June 2022, No. 100

Finance

Key Development Trends

Development trends in Iran in 2019 remained significantly influenced by the continued opposition of the United States to the Joint Comprehensive Plan of Action (JCPOA).

Country Overview:

1. Iran is the second largest economy in the Middle East and North Africa (MENA) region, with an estimated national income of 10,300 Trillion IRR in 2016, up from 6,000 Trillion IRR in 2012. Iran�s current population of 83 million grew by an average of 1.24 per cent per year between 2011 and 2016, down from 1.29 per cent for the preceding five-year period. Life expectancy at birth increased from 55 years to 76 years between 1980 and 2016 reflecting improvements in the country�s economic and social infrastructure over the decades. Iran�s score on the Human Development Index (HDI) was 0.797 in 2019, ranking 65th out of 189 countries. In terms of macro-economic indicators, GDP per capita declined from USD 6,586 in 2010 to 5,680 in 2019 due to factors that are discussed in more detail in this section of the report. 

Development trends:

2. Development trends in Iran in 2019 remained significantly influenced by the continued opposition of the United States to the Joint Comprehensive Plan of Action (JCPOA).

Following two years of recession, the Iranian economy had recovered in 2014 and expanded by 3%, inflation declined from average 29% in 2012 to 12% in 2017 � following the JCPOA.

However, the economic recovery experienced after conclusion of the JCPOA has, since the

US withdrawal from the JCPOA in 2018 and the subsequent re-imposition and tightening of economic sanctions on Iran and its consequent effects on oil revenues, given way to a macroeconomic downturn. This has hampered progress on national development plans.

3. Iran�s HDI ranking as reflected above indicates that Iran is well-positioned to progress on development priorities and a higher GDP growth rate could result in reduced poverty, lower unemployment and improved health and education access. However, in 2018 Iran experienced a decline in GDP income following the re-imposition of sanctions, inflation and devaluation of the Rial. The economy slid into recession in 2018-19, with preliminary figures from the SCI pointing to a 4.9% contraction and is expected to remain in a state of stagflation in the near term with inflation at 30-40% and unemployment at around 12%. In late 2019, GoI expected a return to recovery by mid-2020 or 2021.

4. Oil production fell sharply following the reintroduction of sanctions and the US�s decision (effective May 2019) not to renew the waivers previously granted to eight of Iran�s key oil customers. In November 2019, the output shrank to 2.1m barrels per day, from an average of 3.8m barrels per day in 2017, and its lowest level since the late 1980s. It has been forecast that oil exports will remain depressed in 2020 (at about a fifth of average 2017 volumes) and in 2021-24, there will be a sluggish recovery.

By mid-2019, it was predicted by some entities, that the economy will actually contract by 9.2% in 2019/20 and by a further 1.6% in 2020/21. However, that amount of contraction was not expected by GoI, given its ongoing fiscal stimulus. It was the expectation of GoI that growth would again improve in 2020, following recent fiscal stimulus actions, and the Central Bank�s efforts to restore greater stability to the foreign-exchange market. However, despite this, the re-imposition of sanctions has weighed heavily on the economy, and the Rial has continued its fall.

5. In November 2019, the Government raised petrol prices by 50% for �rationed� petrol and by 300% for �freely bought� petrol, indicating that it would compensate for this by transferring the petrol rise proceeds as cash payment to 60 million persons (70% of the population). This stimulus package also raises the possibility of improved targeting of cash transfers and welfare payments. The fuel prices increase, coupled with exchange rate volatility will likely cause inflation to increase over the coming months; an annual average inflation of 32.3% is predicted for 2020. A downward trajectory may prevail between 2021-24, at an annual average of 14.1%, as the economy adapts to sanctions by finding ways to import more easily, and currency deprecation slows down as oil export receipts edge up.

6. The past few decades witnessed solid reductions in absolute poverty in Iran. However, the Gini coefficient stands at 0.398 and has been increasing since 2012 signifying increasing income inequality. Despite the significant improvement in living standards across the country, the gap between the leading and lagging regions in Iran has widened since the early 1990s, indicating that the GDP growth process needs to be made more inclusive.

7. In the face of increasing economic hardship, the less advantaged segments of society in the country risk losing the protection of functional social safety nets and quality social services. The Majlis Research Centre (MRC) projects that the bottom 40% income group will remain vulnerable. The World Bank has projected that the poverty line (of $5.5 per day @ 2011 PPP US$) increased from 8% in 2013 to 11.6% in 2016. Economic hardship is resulting in scarcity of essential goods, increased unemployment, lower salaries in real terms, decreases in household purchasing power and overall income, and therefore increased social protection needs. Iran�s unemployment rate was reported at 12.1% in 2017. GoI�s estimates reflect that since mid-2018, 800,000 new jobs have been created, 95,000 new projects financed, and more recently 400,000 new houses initiated and 470,000 new employment opportunities created. The 2019 (1398) Budget contains a significant rise (50%) in the Budget�s public entity economic stimuli component for production/growth, and a relatively larger share for social development/welfare towards human capital and redistribution: a 24% share of Central GoI Budget has been allocated for social Ministries, making up 83% of all Ministries� budgets. 

The past few decades witnessed solid reductions in absolute poverty in Iran. However, the Gini coefficient stands at 0.398 and has been increasing since 2012 signifying increasing income inequality.

Iran�s key development challenges and GoI�s development priorities:

8. GoI�s comprehensive development strategy to improve social and economic resilience, encompassing both market-based reforms and social welfare improvement, is reflected in the 20-year Vision Document and the 6th FYDP 2017-2021, which focus on: a) development of a resilient economy, b) progress in science and technology, and c) promotion of a culture of excellence. The priorities of the 6th FYDP include a) continuing reform of state-owned enterprises and the financial/banking sector, and b) improved allocation of oil revenues.

The Government, through the 6th FYDP, takes measures to protect production, employment and social welfare in Iran�s various economic sectors; while also taking measures to protect against social harm, and for social protection and social insurance. Although the latest GoI Budget is indicative of the increased nominal allocations to social welfare and education the austerity measures resulting from the imposed sanctions may potentially affect those plans. The newly proposed 2020/2021 two-year �performance-based� Budget also intends to increase the share of social support to 40%, and is possibly more aligned with the economic growth expenditures for raising synergy.

9. Iran�s environmental challenges, which include its preponderantly arid and semi-arid climate, scarcity of water resources, rapid urbanization, high energy use intensity, and vulnerably to earthquakes, desertification, sand and dust storms and severe flooding, are being compounded by ongoing climate change. Disaster events in the country such as the devastating floods in March 2019, which damaged river ecosystems and biosphere reserves, affecting more than 1 million people and causing over USD 3.5 billion in damage reaffirm the need to address climate impacts.

Sand and dust storms are increasing in severity and frequency, thereby affecting health, livelihoods and the environment. Despite GoI�s investment in sustainable water management, groundwater is being over-used, rivers have dried up and wetlands are disappearing. Iran is highly exposed to natural disasters, especially earthquakes, where the country scores highest amongst 191 countries on risk indicators.

GoI is well prepared for initial response, but in terms of preparedness and long-term recovery, the draft National Disaster Management Act of April 2019 was introduced, focusing on more coherent legislation, evidence-based planning, better coordination, public education, and multi-hazard non-physical vulnerabilities.

Iran�s 6th FYDP encompasses environment protection and promotes the adoption of a lowcarbon economy (greenhouse gas mitigation) approach to improve energy efficiency in residential, industrial, transport and urban systems, and also renewable energy methods (raising share of solar, wind and geothermal in energy mix).

10. Iran�s health system is cited in global health literature as one of the most robust in the world, with strong national health indicators, defined by a pioneering and well-established Primary Health Care (PHC) system, emphasizing equity, community and inter-sectoral participation. Non-Communicable Diseases (NCDs) caused 82% of all deaths in Iran in 2016; road traffic injuries are among the top 5 leading causes of death, while 22% of annual deaths are due to air pollution and other environmental health problems. Iran has responded by producing evidence-based national guidelines for the management of major NCDs through a PHC approach, and establishing a surveillance and monitoring system to enable reporting against the nine global NCDs targets. HIV prevalence amongst people who inject drugs is slowly decreasing, but gradually shifting towards sexual transmission. The national programme has responded but further action is needed for Iran to fulfil its stated objective of ending the AIDS epidemic by 2030. Malaria, once a public health hazard across the country, is now mainly confined to the 3 south-eastern provinces, but reintroduction through cross-border migration remains a concern. The health sector has over the years, undergone significant reforms through the Health Transformation Plan (HTP), focusing on sustainable financing of the health sector, financial risk protection against health expenditures, increasing equitable access to quality healthcare services, improving service provision, and increasing people satisfaction.

By 2018, around 95% of Iranians were covered by some form of health insurance.

11. However, the cost of health care for families increased by 22% in urban areas and by 31% in rural areas between October 2018 and October 2019, mostly due to hospitals facing shortages of medicines, equipment and consumer goods, placing vulnerable patients at greater risk.

Sanctions and banking restrictions have had an adverse effect on the production, availability and distribution of medicines, pharmaceutical equipment and supplies. Foreign medication has become scarce since 2018, in particular specialized medication required for the treatment of life-threatening conditions, including cancer, heart and blood diseases, thalassemia and multiple sclerosis. As noted by the Government, 15 children reportedly died of epidermolysis bullosa since companies stopped selling absorbent foam dressing to Iran due to sanctions. To better meet the health needs of specific target groups such as the elderly, the disabled, the poor and the less advantaged persons, remains a key concern of GoI. However, recent macro-economic shocks could possibly limit the capacity for timely and quality response to medical and health needs. The reduced fiscal space may also increasingly bring disruptive consequences on the health benefit packages under the mixed funding system of the health sector, resulting in reduced purchasing power coupled with a higher rate of catastrophic health payments and impoverishment. This has an impact on increasing mortality and morbidity rates, particularly for the most vulnerable, and with increasing duration and tightening of sanctions, also strongly affecting the middle class.

12. The Global Hunger Index bears witness to Iran�s sustained achievements in food and nutrition security, showing a steady downward trend of hunger in Iran and the greatest reduction in ranking on the Index in the Middle East.

However, water supply constraints, impacts of climate change and disaster-related shocks threaten this progress. In addition, the food and agriculture sector in Iran has been impacted by restrictions on financial transactions due to sanctions and resulting fear of exporters to be subject to any possible legal measures. As a result of currency devaluation, the costs of imported food and agriculture inputs and machineries have increased, in turn considerably increasing production costs of most agricultural and food items. Increasing transport costs due to shipping companies and courier services withdrawing from Iran, and the need for alternate import routes, further amplify this effect. Most of the animal feed were previously imported to the country; however, now there are serious problems in importing animal feed, affecting productivity of livestock and poultry sectors. Maize and soybean were mainly imported from the US and with the recent sanctions, the import of these two very important food items has become almost impossible.

13. Over past decades, Iran�s urban population has increased from 37% in 1965 to 60.2% in 1995 and 74% in 2016, due to both natural population increase, migration, and increase in the number of cities. To make this urbanization sustainable, there is a need to balance the wider opportunities of urban life (e.g. employment and services), with its socio-economic and environmental costs.

14. Iran has been one of the world�s largest refugee hosting countries during the last four decades, ranked sixth amongst refugee hosting nations. It still hosts nearly 1 million documented refugees, largely from Afghanistan, as well as 450,000 Afghans holding valid passports and 1.5 to 2 million undocumented Afghans. Most refugees reside in cities and towns across the country, rather than in camps. The country deserves due acknowledgement for the inclusive policies and programmes in place for refugees. All children, regardless of their legal status, have access to the national education system, and refugees can enrol in the national health insurance system and acquire access to medical care.

The current economic difficulties have also had an impact on the living conditions of refugees in the country. Providing refugees with sustainable protection and assistance on behalf of the international community in the absence of sufficient global assistance (global assistance has greatly reduced), has led to huge economic, social and security implications for the country.

15. Iran has, over the years, been a country of origin, transit and destination for migrants due to its political context, demographics and economic opportunities. Responding to a wide range of migration challenges over the past few decades, Iran has acquired noteworthy knowledge on migration management, yet, as migration itself is an unpredictable phenomenon, there is a need to have regular and frequent exchanges of views and experience among sending, receiving and transit countries in which Iran could play a key role.

16. Due to its shared border with Afghanistan, the world�s leading opium producer, Iran faces a range of challenges related to the world drug problem and its negative impacts on public health. Iran is responsible for 87% of the world�s opium seizures, 20% of the world�s heroin and morphine seizures, and 7% of the world�s hashish seizures. Organized crime networks have also increased the use of maritime routes for drug trafficking from the Persian Gulf and sea of Oman to various markets in Asia, Middle East, and Africa. Iran has established many successful programmes for addressing and containing drug use and for HIV prevention, treatment and care. Many communities benefit from outreach programmes, Drop-in Centres and other initiatives, and Non-Governmental Organizations (NGOs) are also actively involved in programme implementation and direct service delivery. Moreover, Iran is a pioneer country in the area of opium substitution therapies, HIV prevention and treatment of AIDS, including in prison settings.