June 2022, No. 100

Spotlight

Iran’s Economy and Foreign Trade in 1401 (March 2022 – March - 2023)

Now that the first year of 1400 decade has begun the analysis of the Iranian economy in 1401 without analyzing the macro trends and trends of the coming decade will be misleading and devoid of genuine value.

The Iranian economy is entering a new decade in a situation where the economy was in dire straits in the 1390s (solar calendar year), so that it might be called the “Decade of Missed Opportunities.” Twice the imposition of severe sanctions in the first and last years of this decade, along with the deepening of the accumulation of macroeconomic challenges, caused the average economic growth and inflation rate to be zero and 24 percent, respectively, and experienced unprecedented stagnation in the country. The average growth of gross fixed capital formation was around minus 5 percent and for the first time since the release of national accounts, as of 1397 (2018 – 2019), the growth of depreciation compensation costs has exceeded the growth of investment, which sends a warning signal to the economy in the sense that the Iranian economy has entered the stage of infrastructure erosion.

On the other hand, due to disruptions and inefficiencies in the three key systems of wealth redistribution in the Iranian economy, namely banking, subsidies and taxes, along with corrupt and rent-seeking structures governing economic activities, rampant inflation of the 1390s was imposed on the middle and lower deciles. Meantime, the rich class of the society benefited from these inflationary conditions so that the class gap accelerated over a decade and the Gini coefficient rose from 0.365 in the early 1390s to over 0.41 in the late 1390s and the proportion of poor households increased from about 11 percent in 1397 (2018 – 2019) to about 25 percent in 1400 (2021 – 2022).

Also due to lack of tough decisions and absence of structural and institutional reforms in the economy, water and environmental macro challenges, pension funds, rapidly declining population growth [(average growth of 1.24 percent in 1390-95 (2011/12 – 2016/17) and 0.68 percent in 1399 (2020/21))] and fertility rate (estimated at 1.6 to 1.7 in 1400) have reached complex conditions that if the daily routine and indifferent attitudes towards these key issues continue and difficult decisions are not made, they can reach irreversible conditions at the end of this decade.

The first macro trend towards the end of the decade (1410 solar hijri - 2030 Christian) is to reduce the dependence of developed countries on fossil fuels (oil and gas).

Now that the first year of 1400 decade has begun the analysis of the Iranian economy in 1401 without analyzing the macro trends and trends of the coming decade will be misleading and devoid of genuine value. Therefore, for the analysis of the Iranian economy in 1401, it was deemed appropriate to first estimate the trends and macro trends during the next decade and then to deal with the one-year slice of this decade (1401).

From the international aspect and the issue of sanctions, what is clear is that unfortunately the JCPOA (Joint Comprehensive Plan of Action known as BARJAM in Persian) negotiations are lasting long and the results are facing fragile conditions due to the forthcoming Congressional and Senate elections in the United States in November. This issue will become more complicated when the election campaign begins (in about two years) and if the Republican contender issues a withdrawal message from BARJAM in which case domestic inflation expectations will sharply increase and prices will go up abruptly again.

The first macro trend towards the end of the decade (1410 solar hijri - 2030 Christian) is to reduce the dependence of developed countries on fossil fuels (oil and gas). Environmental change and global warming, on the one hand, and the Russia-Ukraine war, on the other, have strengthened European resolve to end dependence on fossil fuels. Meantime, production of electric and hydrogen vehicles, along with renewable energy heating by the end of the 2030s will realize the transition from the age of fossil fuels. Furthermore, the possibility of exploiting the Arctic oil and gas energy due to the phenomenon of global warming should also be considered in the analysis. From this perspective, Iran’s economy, the country’s economic governance, and economic institutions that have relied on accessible oil resources for more than half a century will be severely affected by this shock. It should be noted that since the (1979) Islamic Revolution, the country has earned over 1.5 trillion dollars in oil money, and if these foreign exchange earnings were invested and stored, at least 3 trillion dollars of foreign exchange reserves should be accumulated in the Iranian Wealth Fund.

The next macro trend is the aging of the country’s population. At present, the population over the age of 65 in Iran is more than 8 million and it is predicted that in 1410 it will reach more than 10 million and in 1430, it will go as high as 20 million people. This wave of aging will both put pressure on the health sector spending and, by the end of this decade, allocate more than 50 percent of the government’s general budget resources to the pension fund deficit, transforming the government from a development mission into a pay-as-you-go fund. It is noteworthy that in the budget of 1401 (2022 – 2023), 200 thousand billion tomans of aid to state and military pension funds has been seen, which includes about 13 percent of the general budget resources of the government.

The third macro trend is the spread of environmental phenomena, especially the water crisis, which will widely affect the southern parts of the country and prompt a wave of migration and unrest. During 60 years (1335 [1956/7 – 1395[2016/7]) the population of the country has quadrupled and according to the projected population in the horizon of 1420 (2041/2) and assuming 103 billion cubic meters of long-term renewable water, the per capita amount will be 976 cubic meters per year (water scarcity and crisis). According to the Falcon Mark Index, the per capita renewable water will be less than 1,700 cubic meters per year in the water stress phase and less than 2,000 cubic meters per year in the water crisis. Therefore, at the end of the decade (1410), the problem of water stress will intensify and in the 1420s, water shortage will begin.

In addition to these three macro trends, in the absence of structural reforms, the three key systems of wealth redistribution - banks, taxes and subsidies - and the high level of corruption perception in society and the prevalence of corruption and economic rent due to the inflationary structure of Iran’s economy, we will continue to see class gaps as the fourth macro trend. This class gap will become unbearable when the Gini coefficient reaches 45 and dissatisfaction will erupt (the Gini coefficient is currently estimated at 41). As mentioned, due to the lack of investment in the Iranian economy during the 90s and the intensification of the process of depreciation of infrastructure, attracting financial resources and investment in oil and gas (according to the 13th government oil minister, the country needs 160 billion dollars in investment in these areas. The country will become an importer of these products in the future without spending money on the development of oil and gas fields.

 ... Attracting this huge amount of financial resources requires the reconstruction of international and regional relations along with strengthening economic security and investment, creating economic stability and predictability of the Iranian economy. Therefore, the fifth macro trend in the Iranian economy is the lack of financial resources and the need to attract and invest widely in these areas. Of course, the small amount of foreign debt of the Iranian economy (less than10 billion dollars) can be regarded a prominent opportunity to get financing from the world countries.

In addition to the mentioned macro trends, there are other worrying trends. Gradual depletion of intellectual power, creativity and economic management capacity during the past decades, gradual decline of social capital, intensification of corruption and discrimination, especially increasing corruption perception discrimination in society, reducing the level of concern of the executive management to correct current challenges, lack of accountability and persuasion of the  public opinion on the problems of the country, especially the prevalence of corruption and rent-seeking among some managers and officials and their family members, and finally the intensification of human, intellectual and material capital is one of the trends that began in decades and continues. If the above-mentioned trends are considered for the next decade, the following points can be highlighted for the Iranian economy in 1401:

1. Due to the high probability of the success of the nuclear negotiations in the minds of economic activists and the general public, inflation expectations have subsided for the time being, and this has led to a slight slowdown in the rise in prices for goods and services. It is expected that by the first half of 1401 we will see the control of inflation expectations. However, if the Republican Party wins the Congressional and Senate elections in November - the most likely estimate - the trend of inflation expectations will increase again, and in the second half of 1401, inflation will go up once again.

2. Considering the 40 percent inflation in 1400, assuming that the nuclear talks between Iran and the big powers end up in an agreement, and in case of continued growth of world energy and metal prices, as well as the inflationary effects of eliminating the special dollar rate (4200 tomans per US dollar while the open market price of the USD is about 27000 tomans) for purchase of basic goods the inflation rate is expected to be in the range of 30-25 percent in 1401.

3. In the year 1400, the volume of liquidity amounting to 4600 thousand billion tomans was recorded with a growth of liquidity of about 40 percent. If the budget and banking imbalances continue despite the improvement of trade imbalances, it is expected that the growth of liquidity in 1401 will reach about 30 percent, in which case by the end of the current year, the liquidity will reach about 6,000 trillion tomans.

4. Assuming the average price of the US dollar equal to 30,000 tomans this year, the dollar power of the liquidity will reach about 200 billion dollars. It is worth mentioning that the dollar’s strength of the volume of liquidity in 1390 (2011/12), 1392 (2013/14), 1396 (2017/18), 1397 (2018/19) was equivalent to 261, 200, 378 and 170 billion dollars, respectively.

5. The GDP with oil and without oil in 9 months of 1400 at constant prices of 2016 compared to the same period of the previous year has increased by 4.4 and 3.4 percent, respectively. Positive economic growth is expected to continue in the range of 5-6 percent this year. This positive economic growth is not considered endogenous growth due to the spillover effects of value added growth of the oil sector, the growth of exports of petroleum products and metals, as well as the activation of manufacturing and service enterprises after the Corona period.

6. In the field of foreign trade in terms of exports and imports, it should be noted that in 1400, equivalent to 122 million tons of goods worth 48 billion dollars was exported to all parts of the world, which is 14 billion dollars more than the previous year and grew by 410 percent. In 1400, more than 40 million tons of goods worth 52.5 billion dollars entered the country. The amount of imported goods in 1400 compared to 1399 (2020/21) also increased by 21 percent in weight and 36 percent in value. Due to rising world prices for oil and petroleum products and metals, we are expected to see an improvement in the foreign trade sector. It should be noted that in 1400, non-oil trade deficits were equivalent to 40 billion dollars which if not managed through strict rules and regulations on imports, there is a possibility of increasing non-oil trade deficits this year. 

By: Vahid Shaghaghi