labor Market Conditions 200 aircrafts from Boeing and Airbus has also been signed. Both companies announced that they received 40 14 the first licenses from the U.S. Treasury’s Office 38 of Foreign Assets Control.4 Moreover, the revised 13 terms of the new Iran Petroleum Contract (IPC) were 36 12 approved by Iran’s Resilient Economy Headquarters 34 in mid-July, which will help attract investments from 11 International Oil Companies (IOCs) to Iran. The new 32 contract replaces the existing “buy-back” model, 30 10 2010 2011 2012 2013 2014 2015 whereby the contractor funded the development of the project for an agreed amount of production share Labor Force Participation Rate* Unemployment Rate* (rhs) and for an agreed period of time—of five years in Source: Iranian authorities. many instances—and transferred the operation of the Note: *Population10 years of age and over. fields to the government at the end of the contract. In contrast, the new IPC is structured as a joint venture, giving IOCs up to 49 percent of oil output and with The rise in unemployment was partly a term of up to 25 years. In addition, the Foreign driven by the increase in labor force participation Investment Board, the official body responsible for rate, which reached 38.2 percent in 2015 (up making decisionss on FDI applications under the from 37.2 percent in 2014). This average participation Foreign Investment Promotion and Protection Act rate masks sharp gender differences with men’s (FIPPA), approved about USD 7 billion in investments participation rate at 63.2 percent, in comparison with 7 between March 2015 and March 2016 and more than women’s participation rate of 13.2 percent. The pace USD 2 billion in investments between March 2016 and of job creation, which was estimated at 667,800 jobs September 2016.5 in 2014, remains well below the government’s annual target of 955,000. A stronger pace of economic growth, supported in part by FDI, will be critical to Labor and Unemployment achieve such a target if the relatively prudent fiscal and monetary policies are to be maintained. Iran’s unemployment rate rose in 2015, with the pace of job creation remaining insufficient to absorb new entrants to the labor market Public Finances (Figure 2). The unemployment rate slightly deteriorated from 10.6 percent in 2014 to 11.0 The central government fiscal deficit is percent in 2015, marked by stark gender differences estimated to have deteriorated in 2015, with the (19.4 percent for women vs. 9.3 percent for men). rise in revenue being more than offset by the Significant differences are also evident along the age dimension, with the youth particularly affected (with 4 https://www.bloomberg.com/news/ the unemployment rate at 26.1 percent for the 15–24 6 articles/2016-09-21/urgent-airbus-says-us-grants- age group). The high incidence of underemployment license-for-planes-in-iran-deal, Sep [11], 2016. continued to prevail, with an estimated 9.8 percent 5 Information provided by OIETAI in November 2016. of workers being underemployed (10.8 percent for 6 The Statistical Center of Iran defines underemployment men and 4.5 percent for women) in 2015, up from as the situation in which labor market participants are 9.6 percent in 2014 (10.5 percent for men and 4.2 involuntarily performing less than 44 hours of work percent for women). Underemployment, estimated at during the reference week. 2.1 million in 2015, is largely concentrated among the 7 The labor force in Iran is the population 10 years of age youth population and in rural areas. or above. 4 IRAN ECONOMIC MONITOR: TOWARDS REINTEGRATION BOX 2  •  Gender Paradox of Iranian Women’s Labor Force Participation Rate Iran constitutes a prime example for the “MENA gender paradox”, a term coined by the World Bank, which refers to the puzzle of the female labor force participation rate remaining very low in spite of the significant decline in fertility. Indeed, while Iran’s fertility rate has fallen sharply and the average number of years of schooling for women has expanded by 40 percent in only one generation, the female labor force participation rate remains at a quarter of the male labor force participation rate (Figure 2.1). This comes in spite of the emergence of labor saving home appliances, which are known to have been widely adopted in Iran. The relatively high return to women providing child care and child education appears to be the most plausible reason for this outcome.   FIGURE 2.1 • Labor Force Participation Rate by Unemployment Rate by FIGURE 2.2 •  Gender Gender 70 25 60 20 50 40 15 % % 30 10 20 5 10 0 0 2005 2007 2008 2009 2010 2013 2014 2015 2005 2007 2008 2009 2010 2013 2014 2015 Total Male Female Total Male Female Source: ILO. Source: ILO. This has triggered a public debate in Iran about whether or not public spending on women’s education bears positive economic returns. A study by Salehi and Taghvatalab (2016) finds compelling evidence of positive economic returns.a The study finds that, while women’s education has no effect in the time use of their husbands, more educated women have a higher propensity to stay longer in the labor market as well as spending more time on child care and child education, than their less educated counterparts. This is complemented by the finding that domestic work declines by the level of education of women. As such, the evidence indicates strong positive returns for society. A stronger pace of job creation could also support a rise in the female labor force participation rate. The female unemployment rate is twice as high as their male counterpart (Figure 2.2). A steadier pace of job creation could effectively induce a higher female participation rate as women who have given up their employment search efforts and have become inactive re-enter the labor force. a Salehi and Taghvatalab (2016). “Education and the time allocation of Iranian women” http://www.iraneconomics.org concomitant increase in expenditures. The fiscal FIGURE 3 • Central Government Expenditures, deficit is estimated at 1.6 percent of GDP in 2015, up Revenues and Budget Balance, 2012–15 from a deficit of 1.2 percent of GDP in 2014 (Figure 3). Government revenue is estimated to have risen to 15.3 20 percent of GDP in 2015, up from 14.6 percent of GDP 15 10 in 2014, in line with the continued rise in tax revenues Percent of GDP (%) 5 and in the disposal of non-financial assets, while oil 0 revenues remained stagnant at 5.7 percent of GDP, –5 with the rise in export volume being offset by the oil –10 price decline. Direct taxes rose from 3.3 percent of GDP –15 in 2014 to 3.6 percent of GDP in 2015, while indirect –20 2012 2013 2014 2015 taxes fell slightly from 3.2 percent of GDP in 2014 to 3.1 percent of GDP. The latter was attributable to the Capital Expenditures Current Expenditures Other Revenues Oil Revenues Tax Revenues Budget Balance fall in import duties driven by the fall in imports, which was partially compensated by the VAT rate increase Source: Iranian authorities and World Bank estimates. Recent economic and policy developments 5 from 8 percent to 9 percent in March 2015. Meanwhile, issuance of bonds is needed. Money markets government expenditure is estimated to have expanded financed 89.2 percent of the overall financing needs from 15.8 percent of GDP in 2014 to 16.9 percent of of the economy in 2015, while the bond market and GDP in 2015, led by the rise in current expenditures. the stock market only financed 3.2 percent and 8 Transfers through the Cash Subsidy Program declined 7.6 percent of total financing needs, respectively. from 3.8 percent of GDP in 2014 to an estimated Developing Iran’s bond market remains a priority 3.5 percent of GDP in 2015, due to exclusion of high- as it would significantly help support private sector income households and the elimination of the earlier development. indexation of cash transfers to inflation (Figure 4). Amendments to the budget law, drafted in The 2016 Budget was ratified by the September 2016, aim to address the structural Iranian Parliament in April 2016. The underlying problems in the banking system as well as the assumptions of the 2016 Budget are that sanctions legacy of the sanctions in the aftermath of the on Iran will be lifted, oil exports will rise from 1.4 implementation of the JCPOA. The banking sector mbpd at end-2015 to 2.25 mbpd in 2016, and that oil has been constrained by high NPL ratios, outstanding exports will be at an average of USD 40 per barrel in government debt and low capital adequacy. These 2016. President Rouhani reiterated the government’s challenges have been aggravated by the continued interest to reduce its reliance on oil revenues ahead of lack of integration with the global banking system, the structural decline in oil prices. a major impediment to foreign investment. In order The budget deficit widened in the first half to improve the efficiency of the banking system, the of 2016. The revenues increased to 589.6 trillion Rials government has undertaken a series of initiatives in the first six months of the year from 464.8 trillion through the CBI and MoEF. Rials in the same period of last year, while expenditures grew by close to Rials 200 trillion during this period. As a result, the operating balance of the government Monetary Policy and the Financial increased by 17 percent in the first six months Sector compared to the same period of 2015. Inflationary pressures on the economy continued The government’s financing needs to abate within the context of curbing inflationary continue to be met by banks and a more market- expectations, a less accommodative monetary oriented structure of financing through the policy stance and the lifting of sanctions. After 5 years of double digit inflation, policy makers successfully FIGURE 4 •  Beneficiaries and Cost of Cash Transfer reigned in price growth in 2016 to single digits, reaching Subsidy Program 2011–15 a low of at 7.3 percent in March 2016, half the rate it was one year ago, driven by a stable exchange rate and 78 7% favorable food prices. Since then, inflation has moved 77 6% up to 9.5 percent in September 2016. 76 Half the decline in headline inflation was 5% 75 4% driven by falling food inflation, which fell from 21 74 73 3% percent in June 2015 to 9 percent in September 72 2% 2016. The slowdown in food inflation was a result of 71 the unwinding in fruit prices that soared to 50 percent 70 1% year on year growth in mid 2015, before falling to 69 0% 2011 2012 2013 2014 2015 negative 20 percent in March 2016 and picking up Number of beneficiaries of the Amount disbursed through the again to reach 7 percent in September 2016. Cash Subsidy program Cash Transfer Subsidy program (millions of individuals) (LHS) as a share of GDP (RHS) Source: Iranian authorities. 8 Statement by the Governor of the CBI. 6 IRAN ECONOMIC MONITOR: TOWARDS REINTEGRATION FIGURE 5 • Inflation (percent, Yoy) prices for producers, manufacturing prices recorded a negative growth of around 1 percent in year-on-year 60 6 terms through January-August 2016 with declines in 50 5 the producer prices of textiles, chemicals and metals. 40 4 September saw the first increase in manufacturing 30 3 producer inflation with growth of 1 percent. An 20 2 important exception to the rapidly declining inflation 10 1 rate was services, particularly health and education, 0 0 for both producers and consumers. Education prices –10 –1 for consumers grew by 22 percent year on year in Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 September 2016, twice the rate from a year ago. The cost of health services continued to grow at a high CPI Inflation (monthly) (RHS) CPI Inflation rate of 18 percent, but this is still a significant easing Food and Beverages Inflation PPI Inflation from above 30 percent a year ago. Notwithstanding this improvement, the Central Bank of Iran (CBI) remains wary of easing its monetary policy. The CBI’s lending rates Consumer prices were subdued largely remained almost unchanged following the maximum because producer price inflation fell to 2 percent deposit rate cut from 20 percent to 18 percent in in June 2016—the lowest growth rate since the February 2015 (Figure 7). This induced the Money series began 14 years ago. In addition to food and Credit Council (MCC)—which is composed of FIGURE 6 • Inflation Subcomponents (percent, Yoy) Education Health Tobacco Miscellaneous Goods and Services Restaurants and Hotels Housing, Water, Electricity, Gas Recreation and Culture Clothing and Footwear Communication Food and Beverages Transport Furnishing, Household Equipment and Routine Household Maintenance CPI –15 –10 –5 0 5 10 15 20 25 percentage point change in the previous 12 months Sept 2016 Source: Central Bank of Iran and WB staff. Recent economic and policy developments 7 FIGURE 7 • Lending Rates and Inflation 25 50 45 20 40 35 15 30 Percent (%) 25 10 20 15 5 10 5 0 0 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Average Lending Rate for Loans with Maturity Below 2 Years (RHS) Inflation rate Average Lending Rate for Loans with Maturity Above 2 Years (RHS) Source: Iranian authorities. representatives from the CBI, the Ministry of Economy and effectively channeling savings to productive and Finance, and the Chamber of Commerce, among investment. Two new bills on the Central Bank and others—to exert pressure on the commercial banks to commercial banking have been drafted and are ease their lending rates in line with the reduction in expected to be submitted shortly to the Parliament inflation. In June, the heads of several private banks to enhance CBI’s mandate and strengthen banking decided to reduce their rates on one-year deposits to sector governance and supervision.9 15 percent, down from 18. Due to more active role of The official exchange rate continued the CBI, partially through its communication policy, the to depreciate through 2016 but at a much interbank market interest rate has fallen sharply over slower rate than in previous years, likely due the past year from a peak of 27.3 percent in Q2 2015 to a pick-up in demand for Iran’s exports. As of to 17.9 percent in Q2 2016. The reduction in deposit October 2016, the Rial was 6 percent weaker against and interbank rates should spur businesses to move the USD and this is likely to flow through to higher their savings to increased production, however real producer and consumer prices. A heavier reliance rates have remained high since mid-2014. on imports is expected following the JCPOA. The On the structural side, the government greater sentiment in the local currency has led to a has taken a number of steps to improve the closing of the gap between the official and parallel performance of the financial sector. To support the mobilization of national savings in anticipation of the lifting of sanctions, the government conducted 9 On June 2016, the Financial Action Task Force welcomed a financial health review of the banking system. Iran’s adoption of, and high-level political commitment Furthermore, measures to reform this sector and to, an Action Plan to address its AML/CFT deficiencies, enhance the supervisory role of the CBI, as well and its decision to seek technical assistance in the implementation of the Plan. The FATF, therefore, has as measures to address the linkages between suspended counter-measures in order to monitor Iran’s government arrears, NPLs and public debt to banks progress in implementing the Plan. If Iran meets its are being taken. Directed lending is another constraint commitments under the Action Plan in the course of twelve to improving the health of the financial system months, the FATF will consider next steps in this regard. 8 IRAN ECONOMIC MONITOR: TOWARDS REINTEGRATION The IranianRial/US$: Parallel and FIGURE 8 •  has buffeted the sentiment for the local currency. The Official Exchange Rates CBI aims to unify the official and parallel exchange markets by March 2017and towards this goal, it 40,000 allows a greater number of transactions to take place 35,000 at the parallel market rate, including in the banking 30,000 25,000 system. This is likely to improve the predictability IRR/USD 20,000 of the foreign exchange rate for local traders and 15,000 international investors alike. However, the lack of 10,000 5,000 access to major correspondent banks and difficulties 0 in accessing foreign exchange reserves remain as 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 2016Q1 challenges towards reaching this goal. The Tehran Stock Exchange (TSE) Official Rate Parallel Rate index has generally been on an upward trend since January 2016 (Figure 9). As of September Source: Iranian authorities. 2016, the TSE index rose by 24 percent since the beginning of 2016. There was a correction in the exchange market rates, facilitating the government’s TSE index following skepticism over the effective plan to unify the two rates. In September 2016, the implementation of the JCPOA, much of the value of the Iranian Rial in the official market stood correction has since been recovered. The TSE also at 31,274 Iranian Rial per USD, while the value of the saw significantly more activity following the JCPOA, Iranian Rial in the parallel market stood at 35,571 with four times more shares traded per month on Iranian Rials per USD (Figure 8). The gap of roughly average in 2016 than the long-term average. This 14 percent between the official and parallel exchange has led to higher turnover velocity in the TSE and market rates represents a marked improvement coupled with rising stock market P/E ratio and falling relative to the spread of 187 percent observed in the deposit rates, the stock market is firming to become second quarter of 2012. These developments largely a more vibrant and investor friendly alternative for come as a result of the signing of the JCPOA, which savers and investors. FIGURE 9 • Tehran Stock Exchange 100,000 10 90,000 9 80,000 8 70,000 7 60,000 6 50,000 5 40,000 4 30,000 3 20,000 2 10,000 1 0 0 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Average number of shares traded daily Tehran Stock Exchange Index PE ratio (TSE) (RHS) Turnover velocity (TSE) (RHS) Source: Tehran stock exchange and WB staff.. Recent economic and policy developments 9 FIGURE 10 • The Current Account Surplus Has Declined in Recent Years 160 12 140 10 120 8 100 USD, billions 6 % of GDP 80 4 60 2 40 20 0 0 –2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Current Account Balance (RHS) Imports (LHS) Exports (LHS) Energy exports (LHS) Source: Iranian authorities. External Position Foreign reserves, including gold reserves, were estimated at USD 128.4 billion in 2015, Iran’s current account surplus continued to which was equivalent to 23 months of imports. decline. The surplus is estimated to have shrunk from The liquidity and currency composition of these 3.8 percent of GDP in 2014 to 2.3 percent of GDP in reserves have, however, been affected by the 2015, with the decline in oil exports being only partially difficulties in accessing the international payment offset by the fall in imports (Figure 10). Net exports system and making payments in convertible declined from 3.5 percent of GDP in 2014 to 1.9 currencies due to the intensification of international percent of GDP in 2015. The current account surplus sanctions in 2012. The high level of import coverage remains markedly lower than in the year preceding is a reflection of the still relatively low level of imports the imposition of sanctions (a surplus of 10.2 percent of goods and services. of GDP in 2011). This predominently reflects lower oil FDI is estimated to have remained receipts in 2015, only at half of the 2011 levels, due relatively unchanged in 2015 compared to the to both lower oil prices and lower volume of exports. previous year, with an uptick expected starting According to government sources, oil exports edged in 2016. The extent to which these would materialize up to 2.1 mbpd and 2.2 mbpd in April and May 2016. depend on how quickly residual country risk can be Structurally, Iran’s current account mitigated and financing channels become operational balance is primarily driven by oil production and availability of greater clarity on the regulatory and oil prices, although it is less volatile than its environment. FDI is estimated at USD 1.7 billion peers. Over the past 20 years, Iran’s current account in 2015, significantly lower than the USD 4.5 billion (CA) was primarily in surplus10 and volatile. Despite recorded in 2012. Iran’s high dependence on oil exports, its CA is less volatile than its MENA peers.11 This suggests that factors other than oil exports may have a stronger 10 The exceptions are 1998 and 2003–04. influence on the current account dynamics compared 11 The standard deviation of the current account balance to the standard oil exporting country. Box 3 presents over 1994–2015 is the lowest among MENA oil exporters, the results of an an analysis of the long-term structural and almost three times smaller than the MENA average determinants of Iran’s current account balance. (3.47 versus 9.70). 10 IRAN ECONOMIC MONITOR: TOWARDS REINTEGRATION BOX 3  •  Determinants of Iran’s Current Account Balance (CAB) To identify the contribution of additional drivers, a model is used that explains the CA as a function of national saving and investments as well as trade competitiveness related factors.a The parameters are estimated using ‘model-averaging’ methodology, which addresses the frequently overlooked problem of uncertainty with respect to the true model that best describes the determination of the current account balance. The estimated model performs well on average—the difference between the three year averages of the CAB predicted by the model and the observed CA is small throughout the period (Figure 3.1). The model also fits well the most recent CA deterioration. The key drivers of the CA balance are shown in Figure 3.1 and are summarized below: 1. As expected, oil production has the largest absolute contribution. However, aside from oil production growth over 2003–05, the relative changes in its contribution across the three-year period before economic sanctions are small; at around 0.15 percent of GDP (Figure 3.1). Economic sanctions resulted in a significant drop in oil production, which had a strong negative effect on the CA over 2012–14. 2. The volatility of oil prices significantly contributed to the volatility of the CAB. Rising oil prices led to a surplus in the CA by more than 1.5 percent of GDP in the mid-2000s and again over 2010–12. The 2015 fall in oil prices had the largest negative impact (–3 percent of GDP) on the decline in the CAB over 2013–15. 3. A relatively persistent real effective exchange rate (REER) appreciation over the second half of 1990s and 2000s (with the exception of 1999 and 2003) had a negative impact on the CA. The most recent depreciation of the nominal and real exchange rate in contrast had a positive impact on the CAB that partially compensated the fall in oil exports over 2012–14. 4. The reduction in both current and capital expenditure of the government after 2008 contributed to the CA surplus and the impact is stronger in case of the current expenditure. Looking ahead, the volatility of the CA is expected to remain given the dependence of the economy on oil exports. In terms of the CA drivers, removal of economic sanctions should lead to a higher volume of oil production and oil exports; however the total effect of oil exports in the CA is conditional on the dynamics of oil prices. Assuming the average price of crude oil of 43 USD and 53.2 USD in 2016 and 2017 respectively, and expected increase in average oil production to 3.7 and 4.2 mbpd, the model estimates suggest improvements in the CA to around 3 percent of GDP and 4 percent of GDP, respectively. Strong fiscal and monetary policies and policies to ramp up FDI will be instrumental in improving the CAB. Lifting of sanctions and higher growth may open the room for future increase in the government expenditures whose contraction over the sanctions period counteracted the fall in oil exports in the CAB. In particular, an increase in capital expenditures would have a smaller negative impact on the CA and would not offset improvements in the CA driven by the oil sector. Recent nominal and real depreciation contributed positively to the CA. An expected increase in oil exports may alleviate the need for stronger nominal depreciation from the current account sustainability perspective. Inflation stabilization and a successful disinflation strategy should also reduce the pressures on the foreign exchange market. The limited positive impact of FDI inflows on the CAB implies that increased efforts are needed to promote foreign investment in Iran in sectors that contribute directly or indirectly to exports. This includes policies towards stimulating FDI inflows in tradable, export oriented sectors, including oil, as well as a better understanding of the linkages between FDI in upstream, non-tradable sectors, and the performance of exporting firms. Contributions of Key Variables to FIGURE 3.1 •    Change in Contributions to the CA FIGURE 3.2 •  the CA Balance (as a percent of Balance in Different Periods (as a GDP) percent of GDP) 15% 4% 10% 2% 5% 0% –2% 0% –4% –5% –6% –10% –8% 1998–00 2001–03 2004–06 2007–09 2010–12 2013–15 1995–97 1998–00 2001–03 2004–06 2007–09 2010–12 2013–15 actual CA predicted CA oil prod. current exp. REER change oil prod. current exp. REER change oil prices capital exp. oil prices capital exp. a The approach follows the Toolkit for the Analysis of Current Account Imbalances developed by the World Bank’s Trade and Competitiveness Global Practice. Outlook and risks 11 IRAN ECONOMIC MONITOR: TOWARDS REINTEGRATION 2 OUTLOOK AND RISKS O ur baseline forecast hinges on the Meanwhile, inflation is expected to ease following set of international economic into single digits in 2016 for the first time since assumptions. According to the World 1990. Consumer price inflation is forecast to register Bank’s Global Economic Prospects (2016), the global 8.6 percent in 2016, down from 34.7 percent in 2013, economy is projected to grow modestly at 2.4, 2.8 as a result of curbing inflationary expectations, fiscal and 3 percent in 2016, 2017 and 2018, respectively discipline, lower commodity prices and easing import (Table 2). In line with the Federal Reserve’s costs in the wake of partial lifting of the sanctions. monetary policy normalization, a gradual increase This might create room for the central bank to ease in international interest rates can be expected over its monetary policy by lowering interest rates with the the short to medium run, albeit at a slower pace than objective of reducing borrowing cost and boosting earlier expected, following the Brexit outcome. Oil growth. However, as reflected in the recently rising prices are projected to average USD 43, USD 53.2 monthly rates there are increasing pressures on the and USD 59.9 in 2016, 2017 and 2018, respectively.12 disinflationary trend and continued tight fiscal and Iran’s economy is expected to grow monetary policies will be important to keep inflation at an annual average rate of 4.5 percent in in check. 2016–18. Relative to the Spring 2016 issue of the The fiscal position is expected to improve Iran Economic Monitor (IEM), real GDP growth for for the first time since 2012. After an estimated 2016 is projected to be 0.1 pp higher at 4.3 percent, deficit of 1.6 percent of GDP in 2015, the fiscal reflecting a larger increase in oil and gas production balance is projected to improve by 1.2 pp of GDP in (Table 3). In particular, the oil and gas sector is 2016 as a result of an expected surge in the volume projected to grow by 14.5 percent in 2016 up from of oil exports, which will outweigh the projected drop 12.9 percent in the previous IEM. Over the medium in prices. In parallel, non-oil revenues are likely to term (2017–2018), investment is likely to play a much increase due to: (i) the recovery in economic activity, larger role in generating growth on the assumption (ii) continued expansion of coverage of value added that new investment deals that are currently being tax, and (iii) an estimated USD 3 billion windfall negotiated will materialize in 2017 and 2018, and in frozen assets.13 On the expenditure side, the financial linkages with the rest of the world will be projected rise in capital spending is expected to be restored. In particular, the 4.7 percent average growth projected for 2017 and 2018 is expected to be driven by a 7.9 percent average increase in total investment. 12 Information on the latest World Bank commodities With renewed confidence in the economy and a lower price forecast can be accessed at: http://pubdocs. inflationary environment, consumption is expected worldbank.org/en/764161469470731154/CMO-2016- to grow at an average of 3.5 percent over the 2016– July-forecasts.pdf. 2018 period. 13 See EIU (2016) “Iran Country Forecast: July 2016”, London. 13 TABLE 2 • Global Growth Rates 2013 2014 2015e 2016p 2017p 2018p World 2.4 2.6 2.4 2.4 2.8 3.0 High-income countries 1.2 1.7 1.6 1.5 1.9 1.9 Developing countries 5.3 4.9 4.3 4.3 4.9 5.1 Commodity exporting EMDEs* 3.2 2.1 0.2 0.4 2.4 3.0 Middle East and North Africa 2.0 2.9 2.6 2.9 3.5 3.6 Islamic Republic of Iran –1.9 3.0 0.6 4.3 4.8 4.5 Source: World Bank Global Economic Prospects (June 2016) and World Bank Iran team. e: expected; p: projected. * EMDEs stands for Emerging and Developing Economies. counterbalanced by a drop in current spending as oil prices do not pick up over the medium a result of the parliament’s decision in April 2016 to term. Achieving sustained growth rates of 4.5–5 remove cash subsidies (introduced in 2010) for high percent a year or closer to the government’s target income households. Notwithstanding the expected of 8 percent will critically depend on accelerating pick-up in capital spending in 2017 and 2018, the pace of structural reforms undertaken by current fiscal balance is projected to record surpluses administration, reintegration with the global economy of 0.5 and 1.1 percent of GDP in 2017 and 2018, in international trade and finance and reviving foreign respectively. This projected improvement over the investors’ activity in the country. Meanwhile, Iran’s medium term, assumes a higher efficiency in terms dependence on the energy sector leaves it highly of tax collection combined with a continued increase exposed to swings in gas and oil prices. In particular, in oil inflows, as well as implementation of fiscal any drop in international oil prices, due to increased measures that may be needed to manage the impact supply or a lower global growth, will exert downward of the ongoing securitization of government arrears pressure on the fiscal and current account balances and recapitalization of public banks. assuming that Iran’s oil receipts are continued The current account balance is projected to be pro-cyclical—as the budget receives a fixed to follow a monotonically increasing path percentage of oil proceeds. over the next three years. The current account balance in 2016–2018 is revised upwards, in line with the recent data published by the CBI showing Growth Under Two Different Scenarios FIGURE 11 •  that oil exports actually rose in 2015, despite falling oil prices. In particular, after decreasing from 6.3 6 percent of GDP in 2013 to an estimated 2.3 percent 5 of GDP in 2015, the current account surplus is expected to reach 2.6, 3.4 and 4.1 percent in 2016, 4 2017 and 2018, respectively. This improvement 3 reflects a projected increase in energy exports, 2 which is expected to fully offset the rise in imports 1 stemming from lower trade costs and increased 0 domestic consumption. Moreover, tourism inflows 2016 2017 2018 are expected to provide an additional boost. Baseline Delay in take-off Iran’s growth prospects may be at risk if investment inflows do not materialize and Source: WB staff calculations. 14 IRAN ECONOMIC MONITOR: TOWARDS REINTEGRATION Simulations of a scenario where long-term investment activity. While in the baseline investment activity falters as a result of failure scenario investments are projected to grow by an in restoring confidence suggests a significant average of over 7 percent, this rate will marginally reduction in growth in 2017–18 (Figure 11). be above 4 percent in a scenario where investor This downside scenario is illustrative of the impact confidence cannot be restored, and macroeconomic of a weak investment outturn that may either result policies falter. Potential investment activity will be from the delays in the reintegration of the Iranian greatly supported by reforms that will improve the banking sector with the global system or lack of investment climate including reforms in factor and sufficient progress in key structural reforms, which product markets and reducing state’s role in the would both hurt investors’ confidence and deter economy to create room for the private sector. Iran: Selected Economic Indicators (2013–2018)* TABLE 3 •  2013 2014 2015 2016 2017 2018 Act. Act. Est. Proj. Proj. Proj. Real sector (annual percentage change, unless otherwise specified) Real GDP at factor cost –1.9 3.0 0.6 4.3 4.8 4.5 Real GDP at factor cost (without Oil & Gas) –1.1 2.8 0.1 3.4 3.9 4.3 Real Oil & Gas GDP –8.9 4.8 4.6 14.5 13.1 5.9 Total oil production (million barrels/day) 3.5 3.1 3.2 3.7 4.2 4.4 Crude oil, average price (US$) 104.1 96.2 50.8 43.0 53.2 59.9 Money and prices (annual percentage change, unless otherwise specified) CPI Inflation (p.a) 34.7 15.6 11.9 8.6 10.4 9.1 Money and Quasi-Money 38.8 22.3 30.0 36.5 31.6 24.4 Investment & saving (percent of GDP, unless otherwise specified) Gross Capital Formation 32.1 33.4 32.4 31.5 32.1 32.7 Gross National Savings 32.8 37.2 34.7 34.0 35.6 36.8 Government finance (percent of GDP, unless otherwise specified) Total revenues 14.1 14.6 15.3 16.5 18.2 19.1 Tax Revenues 5.2 6.4 6.7 7.3 8.0 8.6 Direct Taxes 2.9 3.3 3.6 4.0 4.3 4.6 Indirect Taxes 2.3 3.2 3.1 3.3 3.7 4.0 Oil Revenues 6.5 5.7 5.7 6.1 6.7 7.0 Others disposal of non-financial assets 2.4 2.4 2.8 3.1 3.4 3.5 Total expenditures 15.0 15.8 16.9 16.9 17.6 18.0 Current 12.7 13.0 14.5 14.2 14.5 14.7 Acquisition of non-financial assets 2.3 2.7 2.4 2.8 3.2 3.3 Net lending/borrowing (overall balance) –0.9 –1.2 –1.6 –0.4 0.5 1.1 (continues to next page) Outlook and risks 15 Iran: Selected Economic Indicators (2013–2018)* (continued) TABLE 3 •  2013 2014 2015 2016 2017 2018 Act. Act. Est. Proj. Proj. Proj. External sector (percent of GDP, unless otherwise specified) Current Account 5.7 3.8 2.3 2.6 3.4 4.1 Net Exports 5.1 3.5 1.9 2.2 3.0 3.6 Export of Goods and Services 23.1 23.1 18.7 19.2 20.7 21.8 Export of Goods 21.0 20.8 16.2 16.5 17.9 18.8 Export of Services 2.1 2.3 2.5 2.7 2.9 3.0 Import of Goods and Services 18.0 19.6 16.8 17.0 17.8 18.2 Imports of Goods 14.3 15.6 13.2 13.3 13.9 14.2 Imports of Services 3.7 4.0 3.6 3.7 3.9 4.0 Net Income Receipts 0.5 0.2 0.2 0.3 0.4 0.4 Income Receipts 0.7 0.6 0.6 0.6 0.7 0.7 Income Payments 0.3 0.3 0.4 0.4 0.3 0.3 Net total current transfers 0.1 0.1 0.1 0.1 0.1 0.1 Total International Reserves (Billion US$) 117.6 126.2 128.4 134.3 147.2 166.1 as Months of Imports (number of months) 18.2 18.5 23.0 20.6 17.8 17.1 Total Gross External Debt Stock (US$ bln) 6.7 5.1 7.5 3.3 2.8 2.7 Total Gross External Debt Stock (% of GDP) 1.5 1.2 1.9 0.7 0.5 0.4 Memorandum Items: Nominal GDP (Billion IRR**) 9,421,215 11,033,666 11,771,532 12,842,483 15,204,880 17,607,859 Source: Government Data and World Bank Staff Calculation. * Fiscal year ends March 20. For example, 2015 corresponds to the fiscal year of 2015/2016. ** IRR: Iranian Rials 16 IRAN ECONOMIC MONITOR: TOWARDS REINTEGRATION SPECIAL FOCUS 1: CONSTRUCTING AND UNDERSTANDING POVERTY TRENDS IN IRAN14 Accurate, credible, and timely measurement of growth has been inclusive of the less well-off in poverty and inequality is important for many reasons: the population. Finally, different econometric and it helps to focus attention of policymakers on the poor statistical techniques are used to identify the drivers and vulnerable in their population; it also helps to behind changes in poverty and shared prosperity. benchmark and assess the impact of policies on the poorer segments of society and design interventions that are targeted towards improving their wellbeing. Introduction The Islamic Republic of Iran has a long and rich Iran entered a turbulent period after 2008 which tradition of conducting household budget surveys had adverse effects on its macroeconomic and making the data publicly available. This section performance. As shown in Figure 12, annualized examines poverty and inequality trends in Iran using these surveys, covering the period from 2008 to 2014. Poverty is measured using international poverty 14 This section is a product of the Global Poverty lines based on U.S. dollars at 2011 purchasing power Practice. It has been written by Aziz Atamanov, Mohammad-Hadi Mostafavi, Djavad Salehi-Isfahani, parity (PPP). In addition to measuring inequality, the and Tara Vishwanath. Measurement section draws note also examines “shared prosperity,” which is heavily on the World Bank policy research working essentially the consumption growth of the bottom 40 paper 7836 “Constructing robust poverty trends in percent and aimed at capturing whether economic the Islamic Republic of Iran: 2008–14”. 17 Average Annualized GDP Per Capita FIGURE 12 •  available “official” poverty estimates in Iran, estimates Growth Rates During 2008–2014 and of poverty trends exist in the academic literature. GDP Per Capita in 2014 These are calculated either based on authors’ own assessment of an appropriate national line or according 9 to international poverty lines based on U.S. dollars. annualized growth rate, 2008–2014 8 China 7 Examples of such estimates in English cover different 6 periods between 1984 and 2009 and are available in 5 Assadzadeh and Paul (2004), Salehi-Isfahani (2009), Upper middle income 4 Vietnam Mahmoudi (2011), Nili and Poursadeghi (2011) and 3 Saudi Araibia Maasoumi and Mahmoudi (2013). There is, however, Malaysia 2 Brasil little knowledge about trends in indicators of welfare 1 Iran Russia in Iran in the most recent past, in particular after the 0 0 10,000 20,000 30,000 40,000 50,000 second half of 2000s. The most recent international GDP per capita in 2014 (2011 PPP constant) poverty rates reported in the World Bank Development Source: WDI, May 2, 2016. Authors’ calculation. Indicators are available only for two years (2009 and Notes: Annualized growth rates are calculated using geometric mean. 2013) and mask significant volatility of poverty rates after 2008 due to the adverse economic conditions. GDP per capita growth was close to zero in Iran during Furthermore, the factors behind changes in poverty 2008–2014, which is lower than growth rates observed and inequality also need to be explored. among selected peers. Iran’s GDP per capita growth This section fills the existing knowledge rate varied substantially during this period (Figure 13): a gap by exploring poverty and inequality trends in period of economic growth in 2009–2011 was followed the Islamic Republic of Iran during 2008–2014. by sharp decline in 2012 and 2013 and positive Given the absence of an official poverty line, poverty is growth in 2014, reflecting the shocks the country was measured using international poverty lines expressed experiencing, including sanctions. in U.S. dollars at 2011 PPP. Using an international There is limited knowledge of the most line helps to avoid arbitrariness and sensitivity of recent trends in socio-economic wellbeing of the establishing a line in local currency units—a long population in Iran. Even though there are no publicly process which is usually led by national authorities and requires access to auxiliary data unavailable to us. Finally, using international poverty lines brings Annualized GDP Per Capita FIGURE 13 •  additional flexibility through the possibility of choosing Growth Rates in Iran and Selected Comparators, 2008–2014 different illustrative values for the line and testing the robustness of the constructed trends. 10 8 6 Stylized Facts on Poverty, Inequality, GDP per capita growh rates 4 and Shared Prosperity in Iran for 2 0 2008–201415 –2 –4 Poverty and inequality –6 –8 –10 Iran is one of very few countries in the Middle Brazil Chile Iran Russia Turkey Upper middle East and North Africa region (MENA) that collects income 2008 2009 2010 2011 2012 2013 2014 15 Detailed explanation of methodological choices made as well as all robustness tests are discussed in Atamanov et Source: WDI, May 2, 2016. Authors’ calculation. al. (2016). 18 IRAN ECONOMIC MONITOR: TOWARDS REINTEGRATION high quality household budget survey data on FIGURE 14 • Poverty Rate ($5.50 2011 PPP an annual basis. The Household Expenditure and Line) and Gini Coefficient in Iran, 2008–2012 Income Survey (HEIS) data collection started in 1963 in rural areas and in urban areas since 1968. The HEIS 0.370 11.5% 12% series is used to construct poverty estimates for this 10.3% 0.360 9.5% 10% section, covering seven years from 2008 to 2014.16 9.3% 0.358 Besides filling a knowledge gap, this particular time 0.350 7.8% 7.9% 8% 0.350 0.353 headcount rate 7.2% period is chosen to minimize the risk of comparability 0.340 6% Gini between surveys due to changes in instruments and 0.330 4% 0.327 0.320 0.325 0.325 process of data collection. 0.320 0.310 2% The poverty measurement methodology applied in this section follows a well-established 0.300 0% 2008 2009 2010 2011 2012 2013 2014 and widely accepted tradition. Measuring poverty poverty rate at 5.5 USD 2011 PPP line requires two broad steps. The first step is to define an Gini, expenditure based indicator to measure welfare or living standards. The Source: HEIS 2008–2014. Authors’ calculations. second step requires setting a poverty line—the minimum welfare level below which a person is considered to be poor. Standard procedures were followed in order to construct the components of the welfare aggregate as CDF of Welfare Aggregate and FIGURE 15 •  Different Daily Poverty Lines in 2011 well as price adjustments to ensure comparability within PPPs, % survey years and across them (Deaton and Zaidi 2012; Haughton and Khandker 2014). 1.0 Poverty lines in this section are expressed Cumulative Probability in U.S. dollars at 2011 PPP. The most widely used 0.8 international poverty line is $1.90 (Ferreira et al. 2015). 0.6 It was established by the World Bank as an average of 0.4 the national poverty lines of the 15 poorest developing 0.2 countries expressed in PPP terms to monitor global 0.0 extreme poverty (Chen and Ravallion 2010). Given 0 4 5 8 10 15 that the extreme poverty line is not relevant for Iran, Daily expenditure per capita in $ PPP several other lines with higher values are used in this 2008 2009 2012 2014 section for illustrative purposes. Three distinct trends in poverty and Source: HEIS 2008–2014. Authors’ calculations. inequality are observed during 2008–2014. Figure 14 shows estimated poverty rates at $5.50 2011 PPP daily poverty line (selected for illustrative Evidently, there is no overlap between CDFs between purpose) and the Gini coefficient for 2008–2014. There $4 and $10 2011 PPP indicating that all population are clearly three distinct periods: Increase in poverty in this range had higher expenditure per capita in and inequality during 2008–2009, a sharp fall in 2008 versus 2009, higher expenditure in 2012 versus poverty and inequality during 2009–2012, and gradual 2009, and lower expenditure in 2014 versus 2012.17 increase in poverty and inequality again after 2012. In other words, the precise choice of poverty line is Remarkably, these trends do not change unimportant and does not affect the trend for this with the choice of poverty line. This is clearly seen from constructed cumulative distribution functions in Figure 15 (CDF). The CDF, for any selected level of 16 Data points were downloaded in January 2016. expenditure per capita, gives the proportion of people 17 No crossing between CDFs indicates first-order stochastic who have expenditure per capita below that level. dominance. Special Focus 1: Constructing and Understanding Poverty Trends in IraN 19 Headcount Poverty Rates at $5.50 FIGURE 16 •  Poverty Rates at $5.50 2011 PPP FIGURE 17 •  2011 PPP by Residence, 2008–2014 Poverty Line by Regions* in 2014 25% 40 20% 22% 35 19% 20% 30 18% 15% headcount, % 15% 15% 25 13% 10% 20 5% 7% 15 6% 6% 6% 5% 5% 5% 10 0% 5 2008 2009 2010 2011 2012 2013 2014 0 Tehran metro Northwest Zagros Central Northeast Caspian Persian Gulf Southeast Rural Urban Source: Authors’ calculation using HEIS 2008–2014. Source: Authors’ calculation using HEIS 2008–2014. part of the distribution covering almost 60 percent Note: * Regions are defined as follows: metropolitan Tehran included only urban areas of the population in Iran. Hence trends in poverty are of Tehran and Alborz province since 2012. Northwest includes East Azarbaijan, West Azarbaijan, Zanjan, and Ardebil. Northeast includes Khorasan Razavi, Semnan, and unaffected by the choice of the poverty line. North and South Khorasan. Central includes Markazi, Fars, Isfahan, Tehran, Qom, Qazvin, and rural areas of Alborz. Southeast includes Kerman, Sistan, and Yazd. Persian National level numbers hide stark urban/ Gulf includes Khuzestan, Bushehr, and Hormozgan. Zagros includes Kermanshah, rural differences in poverty levels, with much Kurdestan, Hamadan, Bakhtiari, Lorestan, Ilam, and Kohkiloyeh. larger rural poverty headcount rates. Figure 16 shows poverty rates in urban and rural areas of Iran. exception—the southeast region suffers the On average, poverty in rural areas is three times higher highest poverty incidence. Figure 17 shows than poverty in urban areas. Over time, this gap slightly poverty headcount rates by regions in 2014. The narrowed between 2009 and 2012, but increased poverty rate in the southeast is noticeably higher than again in 2014. In spite of such a large disparity in in other regions, reaching 37 percent in 2014 using poverty rates, the distribution of the poor population the $5.50 2011 PPP poverty line. In contrast, in the between rural and urban areas is more equal due to Tehran metropolitan area, poverty is close to zero. the much larger population residing in urban areas. There is not much variation in poverty Shared prosperity rates in Iran across regions with one noticeable Iran managed to sustain positive growth in per FIGURE 18 • Annualized Expenditure Per Capita capita expenditure for the bottom 40 percent of Growth Rates for the Bottom 40 the population during 2009–2012 in spite of an Percent and Total Population in overall average negative growth rate. One of the 2009–2012 and 2012–2014, % ways to check whether benefits of economic growth are shared widely among the population, especially 4% 3.3% among the least well-off, is to calculate the shared 3% 2% prosperity indicator—a measure established by the 1% World Bank to monitor one of the twin goals. Shared 0% prosperity aims at increasing the real per capita –1% –0.4% –2% income or consumption of the bottom 40 percent of –3% –2.7% population. –3.1% –4% Figure 18 shows annualized expenditure 2009–2012 2012–2014 per capita growth rates of the bottom 40 percent annualized growth rates for b40 of the population versus growth rates for the annualized growth rates for total population total population. Consistent with sharply falling Source: HEIS 2008–2014. Authors’ calculations. poverty and inequality rates, the most vulnerable 20 IRAN ECONOMIC MONITOR: TOWARDS REINTEGRATION population from the bottom 40 percent experienced a Poverty Rates in Iran and Selected FIGURE 19 •  positive growth rate of 3.3 percent during 2009–2012. Comparators at $5.50 2011 PPP Daily Poverty Line Circa 2012, % This good outcome was achieved despite the fact that growth for the population overall was negative 60 during this period. However in the second period 53.4 50 (2012–2014), the bottom 40 percent were slightly 43.5 40 headcount, % worse off relative to the overall population, consistent 30 with increasing inequality over this period. 22.1 20 Individuals from the bottom 40 percent 9.5 13.0 13.6 8.8 8.9 10 of the distribution are more likely to work in 3.6 agriculture, in low-skilled occupations, and 0 Russia Chile Iran, group data Iran, microdata Turkey Malaysia Brazil Vietnam China live in rural areas. Unsurprisingly, comparing the characteristics of the population from the bottom 40 percent with the characteristics of the population from the top 60 percent reveals substantial differences. Source: HEIS 2008–2014 and PovcalNet as of October 6, 2015. Authors’ calculations. Note: Poverty for Iran is for 2014. Adults (15+) in the bottom 40 percent lag behind those in the top 60 percent in terms of education. For example, only 8 percent of the bottom 40 percent The Gini Coefficient in Iran and FIGURE 20 •  have at least a college degree compared to 25 Selected Comparators Circa 2012 percent among the top 60 percent in 2014. The share of illiterate people is also higher among the bottom 40 0.6 percent of population. Consistently with this finding, 0.49 0.50 0.53 0.5 individuals in the bottom 40 percent of the distribution 0.40 0.42 0.42 0.4 0.34 are more likely to live in rural areas, be employed in the 0.33 0.3 Gini agricultural sector, and have unskilled occupations. 0.2 0.1 How does Iran compare with its peers? 0.0 Iran (exp) Iran (inc) Turkey (exp) Russia (exp) Uruguay (inc) Mexico (inc) Chile (inc) Brazil (inc) The level of poverty in Iran is comparable to what is observed in countries with a similar level of economic development. Figure 19 shows poverty rates in Iran and selected peers circa 2012. While Source: HEIS 2008–2014 and PovcalNet as of October 6, 2015. Authors’ calculations. Note: The Gini index for Iran is for 2014. welfare aggregates among different countries are not strictly comparable, this comparison reveals that for the most recent years, Iran’s poverty rate is broadly what is observed in countries with similar level of within a range of poverty rates observed in countries economic development regardless of the type of with similar economic wellbeing: Turkey, Chile, and welfare aggregate used (income or consumption Malaysia (using an international poverty line of $5.50 per capita). Thus, the Gini index based on spatially 2011 PPP per day). Vietnam, Indonesia, and China adjusted income per capita is around 34 and not have much higher poverty rates, but also much lower spatially adjusted around 36,18 while in Turkey, which GDP per capita in 2011 PPP. has the second-lowest Gini among selected countries, The level of inequality is also quite low in it reaches 40 (Figure 20). Iran compared to its peers. Comparing the level of inequality across countries is usually full of caveats for many reasons including the use of “income” 18 Gini of 37.4 reported in WDI for 2013 is based on group by some countries and “consumption” by others. expenditure data and not spatially deflated welfare Keeping this in mind, inequality in Iran is lower than aggregate. It is still lower than what is observed in Turkey. Special Focus 1: Constructing and Understanding Poverty Trends in IraN 21 GDP Growth Rates and Poverty Rates FIGURE 21 •  2014 even with a positive economic growth. This in Iran, 2008–2014 indicates that negative growth in 2012 did not affect the bottom poor distribution during 2012, while the 8% 14% same population could not fully benefit from economic 6% 11.5% 12% 10.3% growth in 2014. In the previous section it was also 4% Poverty headcount, % 9.3% 9.5% 10% shown that the vulnerable population from the bottom GDP growth rate 2% 7.8% 7.9% 7.2% 8% 40 percent of the distribution seem to be insulated 0% 6% from the negative shock in 2009–2012, but could not –2% –4% 4% benefit from economic growth in 2012–2014. –6% 2% The apparent disconnect between –8% 0% economic growth and welfare changes can 2008 2009 2010 2011 2012 2013 2014 happen for many reasons. It may be related to the GDP growth rates (lhs) poverty, 5.5 USD 2011 PPP (rhs) lagged impact of economic growth or lack of a trickle- down effect. In addition, redistributive government Source: Authors’ calculation using HEIS 2008–2014. policies could play a protective role. A definite answer requires identifying and quantifying the sources Explaining Welfare Changes in of poverty changes during the period considered. 2008–2014 One way of doing this is to decompose changes in income poverty by income sources (Azevedo, Minh, Trends in poverty in Iran broadly follow observed and Sanfelice 2012). This will help to identify the key trends in macroeconomic performance during drivers underlying the increase or decline in income 2008–2014 with noticeable exceptions in 2012 poverty and inequality.19 Two periods are selected and 2014. Figure 21 combines real growth rates for the analysis: the first is 2009–2012 when there of GDP in Iran with poverty rates at the $5.50 2011 was a sharp poverty reduction, and the second is PPP poverty line. Fall in poverty during 2009–2011 is 2012–2014 when welfare indicators deteriorated. accompanied by positive economic growth, however Social benefits were the key contributors a negative shock in 2012–13 led to an increase in to the fall in poverty during 2009–2012, poverty only in 2013. Poverty continued to grow in counterbalancing the negative impact coming from the labor market. Figure 22 shows contributors FIGURE 22 •  Sources of Income Poverty Changes, to income poverty changes in 2009–2012. In total, 2009–2012, Percentage Points income poverty dropped by 11.4 percentage points. The key driving force behind this remarkable fall was social 6 assistance in the form of universal cash transfers the 3.8 government distributed to compensate for increasing pp change in poverty rate 2 1.4 1.2 1.0 –2 energy prices after subsidies reform.20 In particular, –1.7 –1.5 –6 the income poverty fell by 15.6 percentage points due –10 to cash transfers. Generous universal social benefits –11.4 –14 –15.6 19 One may also use Datt-Ravallion (1992) decomposition, –18 which splits the change in poverty into distribution- Share of adults Share of employed Employment income Social assistance Transfers Pension Other income Total change in poverty neutral growth and redistribution effects. According to it, decline in poverty between 2009 and 2012 was fully driven by redistribution, while growth effect contributed to higher poverty. During 2012 and 2014 both growth and redistribution effects were increasing poverty. Income poverty decomposition goes beyond this and has an Source: Authors’ calculation using HEIS 2008–2014. Note: The levels of income poverty are different from the level of poverty based on advantage of being able to quantify contributions of different expenditure per capita, nevertheless their trends are qualitatively similar. income sources to changes in poverty and inequality. 22 IRAN ECONOMIC MONITOR: TOWARDS REINTEGRATION Sources of Income Poverty Changes, FIGURE 23 •  FIGURE 24 • Sources of Income Inequality Changes 2012–2014, Percentage Points Measured by Gini, 2009–2012 6 5.0 0.02 pp change in poverty rate 4 0.00 pp change in Gini 2.15 –0.02 2 1.3 –0.04 0 –0.1 0.0 –0.2 –0.06 –2 –1.4 –0.08 –2.4 –4 –0.10 Share of adults Share of employed Employment income Social assistance Transfers Pension Other income Total change in poverty Share of adults Share of employed Employment income Social assistance Transfers Pension Other income Total change in Gini Source: Authors’ calculation using HEIS 2008–2014. Source: Authors’ calculation using HEIS 2008–2014. Note: The levels of income poverty are different from the level of poverty based on expenditure per capita, nevertheless their trends are qualitatively similar. FIGURE 25 • Sources of Income Inequality Changes Measured by Gini, 2012–2014 counterbalanced the negative impact of labor market deterioration where decrease in both employment 0.03 and employment income contributed to increase in 0.02 pp change in Gini poverty. It is worth noting that the labor market did 0.01 not positively contribute to poverty reduction, given positive economic growth in 2009–2011.21 0.00 The erosion of social benefits contributed –0.01 to the increase in poverty in 2012–2014 with –0.02 Share of adults Share of employed Employment income Social assistance Transfers Pension Other income Total change in Gini a counteracting impact from the labor market. Figure 23 shows the main contributors to poverty changes in 2012–2014. In contrast to 2009–2012, the role of benefits completely reversed. It seems that due to high inflation the real value of benefits diminished and that was the key factor behind increase in poverty. Source: Authors’ calculation using HEIS 2008–2014. Thus, the size of social assistance per capita dropped by 38 percent in real terms between 2012 and 2014. the bottom of the distribution was mostly benefiting At the same time, there was a positive contribution from the positive changes in the labor market. to poverty reduction coming from the labor market, Improving labor market conditions will be but it was not enough to offset the negative impact of key in having sustainable poverty reduction. Iran’s diminishing social assistance. performance in poverty and inequality reduction was Cash transfers were also the key factor remarkable until 2012. However, it was primarily driven behind the decline and increase in inequality. Figures 24 and 25 show that social assistance was the 20 This is consistent with early findings from Salehi-Isfahani, most equalizing source of income during 2009–2012 Stucki and Deutschmann (2015). reducing income per capita Gini, but being the most 21 If 2009–2011 period is chosen for decomposition, there un-equalizing source in 2012–2014. Employment is still lack of positive impact of the labor market on income started playing a significant equalizing role poverty indicating absence of trickling down impact from in 2012–2014, which may signal that population from economic growth on the poor. Special Focus 1: Constructing and Understanding Poverty Trends in IraN 23 by the universal cash transfer program, which was offers a more durable path to welfare improvement, launched to protect the population from the negative the very meager contribution of the labor market to impact of higher energy prices. While the program explaining poverty reduction in Iran is indicative of appears to have been very effective in mitigating the a strong need to improve labor market outcomes adverse impacts of the energy tariff reform, it cannot and access to productive job opportunities. Better be the panacea for sustaining poverty reduction and understanding of the constraints to job creation, boosting shared prosperity in the long-term. To the labor productivity, and private sector participation is extent that improvements in labor market outcomes needed and requires further research. REFERENCES Assadzadeh, A., and S. Paul, S. 2004. Poverty, growth, Ferreira, F., S. Chen, A. Dabalen, Y. Dikhanov, N. and redistribution: a study of Iran. Review of Hamadeh, D. Jolliffe, A. Narayan, E. Prydz, A. Development Economics. 8(4): 640–53. Revenga, P. Sangraula, U. Serajuddin, and N. Atamanov, A., M. Mostafavi, D. Salehi-Isfahani, and T. Yoshida, 2015. A global count of the extreme Vishwanath. 2016. “Constructing robust poverty poor in 2012: data issues, methodology, and trends in the Islamic Republic of Iran: 2008–2014.” initial results. Policy Research working paper; No. Policy Research working paper No. WPS 7836. WPS 7432. World Bank Group: Washington, D.C. Washington, D.C.: World Bank Group. Haughton, Jonathan and Shahidur Khandker. 2009. Azevedo, Joao Pedro, Minh Cong Nguyen, and Viviane Handbook on poverty and inequality. World Sanfelice. 2012. “ADECOMP: Stata module to Bank: Washington D.C. estimate Shapley Decomposition by Components Maasoumi, Esfandiar and Vahid Mahmoudi. 2013. of a Welfare Measure.” Statistical Software Robust growth-equity decomposition of change Components S457562. Boston, MA: Boston in poverty: The case of Iran (2000–2009). The College Department of Economics. Quarterly Review of Economics and Finance, Chen, Shaohua and Martin Ravallion. 2008. The 53(3): 268–276. developing world is poorer than we thought, but Mahmoudi, V. 2011. Poverty Changes during the Three no less successful in the fight against poverty. Recent Development Plans in Iran (1995–2007). Policy research working paper 4703. World Bank: African and Asian Studies, 10 (2–3): 157–179. Washington, D.C. DOI: 10.1163/156921011X587013 Datt, Gaurav. 1998. “Computational Tools for Poverty Nili F. and Poursadeghi H. S. 2011. Poverty Measurement and Analysis,” Discussion Paper Decomposition Based on Iranian Households’ No. 50. Food Consumption and Nutrition Division; Socioeconomic Characteristics: Integrated Micro International Food Policy Research Institute: and Macro Approach. Journal of Money and Washington, D.C. Economy, 6 (1):75–106 Datt, Gaurav and Martin Ravallion. 1992. Growth and Salehi-Isfahani, Djavad. 2009. Poverty, inequality, and Redistribution Components of Changes in Poverty populist politics in Iran. Journal of Economic Measures: A Decomposition with Applications Inequality, 7 (1): 5–28. to Brazil and India in the 1980s. Journal of Salehi-Isfahani, Djavad, Bryce Wilson Stucki, and Development Economics, 38: 275–296. Joshua Deutschmann. 2015. The Reform of Deaton, A. and Zaidi, S. 2002. “Guidelines for Energy Subsidies in Iran: The Role of Cash Constructing Consumption Aggregates for Transfers. Emerging Markets Finance and Trade, Welfare Analysis.” LSMS Working Paper No. 135. 51(6): 1144–1162. World Bank: Washington, DC. World Bank. 2008. Islamic Republic of Iran. Spatial Patterns of Poverty and Economic Activity. Report No. 46603. Washington, D.C: World Bank. 24 IRAN ECONOMIC MONITOR: TOWARDS REINTEGRATION SPECIAL FOCUS 2: AMBIENT AIR POLLUTION IN IRAN 22 The air above Iran is amongst the most polluted in the top most polluted cities in the world, as measured world and it is getting worse. In 2013, the latest year by PM2.5 concentrations (see Figure 26). PM2.5 for which the World Bank together with the Institute is the air pollutant with the most substantial health for Health Metrics and Evaluation (IHME) produced effects.23 As shown by Figure 27, three of the forty estimates for Iran, 19,644 deaths were attributable most PM2.5 polluted countries are in Iran. Overall, to air pollution, translating roughly to 28 in 100,000 persons (World Bank and IHME, 2016). The economic cost of air pollution was estimated at roughly 2.2 percent of Iran’s GDP or USD 13 billion per year, 22 This special focus section has been written by Martin indicating that air pollution reduction is beneficial from Heger, Maria Sarraf and Jia Jun Lee. Massoud Estiri not only a human health perspective, but also from an (Air Quality Specialist, Municipality of Tehran) also economic perspective. In a cost-benefit framework, out contributed to this section. of every USD 100 the Iranian economy produces, USD 23 The WHO air quality guidelines (AQGs) are intended for worldwide use and were developed to support actions 2.6 accrue as negative environmental externalities (i.e. to achieve air quality that protects public health. 10 costs) from air pollution. At the margin, there are several micrograms/m3 is the guideline level, and the lowest industrial, transport, energy, and agricultural activities, concentration level at which premature mortality has that if altered, maybe even halted, would yield more been shown to increase with more than 95% confidence benefits in terms of avoided costs from pollution than in response to long-term exposure to PM2.5. For gains from such activities, if undertaken. countries that have much worse air quality, beyond 35 micrograms/m3, like Iran, WHO has set interim targets to guide the route to better air quality. Interim target-1 Urban Ambient Air Pollution in Iran is aims at curtailing concentrations below 35 micrograms/ m3, a level which corresponds to a 15% higher long- Severe and Getting Worse term mortality risk relative to the guideline level. Interim target-2 aims at curtailing concentrations below 25 Iran is one of the most air polluted countries in micrograms/m3, which corresponds to a lower risk of the world. Some of Iran’s cities rank amongst the premature mortality relative to the interim target-1 level 25 FIGURE 26 • PM2.5 Concentration Levels (Annual Mean of µg/m3) of the Forty Most Polluted Cities 250 200 150 µg/m3 WHO guideline 100 50 0 Zabol Gwalior Allahabad Riyadh Al Jubail Patna Raipur Bamenda Xingtai Baoding Delhi Ludhiana Dammam Shijiazhuang Kanpur Khanna Firozabad Lucknow Handan Peshawar Amritsar Gobindgarh Rawalpindi Hengshui Narayangonj Boshehr Agra Kampala Tangshan Jodhpur Dehradun Ahmedabad Jaipur Howrah Faridabad Yenbu Langfang Dhanbad Chittagong Ahvaz Source: WB staff calculations based on WHO (2016). Note: The cities displayed in this map are based on the list of cities for which there were values in the WHO Air Quality dataset. The number of monitoring stations and their sitting criteria may vary across cities. 14 of the 24 Iranian cities in the WHO Air Quality determine the relative contributions from each of dataset are in the top 10 percent of the most polluted these sources. However, source apportionment cities. Zabol is the single most PM2.5 polluted city analysis is very sparse in Iran. Out of the cities, in the world and the 3rd most PM10 polluted city. which have air pollution data, there are only a few Bushehr and Ahvaz are among the top 25 most air where source apportionment was done, including polluted cities.24 Figure 27 shows the geographical Tehran and Ahvaz. In Tehran, transport and variation of PM2.5 pollution in Iran. Despite some industry contribute largely to the high pollution efforts, nearly the entire Iranian urban population is concentration, but there are also contributions from still exposed to concentration levels that exceed the mineral dust (see e.g. Sarkosh, 2013). In Ahvaz, WHO guidelines. for example, people suffer from both fine dust Tehran exceeds the guideline measure of from natural sources, due to the desert climate of PM10 air pollution several fold. Tehran is far less the location of the city, as well as particles from PM10 polluted than for example Karachi or Delhi combustion sources (Sowlat et al, 2013). The are (see Figure 28). Amongst the megacities for sources of dust affecting Iranian cities originate which we have PM10 pollution data (which allows for both nationally and from other countries in the easier global comparison of megacities than PM2.5), Tehran is in the midfield. That said, the city still has four times the pollution concentration , which would conventionally be considered as healthy by the WHO by approximately 6% [2–11%]. Interim target-3, aims at (20 µg/m3) curtailing concentrations below 15 micrograms/m3, Sources of ambient air pollution: which corresponds to a lower risk of premature mortality Air pollution in Iran is originating from both relative to the interim target-2 by approximately 6% anthropogenic sources (such as transportation, [2–11%]. For a detailed discussion of these targets see WHO (2006) and OECD (2016). industry or agriculture), and natural topographic 24 This note focusses on PM2.5 air pollution, as it is not conditions, such as geological dust. Each city for only most frequently used as a general indicator of the which air pollution concentrations are plotted in air pollution mixture, but also because PM2.5 has the Figure 26 has a different particulate sources mix. largest quantifiable contribution to the burden of disease Source apportionment studies are required to from air pollution (see WHO, 2015). 26 IRAN ECONOMIC MONITOR: TOWARDS REINTEGRATION FIGURE 27 • PM2.5 Concentration Levels of Selected Iranian Cities Note: The cities displayed in this map are based on the list of cities for which there were values in the WHO Air Quality dataset. WHAT IS PM2.5 AIR POLLUTION? Fine particulate matter, or PM2.5 air pollution, is defined as fine inhalable air particles with diameters of 2.5 micrometers (or microns) and smaller. PM2.5 poses the most severe health impacts because they can get deep into the lungs and even into the bloodstream. The infographic below illustrates the size of PM2.5 relative to that of hair, sand and PM10. Most PM2.5 particles form in the atmosphere as a result of complex chemical reactions in the presence of sunlight. In addition, they are often emitted directly from power plants, industries and automobiles. Fine particulate matter may also be emitted directly from a source such as construction sites, unpaved roads, fields, smokestacks or fires. Source: US EPA. FIGURE 28 • PM10 Concentration Levels (Annual Mean of µg/m3) of of Global Megacities 350 350 300 300 250 250 200 200 µg/m3 150 150 100 100 50 50 0 0 Karachi Delhi Greater Cairo Dhaka Chengdu Kolkata Wuhan Mumbai Beijing Chongqing Shanghai Tehran Guangzhou Manila Istanbul Seoul Bangkok Mexico city Rio De J. Moscow Kyoto city Tokyo Buenos Aires London Los Angeles New York Source: World Bank staff (2016) based on WHO 2016 data. Note: The megacities displayed in this Figure are based on the list of cities for which there were values in the WHO Air Quality dataset. We defined megacity as defined by more than twelve milion people living in it. The number of monitoring stations and their sitting criteria may vary across cities. Special Focus 2: Ambient air pollution in Iran 27 Days in the Year 2014 by Air Quality FIGURE 29 •  health effects. Only 9 days a year, the city actually Classification had clean air. Air pollution worsened by about 0.5 Karaj 61% 39% percent per year between 1990 and 2013. PM2.5 Tabriz 4% 77% 19% concentrations increased in every period. From Shiraz 23% 73% 3% 1995–2005, the annual increases were just shy of half Tehran 26% 69% 5% a percent, but from 2005–2013 the annual changes Arak 26% 36% 38% came closer to the 1 percent mark. Mashhad 39% 48% 12% Isfahan 62% 35% 3% Ahvaz 67% 29% 4% Decoupling of Air Pollution from 0 50 100 150 200 250 300 350 Economic and Population Growth in Days in a year Iran Unhealthy Moderate health effects Good Iran’s economic growth is decoupling from air Source: World Bank staff calculations based on data from communications with the Department of Environment, Iran. pollution. On the bright side, overall, Iran’s economic Note: Air quality that is declared as “good” corresponds to a PM2.5 value of 0–50, growth by far outweighs the country’s growth in air “moderate health effects” corresponds to a PM2.5 value of 50–100 and “unhealthy” corresponds to a PM2.5 value of above 100 and includes the categories “unhealthy for pollution, suggesting that the country’s economic sensitive groups”, “unhealthy” and “very unhealthy”. For Ahvaz and Tabriz, PM10 was activity is becoming less pollution intensive (see used to classify the level of air pollution. Figure 30).26 Between 1990 and 2013, GDP grew by 116 percent whereas PM2.5 air pollution increased at a much lower rate of 11 percent, with GDP peaking region (see e.g. Raheleh et al., 2013). Particulates in 2010. from both geological dust and combustion sources However, decoupling in Iran happens at have adverse health effects (see World Bank/ a slower pace compared to other countries IHME, 2016).25 The development of successful suffering from similarly high levels of ambient air pollution policy will heavily depend on the air pollution. Compared to Egypt, a country from distinction between the sources and therefore an the same geographical region and similar levels accurate national air pollutants inventory based on of air pollution, Iran’s GDP has grown at a slower source apportionment studies is highly desirable. rate while PM2.5 concentrations have grown more For more than 300 days a year the rapidly, meaning that Iran’s GDP is decoupling at average Iranian city has air pollution with a slower rate (see Figure 31). This comparison is moderate to severe health effects. For about 100 even starker when looking at India and China. Even of these days, air pollution is qualified as unhealthy though both of these countries have increased their and for about 200 days it can have moderate health pollution levels 3–5 times more than Iran’s from effects (see Figure 29). Only for about 60 days is the 1990 to 2013, because of long-term growth rates that average air quality considered to be good. Shiraz, Tehran, Isfahan and Ahvaz, all had about 350 days a year of air pollution that had adverse health effects, 25 The current position of the WHO, the US-EPA, and the leaving only about 15 days during which there were International Agency of Research on Cancer (IARC) actually clean air concentrations in 2014. On some is that the evidence base at present is insufficient to days these cities have particulate matter levels that support that there are different health effects associated with one or another source. For a detailed elaboration are about several times that of Beijing or Delhi, of health impacts and PM pollution sources, see World two other highly polluted major cities. Ahvaz had Bank/IHME (2016). the worst level of air pollution with 245 days a year 26 Even more so if one assumes that some of the having been unhealthily air polluted, and 106 days increases in pollution may have been driven by increase having had air pollution levels that have moderate contributions from natural sources. 28 IRAN ECONOMIC MONITOR: TOWARDS REINTEGRATION Annual Changes of PM2.5 FIGURE 30 •  Decoupling of Economic Growth FIGURE 31 •  Concentration, from 1990 to 2013 from Air Pollution in Iran 1.5 1,000 900 800 Index (1990 = 100) 1.0 700 600 500 % 400 0.5 300 200 116% 100 11% 0 0 1990–95 1995–00 2000–05 2005–13 1990 1995 2000 2005 2010 2013 Source: World Bank staff calculations based on Brauer et al (2016). GDP PM2.5 Note: The underlying source of these trend data are satellite observations fused with ground-level observations, and interpolated using chemical transportation models. The Source: World Bank staff calculations based on Brauer et al (2016) pollution data and accuracy is therefore not as high as the accuracy of the surface monitoring stations only. WDI (2016) constant GDP data. surpassed Iran’s by 3–8 times they have decoupled relatively faster.27 the Economic Case for Action, a new joint publication Iran’s pollution per capita has decreased. between the World Bank and IHME.29 While the Even though pollution has increased between 1990 deaths continuously increase over time, relative to and 2013, as shown above, this increase was driven population growth, they have actually been declining largely by population growth. Per capita, the pollution from 2000 onwards, meaning that as a share of levels actually decreased by about 1 percent every year population, fewer people have been dying from air from 1990 onwards, with the exception of 2005–2010, pollution (see Figure 33). where it actually slightly increased.28 This indicates that per capita, less pollution is emitted, meaning that the average person is more efficient in terms of emitting 27 A deeper analysis into the driving factors of decoupling pollution and causes less of the negative environmental would be desirable. Such a prospective analysis would externality. take into consideration not only the different topographical, meteorological and climatological conditions of each country, but also varying original states of development Health Effects from Air Pollution in and economic structure. Furthermore, such analysis could Iran also disentangle anthropogenic from natural sources. 28 This calculation is based on Brauer et al (2016) data as Globally, air pollution is the fourth most important well as UN-DESA (2016) data. risk factor of death. It follows metabolic risks, dietary 29 The relative risks of mortality from exposure to PM2.5 was estimated using integrated exposure-response (IER) risks and tobacco smoke according to Global Burden functions Burnett et al., 2014; Cohen et al., (n.d.). The IER of Disease data from the Institute for Health Metrics method captures both the magnitude of PM2.5 exposure and Evaluation (IHME). About 1 in 10 deaths globally and the relative risks associated to that exposure. The is attributable to air pollution, yielding a total of 2.9 relative risks are estimated from published evidence on million deaths per year in 2013, a 30 percent increase cardiovascular disease and lung cancer burden from since 1990. four types of PM2.5 exposure—ambient air pollution, second-hand tobacco smoke, active smoking, and In Iran, an estimated 19,644 deaths a year household air pollution. By doing so, this method allows were attributable to air pollution in 2013. 28 out estimation of risk in places where no studies have been of 100,000 deaths was attributable to air pollution, conducted, such as in much of Asia, Sub-Saharan Africa, according to The Cost of Air pollution: Strengthening and the Middle East and North Africa. Special Focus 2: Ambient air pollution in Iran 29 Decoupling of Economic Growth from Air Pollution in Egypt, India, and China FIGURE 32 •  Egypt India 1,000 1,000 900 900 800 800 Index (1990 = 100) Index (1990 = 100) 700 700 600 600 500 500 322% 400 400 300 160% 300 200 200 54% 1% 100 100 0 0 1990 1995 2000 2005 2010 2013 1990 1995 2000 2005 2010 2013 GDP PM2.5 GDP PM2.5 China 1,000 900 800 831% Index (1990 = 100) 700 600 500 400 300 200 38% 100 0 1990 1995 2000 2005 2010 2013 GDP PM2.5 Source: World Bank staff calculations based on Brauer et al (2016) pollution data and WDI (2016) constant GDP data. Economic Cost of Ambient Air Health Impacts from Air Pollution FIGURE 33 •  Pollution in Iran 25,000 40 Iran’s economic cost of air pollution has been 35 20,000 quantified to be about 2.2 percent of the 30 country’s GDP, or USD 13 billion. In the joint 15,000 25 20 World Bank and IHME report mentioned above the 10,000 15 economic costs from ambient air pollution were 10 computed to correspond to about 2.2 percent a year. 5,000 5 This environmental externality cost measure quantifies 0 0 1990 1995 2000 2005 2010 2013 the economic cost of premature mortality attributable to air pollution in Iran. Deaths (LHS) Deaths per 100,000 people (RHS) 2.2 percent of Iran’s GDP, while being Source: WB staff calculations based on WB/IHME (2016) data. a useful reference point, is likely to be an Note: LHS is an abbreviation of left-hand side, indicating that the left hand side scale on underestimation. Even though premature mortality the y-axis applies. RHS is an abbreviation of right hand side. makes up the largest component of the economic 30 IRAN ECONOMIC MONITOR: TOWARDS REINTEGRATION costs arising from the health impacts of air pollution, that air pollution is an absolutely reversible problem, 2.2 percent of GDP is probably an underestimation, unlike many other challenges. as the report does not take into consideration the costs of morbidity, which are also substantial. For example, the reducing of labor productivity due to constrained breathing, work absenteeism and even 30 The WTP method monetizes the increased fatality risk hospitalization are thus not accounted for in the due to air pollution and how much an individual is willing estimate. These morbidity impacts were incorporated to pay to avoid it. In other words, it accounts for the in the World Bank’s 2005 Cost of Environmental marginal tradeoffs that individuals are willing to make in order to reduce their probabilities of dying. Due to the Degradation Study. limited number of studies on WTP, the Value of Statistical The valuation methods employed to get to Life (VSL) estimated in the global World Bank report for an economic cost estimate from health outcome non OECD countries are based on estimations using data put a price on reducing the likelihood of the benefit-transfer approach. This estimation is done mortality (quantifying the welfare losses) and also by assuming that the ratio of income in country x, say by quantifying the income an individual is forgoing Iran, over the average income in an OECD country is proportional to the ratio of VSL in Iran over average VSL in by dying prematurely (forgone labor output). The an OECD country. e denotes the income elasticity of the estimated value represents the sum of all individuals’ VSL. The value obtained is the total welfare losses incurred willingness-to-pay (WTP) to reduce mortality risk by Iran due to premature morality caused by air pollution: values, and their foregone economic output because e  IncomeIran  they have died prematurely.30 VSLIran = VSLOECD ×  .  IncomeOECD   Improving air quality in Iran will require a mix of technical analyses, investments, and policy reforms That said, for Iran several WTP studies quantifying the costs of air pollution in selected cities, such as Tehran, (which include extensions to the presented analyses are available, which mark a natural extension to improve in this note) on the national as well as the city level the analysis further. For a detailed elaboration of the (as the sources and solutions to air pollution can vary methodology, please consult the Cost of Air Pollution largely from one city to the next). The good news is report (2016). BOX 4  •  Air Pollution is Reversible – Evidence from other Country Experiences Unlike other negative environmental externalities, air pollution is reversible. London, Paris, and New York, all cities which suffered greatly from severe air pollution a couple of decades ago have cleaned up their air owing largely to decisive policy actions. On most days in recent years, these megacities remain within the WHO air pollution guidelines for what is considered healthy. There are also more recent examples of decisive policy action leading to air quality improvements, including Chile and Peru (to name but two examples): Chile, from 2003–2010, launched an urban transportation project with the objective to improve Santiago’s air quality through reducing local air pollutants by expanding the public transportation system. As part of the project, interventions included reducing the emissions from public buses, increasing the use of bicycles, implementing up-to-date emission testing, developing business schemes for operation of the public transportation system, monitoring the bus systems, and implementing overall traffic planning. In large parts due to this comprehensive transportation program, PM2.5 air pollution concentrations reduced by more than half from the early 1990s to the early 2010s. Peru, from 2009–2011, launched an air pollution and transportation program, which included improvements in vehicle emissions, fuel quality, and air quality monitoring systems. The objective of the program was to build a constituency for air pollution control that takes an active interest in shaping air pollution control activities. In large parts due to the project, PM2.5 levels decreased by almost half from 2009–2012 in the metropolitan Lima-Callao area. 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