IRAN ECONOMIC MONITOR Moderate Growth amid Economic Uncertainty Spring/Summer 2023 Iran Economic Monitor Moderate Growth amid Economic Uncertainty With a Special Focus The Gendered Impact of the COVID-19 Crisis on the Labor Market in Iran Spring/Summer 2023 Middle East and North Africa Region © 2023 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclu- sions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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TABLE OF CONTENTS Abbreviations and Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix ‫ چکیده مدیریتی‬. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii 1. Recent Economic and Policy Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Output and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Labor Market and Jobs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Public Sector Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Monetary Policy and Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 External Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2. Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Risks and Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Special Focus: The Gendered Impact of the COVID-19 Crisis on the Labor Market in Iran . . . . . . . . 23 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 List of Figures Figure 1 GDP Continued its Moderate Growth in 2022/23… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Figure 2 …Driven by an Expansion in Non-Oil Industries and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 3 Subdued Global Oil Demand Recovery Impacted the Country’s Oil Production and Export Price… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Figure 4 …but Manufacturing Production Grew Significantly, Thanks to Automotive Industries Growth . . . 2 Figure 5 Construction Sector in a Decade-Long Recession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Figure 6 Consumption Was the Main Driver of GDP Growth on the Demand Side . . . . . . . . . . . . . . . . . . . . . 3 Figure 7 Employment Reached the Highest Level After the Pandemic but Is Still Below Its Pre-Pandemic level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 iii Figure 8 Unemployment Rate also Declined but Mainly Due to a Lower Labor Force Participation Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Figure 9 The Pandemic Worsened Gender Disparities in Iran’s Labor Market . . . . . . . . . . . . . . . . . . . . . .6 Figure 10 Tax and Oil Revenues Grew in 2022/23… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 11 …which Helped Narrow the Fiscal Deficit as a Share of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 12 Inflation Accelerated Further in 2022/23… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 13 …Driven Mainly by Higher Food Prices Due to the Food Price and Import Subsidy Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure B1.1  Consumer Price Inflation in Rural Areas Has Been Higher in Recent Years . . . . . . . . . . . . . . . 10 Figure B1.2  The Inflation Felt by the Lowest Income Deciles Has Surpassed Those for Top Deciles, Especially after the Recent Food Price Measures in June 2022 . . . . . . . . . . . . . .10 Figure B1.3 Food, Housing, and Transport Are the Main Contributors to Inflation . . . . . . . . . . . . . . . . . . . . 10 Figure 14 Economic Uncertainties Drove Fluctuations in the Rial’s Value Against the Dollar . . . . . . . . . .11 Figure 15 M2 Growth Decelerated but M0 Growth Accelerated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Figure 16 M0 Growth Was Led by Claims on Banks in 2022/23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Figure 17 The Stock Market Stagnated Earlier this Year but Rebound Strongly Due to Inflationary Expectations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Figure 18 The CAB Registered a Surplus Due to Increasing Oil Exports Proceed… . . . . . . . . . . . . . . . . . 13 Figure 19 …but the Capital Account Registered a Deficit in H1-22/23 for the Seventh Consecutive Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Figure 20 Higher Import Prices Drove Imports above Non-Oil Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 Figure 21 China Remains the Top Importer of Iran’s Non-Oil Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 Figure B2.1  Iran’s External Trade Has Been Fluctuating Significantly Over the Last Decades… . . . . . . . . .15 Figure B2.2  …and Has Shifted from Europe Toward Asia… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Figure B2.3 …Mainly Due to the Increasing Role of China in Iran’s Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Figure B2.4  Iran’s Trade Concentration Has Increased During the Last Two Decades . . . . . . . . . . . . . . . . . 16 Figure 22 India Is Once Again among Iran’s Top 5 Import Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Figure 23 The New Development Plan Goals are Ambitious . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Figure 24 Stringency of COVID-19 Containment Measures in Iran and Selected Mashreq Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Figure 25 Distribution of Employment by Type of Job and Gender, 2019/20 (pre-COVID) . . . . . . . . . . . . 26 Figure 26 Changes in Employment 2019/20–2020/21, by Gender and Type of job . . . . . . . . . . . . . . . . .26 Figure 27 Trends in Female Labor Force Participation and Tertiary Educated Women in the Working Age Population . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 List of Tables Table 1 2023/24 Budget Law Expanded at the Same Rate as Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Table 2 Iran: Selected Economic and Financial Indicators, 2019/20–2025/26 . . . . . . . . . . . . . . . . . . . 20 Table 3 Changes in Participation and Unemployment 2019/20 and 2020/21, by Gender . . . . . . . . . .25 Table 4 Changes in Work Hours and Underemployment 2019/20,2020/21, by Gender . . . . . . . . . . . . 25 List of Boxes Box 1 How Inflation Affects Income Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Box 2 Iran’s International Trade Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 iv IRAN ECONOMIC MONITOR: MODERATE GROWTH AMID ECONOMIC UNCERTAINTY ABBREVIATIONS AND ACRONYMS CAB Current account balance MENA Middle East and North Africa CAR Capital adequacy ratio m/m Month-on-month CBI Central Bank of Iran mm Millimeters Corona Virus Disease 2019 COVID-19 NIMA Unified system of foreign exchange (Novel Coronavirus) transactions (Persian acronym) CPI Consumer price inflation NPL Non-performing loan bbl Barrel of crude oil OPEC Organization of Petroleum Exporting GDP Gross domestic product Countries IEM Iran Economic Monitor p.a. Per annum IPI Industrial Production Index PBO Plan and Budget Organization IRICA Islamic Republic of Iran’s Customs pp Percentage point Administration RHS Right-hand-side IRR Iranian Rial q/q Quarter-on-quarter ITS Information and telecommunication SCI Statistical Centre of Iran services TEDPIX Tehran Stock Exchange main index LHS Left-hand-side TSE Tehran Stock Exchange M0 Monetary Base US United States of America M2 Broad Money US$/USD United States Dollar mbpd Million barrels per day WAP Working age population MBRI CBI’s Monetary and Banking Research y/y Year-on-year Institute v PREFACE T he Iran Economic Monitor (IEM) provides an under the general guidance of Jean-Christophe Carret update on key economic developments and (Regional Director), Eric Le Borgne (Practice Man- policies. It examines these economic develop- ager, EMNMT), and Norbert Fiess (Lead economist, ments and policies in a longer-term and global context EMNDR). The special focus chapter on the gendered and assesses their implications for the outlook for the impact of COVID-19 was prepared by Silvia Redaelli country. The IEM’s coverage ranges from the macro- (Senior Economist, EMNPV), under the guidance of economy to financial markets to indicators of human Johannes Hoogeveen (Senior Economist, EAWPV). welfare and development. It is intended for a wide The findings, interpretations, and conclusions audience, including policy makers, business leaders, expressed in this Monitor are those of World Bank financial market participants, and the community of staff and do not necessarily reflect the views of the analysts and professionals engaged on Iran. Executive Board of the World Bank or the govern- The Iran Economic Monitor is a product of the ments they represent. World Bank’s Global Practice for Macroeconomics, For questions and comments on the content of Trade and Investment (MTI) team within the Global this publication, please contact Majid Kazemi (mka- Practice Group for Equitable Growth, Finance and zemi@worldbank.org) or Eric Le Borgne (eleborgne@ Innovation (EFI). The eleventh issue of the IEM was pre- worldbank.org). pared by Majid Kazemi (Economist, Task Team Leader, The data cut-off date for this report was June EMNMT) and Razieh Zahedi (Consultant, EMNMT) 22, 2023. vii EXECUTIVE SUMMARY I ran’s economy continued to grow moderately rate declined to a record low of 9 percent in 2022/23, for the third consecutive year in 2022/23,1 this was primarily driven by the decline in labor force albeit at a slower pace than in the previous participation as the population that is actively seek- year. Real gross domestic product (GDP) grew by ing jobs declined. Unemployment remained higher 3.8 percent in 2022/23, driven by expansions in ser- among women who were disproportionately impacted vices and manufacturing. Despite sanctions, the oil by the pandemic (see the Special Focus chapter). sector also expanded, aided by the tighter global oil Iran’s labor market challenges have been exacerbated markets. Favorable weather conditions helped the by the growing flight of human capital abroad in par- agriculture sector to marginally grow after the con- ticular among the high-skilled (including tech) labor tractions in previous years. On the expenditure side, force. Addressing labor market challenges, includ- private consumption was the main driver of GDP ing creating more job opportunities, improving labor growth. Government consumption contracted to con- force participation, and retaining skilled workers, will tain the budget deficit following a sharp expansionary be critical for Iran’s sustainable economic growth and policy in 2021/22. Meanwhile, exports and imports development in the future. both increased, and strong investment in machinery The Special Focus of the report highlights drove investments up, while construction investment the scarring effects of the COVID-19 pandemic, marginally improved. However, the economy contin- documenting the marked deterioration in labor ues to face growth constraints notably related to the market outcomes. Despite sizeable government economic sanctions, restricted access to external interventions to sustain the economy, in the first year markets and to the latest technology, and much- of the pandemic (2021/22), approximately 1 million needed foreign investment. jobs were lost, and labor force participation con- Job creation, however, has not recovered in tracted by 3 percentage points. Iranian women were tandem with the recent GDP growth. While employ- the most affected: two out of three jobs lost between ment grew moderately in 2022/23, it remains below 2019/20 and 2020/21 were previously held by the pre-pandemic level by about 0.7 million jobs, due women. The gendered impact of the crisis contrib- to job losses in the agricultural sector caused by uted to widening Iranian’s women disadvantage in drought and water shortages. Labor force participation also remained weak at 40.9 percent, indicating inad- 1 The Iranian calendar year starts on March 21 of every equate job opportunities. While the unemployment year and ends on March 20 of the following year. ix the labor market. Most importantly, the gains in female oil GDP underperforming due to ongoing sanctions labor force participation slowly accumulated since and years of underinvestment. The agriculture sec- 2011 vanished. Consistent with what is observed in tor is also expected to face challenges, as droughts other countries, women with young children were the and climate change impact performance. Fiscal pres- most affected by the crisis. The combined effect of sures are forecast to increase with higher expen- school closures and unequal intra-household alloca- ditures, including from the wage bill, pensions, and tion of care responsibilities, associated with prevailing transfers in response to high inflation and increased gender norms, pushed Iranian women with children cost of living. Lower projected oil prices are also out of the labor force. Whether or not these trends will expected to add to fiscal pressures. Prospects of job be reversed as the management of the COVID-19 pan- creation remain weak due to water shortages in the demic is normalized and the economy recovers from (labor intensive) agriculture sector and an uncertain the crisis remains an important policy question. investment environment. Inflationary expectations, The fiscal account received a boost from currency pressures, and a growing budget deficit are improved oil income and tax revenues. With tighter forecast to keep inflation elevated in the medium term. global oil markets and nuclear talks in the background, High inflation and the slow pace of job creation in turn high oil prices and increased oil exports significantly would negatively impact households’ welfare, despite increased oil revenue, although the growth fell short government transfers. On the external side, the cur- of meeting the budget target. Tax revenues were fully rent account balance is projected to remain weak realized and accounted for over 40 percent of the gov- due to declining oil prices along with subdued glob- ernment’s total revenues in 2022/23. The increase in al demand and growing competition for oil exports—in revenue helped the government to marginally reduce particular from Russia—in Iran’s main export destina- the budget deficit, to an estimated 2.3 percent of GDP, tions. At the same time, increased capital outflows and cover rising expenditures. and limited access to international reserves will add Consumer price inflation accelerated sharp- pressure to foreign exchange reserves. ly in 2022/23, following the new food import pol- The medium-term outlook is subject to sig- icies and fueled by further currency depreciation nificant internal and external risks. Domestically, and inflationary expectations. Both headline and there is a risk of escalating social tensions and strikes core inflation rose significantly in 2022/23, reach- in manufacturing. Continued internet disruptions ing 48.7 percent and 42.4 percent, respectively. This could further have long-lasting and harmful effects on marked the fourth consecutive year when consumer employment and economic activities, particularly in the prices rose by more than 40 percent. Food prices were service sector. Moreover, the country is exposed to sig- the main contributor to high inflation, accounting for nificant climate change challenges, including extreme about 40 percent of overall inflation. The phasing out weather events, floods, lower precipitation, and recur- of import subsidies for essential goods and the glob- ring droughts, whose impact on agricultural production, al surge in commodity prices following Russia’s inva- employment, and food security can be even more pro- sion of Ukraine drove up food prices. Elevated food found with larger shocks. Extreme temperatures also price inflation tends to particularly impact lower-income increase energy demand while lower rainfalls reduce households, as food expenses account for a larger por- the supply of hydropower energy, which could lead to tion of their expenditures. In addition, the depreciation energy shortages and adversely impact industries in of the rial by over 40 percent in 2022/23, compounded the absence of required investment and energy price the impact of rising global inflation and fueled inflation- reform. External risks include the possibility of an even ary expectations, putting additional pressure on prices. weaker global demand for oil, a sharper decline in oil Ongoing economic sanctions, slowing glob- prices, and the intensification of US sanctions. On the al demand, and energy shortages drive the eco- upside, a partial waiver of sanctions, or stronger ties nomic outlook. GDP growth is projected to remain with neighboring countries and China, could provide a modest in the medium term, with both oil and non- boost to oil and non-oil growth. x IRAN ECONOMIC MONITOR: MODERATE GROWTH AMID ECONOMIC UNCERTAINTY To ensure a sustainable growth rate in the bank supervision, the implementation of international face of multiple crises, significant reforms are regulations and best practices for asset classifica- necessary, including those on the fiscal side tion, liquidity management, and internal controls. and the banking sector. Structural fiscal reforms Other priorities for banking reform include creating a should include rightsizing expenditures in the bud- comprehensive contingency and crisis management get, reducing extrabudgetary spending, gradual framework, strengthening the asset quality exami- reforms to energy prices, and creating more sustain- nation process, conducting an asset quality review able revenues by improving collection and reducing to identify viable banks for recapitalization and to exemptions. The banking system faces multiple and improve capital and liquidity buffers and resolve non- longstanding challenges including negative capi- viable banks, and securitizing government debt to tal adequacy ratio and high non-performing loans. generate cash flow for the banks to use as collateral Addressing these challenges requires enhanced in the interbank market. Executive Summary xi ‫چکیده مدیریتی‬ ‫کار‪ ،‬و حفظ کارگران ماهر‪ ،‬برای رشد و توسعه اقتصادی پایدار ایران در‬ ‫اقتصاد ایران در سال ‪ ،1401‬برای سومین سال متوالی به رشد متوسط‬ ‫آینده بسیار حائز اهمیت خواهد بود‪.‬‬ ‫خود ادامه داد‪ ،‬البته با رسعت کمرتی نسبت به سال قبل‪ .‬تولید ناخالص‬ ‫گزارش مترکز ویژه‪ ،‬به بررسی اثرات ماندگار ویروس کرونا‬ ‫داخلی در سال ‪ 1401‬به میزان ‪ 3.8‬درصد رشد کرد که عمدتا ناشی از‬ ‫و بدترشدن قابل توجه بازار کار پرداخته است‪ .‬با وجود دخالت های‬ ‫رشد بخش خدمات و بخش صنعت بود‪ .‬بخش نفت نیز با وجود تحریم‬ ‫قابل‌ توجه دولت برای حفظ وضعیت اقتصاد‪ ،‬در سال اول همه گیری‬ ‫ها‪ ،‬به کمک تنگناهای بازارهای جهانی نفت رشد یافت‪ .‬رشایط اقلیمی‬ ‫کرونا (‪ ،)1399‬تقریباً یک میلیون شغل از بین رفت و مشارکت نیروی‬ ‫مساعد به بخش کشاورزی کمک کرد تا پس از رکود سال‌ های گذشته‪،‬‬ ‫کار ‪ ۳‬واحد درصد کاهش یافت‪ .‬زنان ایرانی بیشرتین آسیب را دیدند‪،‬‬ ‫رشد اندکی داشته باشد‪ .‬در سمت تقاضا‪ ،‬مرصف خصوصی محرک اصلی‬ ‫از هر سه شغلی که بین سال‌ های ‪ 1398‬و ‪ 1399‬از بین رفت‪ ،‬دو‬ ‫رشد تولید ناخالص داخلی بود‪ .‬مرصف دولت پس از سیاست انبساطی‬ ‫شغل متعلق زنان بود‪ .‬تأثیر جنسیتی این بحران‪ ،‬وضعیت نامناسب‬ ‫شدید در سال ‪ 1400‬به منظور مهار کرسی بودجه کاهش یافت‪ .‬در‬ ‫زنان ایرانی در بازار کار را بدتر کرده است‪ .‬مهم تر اینکه‪ ،‬دستاوردهای‬ ‫همین حال‪ ،‬صادرات و واردات هر دو افزایش یافتند و رشد شدید‬ ‫مشارکت زنان در نیروی کار که از سال ‪ 1390‬به تدریج کسب شده‬ ‫رسمایه گذاری در ماشین آالت باعث افزایش رسمایه گذاری شد درحالی‌که‬ ‫بود‪ ،‬از بین رفت‪ .‬هامنند کشورهای دیگر‪ ،‬زنان دارای فرزند خردسال‬ ‫رسمایه گذاری در ساخت و ساز به میزان اندکی بهبود یافت‪ .‬با این حال‪،‬‬ ‫بیشرتین آسیب را از این بحران دیده‌ اند‪ .‬تاثیر همزمان تعطیلی مدارس‬ ‫اقتصاد هم چنان با محدودیت های رشد به ویژه مرتبط با تحریم های‬ ‫و تخصیص نابرابر مسئولیت های خانواده که با هنجارهای جنسیتی رایج‬ ‫اقتصادی‪ ،‬محدودیت دسرتسی به بازارهای خارجی و دسرتسی به آخرین‬ ‫مرتبط است‪ ،‬زنان ایرانی دارای فرزند را از نیروی کار بیرون راند‪ .‬اینکه‬ ‫فناوری‪ ،‬و رسمایه گذاری خارجی مورد نیاز مواجه است‪.‬‬ ‫با عادی شدن مدیریت همه گیری کووید‪ 19-‬و بهبود اقتصاد از بحران‪،‬‬ ‫با این حال‪ ،‬اشتغال همسو با رشد تولید ناخالص داخلی اخیر‬ ‫این روندها معکوس خواهند شد یا خیر‪ ،‬یک سوال مهم سیاستی باقی‬ ‫بهبود نیافته است‪ .‬با وجود رشد متوسط اشتغال در سال ‪ ،1401‬به دلیل‬ ‫می ماند‪.‬‬ ‫از بین رفنت مشاغل ناشی از خشکسالی و کمبود آب در بخش کشاورزی‪،‬‬ ‫بهبود درآمد نفت و درآمدهای مالیاتی باعث تقویت بودجه‬ ‫میزان اشتغال در حدود ‪ 0.7‬میلیون شغل کمرت از رشوع همه گیری کرونا‬ ‫شد‪ .‬قیمت باالی نفت و افزایش صادرات نفت به دلیل تنگناهای‬ ‫هست‪ .‬مشارکت نیروی کار نیز در سطح ضعیف ‪ 40.9‬درصد باقی‬ ‫بازارهای جهانی نفت و در پس‌زمینه مذاکرات هسته ای‪ ،‬باعث افزایش‬ ‫ماند که نشان دهنده فرصت های شغلی ناکافی است‪ .‬هر چند نرخ‬ ‫قابل مالحظه درآمد نفتی شد‪ ،‬هرچند رشد درآمد نفتی کمرت از هدف‬ ‫بیکاری در سال ‪ 1401‬به ‪ 9‬درصد کاهش یافت‪ ،‬این امر عمدتاً ناشی‬ ‫بودجه تحقق یافت‪ .‬درآمدهای مالیاتی به طور کامل محقق شد و بیش‬ ‫از کاهش مشارکت نیروی کار بود زیرا جمعیت فعال در جستجوی کار‬ ‫از ‪ 40‬درصد از کل درآمدهای دولت در سال ‪ 1401‬را به خود اختصاص‬ ‫کاهش یافته است‪ .‬نرخ بیکاری زنان ‪-‬که به طور نسبی بیشرت متاثر از‬ ‫داد‪ .‬افزایش درآمد به دولت کمک کرد تا کرسی بودجه ‪-‬که در حدود‬ ‫همه گیری کرونا بودند‪ -‬هم‌چنان باالتر باقی ماند (برای اطالعات بیشرت‬ ‫‪ 2.3‬درصد تولید ناخالص داخلی تخمین زده می شود‪ -‬را کاهش و‬ ‫به فصل مترکز ویژه مراجعه کنید)‪ .‬چالش های بازار کار ایران با رشد‬ ‫مخارج رو به افزایش را پوشش دهد‪.‬‬ ‫فزاینده خروج رسمایه انسانی به خارج از کشور‪ ،‬به ویژه در میان نیروی‬ ‫ف کننده در سال ‪ ،1401‬به دنبال سیاست های‬ ‫تورم قیمت مرص ‌‬ ‫کار ماهر (از جمله فناوری) تشدید شده است‪ .‬پرداخنت به چالش های‬ ‫جدید واردات مواد غذایی و با کاهش بیشرت ارزش پول داخلی و انتظارات‬ ‫بازار کار از جمله ایجاد فرصت های شغلی بیشرت‪ ،‬بهبود مشارکت نیروی‬ ‫‪xiii‬‬ ‫چشم انداز میان مدت در معرض ریسک های قابل توجه داخلی‬ ‫تورمی به شدت شتاب گرفت‪ .‬تورم و تورم هسته در سال ‪ 1401‬به طور‬ ‫و خارجی است‪ .‬در داخل کشور‪ ،‬خطر تشدید تنش های اجتامعی و‬ ‫قابل توجهی افزایش یافتند و به ترتیب به ‪ 48.7‬و ‪ 42.4‬درصد رسیدند‪ .‬این‬ ‫اعتصابات در بخش صنعت وجود دارد‪ .‬ادامه اختالالت اینرتنت می تواند‬ ‫چهارمین سال متوالی بود که تورم مرصف‌ کننده بیش از ‪ 40‬درصد افزایش‬ ‫اثرات مخرب بلندمدت بر اشتغال و فعالیت های اقتصادی‪ ،‬به ویژه در‬ ‫یافت‪ .‬قیمت مواد غذایی عامل اصلی تورم باال بوده و حدود ‪ 40‬درصد از‬ ‫بخش خدمات داشته باشد‪ .‬عالوه بر این‪ ،‬کشور در معرض چالش های‬ ‫تورم را تشکیل داد‪ .‬حذف یارانه واردات کاالهای اساسی و افزایش جهانی‬ ‫تغییرات اقلیمی قابل توجهی از جمله رویدادهای شدید آب و هوایی‪،‬‬ ‫قیمت کاالها پس از حمله روسیه به اوکراین‪ ،‬قیمت مواد غذایی را افزایش‬ ‫سیالب‪ ،‬بارش های کمرت و خشکسالی های مکرر است که تأثیر آن‌ها بر‬ ‫داد‪ .‬افزایش تورم قیمت مواد غذایی به ویژه بر خانوارهای کم درآمد تأثیر‬ ‫تولید کشاورزی‪ ،‬اشتغال و امنیت غذایی می تواند با شوک های بزرگ‌تر‬ ‫می گذارد‪ ،‬زیرا هزینه های مواد غذایی بخش بزرگرتی از مخارج آن‌ها را‬ ‫حتی عمیق‌تر باشد‪ .‬در عین حال‪ ،‬دمای شدید هوا‪ ،‬تقاضای انرژی را‬ ‫تشکیل می دهد‪ .‬عالوه بر این‪ ،‬کاهش بیش از ‪ 40‬درصدی ارزش ریال در‬ ‫افزایش می دهد در حالی که بارندگی های کمرت عرضه انرژی برق آبی‬ ‫سال ‪ ،1401‬نیز بر تأثیر افزایش تورم جهانی افزوده و انتظارات تورمی را‬ ‫را کاهش می دهد‪ ،‬که در صورت عدم رسمایه گذاری مورد نیاز و اصالح‬ ‫تقویت کرده و فشار مضاعفی بر قیمت ها وارد کرده است‪.‬‬ ‫قیمت انرژی می تواند منجر به کمبود انرژی و تأثیر نامطلوب بر صنایع‬ ‫تحریم های اقتصادی به همراه کاهش تقاضای جهانی و کمبود‬ ‫شود‪ .‬ریسک های خارجی شامل احتامل کاهش تقاضای جهانی‪ ،‬کاهش‬ ‫انرژی بر چشم انداز اقتصادی اثر گذارند‪ .‬پیش بینی می شود که رشد‬ ‫شدیدتر قیمت نفت و تشدید تحریم های آمریکا است‪ .‬از سوی دیگر‪،‬‬ ‫ن مدت‪ ،‬محدود باقی مباند‪ ،‬زیرا تولید‬ ‫تولید ناخالص داخلی در میا ‌‬ ‫معافیت محدود از تحریم ها یا روابط قویرت با کشورهای همسایه و‬ ‫ناخالص داخلی نفتی و غیرنفتی به دلیل تحریم های مستمر و سال‌ ها‬ ‫چین‪ ،‬می تواند به رشد نفت و غیرنفتی کمک کند‪.‬‬ ‫رسمایه گذاری ناکافی‪ ،‬کمرت از انتظار عمل می کنند‪ .‬انتظار می رود که‬ ‫برای تضمین نرخ رشد پایدار در مواجهه با بحران‌ های متعدد‪،‬‬ ‫بخش کشاورزی به دلیل تاثیرات خشکسالی و تغییرات اقلیمی نیز با‬ ‫اصالحات قابل توجهی از جمله اصالحات بودجه ای و سیستم بانکی‬ ‫چالش هایی روبرو شود‪ .‬پیش بینی می شود که فشارهای بودجه ‌ای به‬ ‫ه باید شامل اصالح هزینه ها‬ ‫رضوری است‪ .‬اصالحات ساختاری بودج ‌‬ ‫دلیل باالرفنت هزینه ها‪ ،‬از جمله مخارج حقوق و دستمزد‪ ،‬مستمری‬ ‫در بودجه‪ ،‬کاهش هزینه های فرا بودجه ای‪ ،‬اصالحات تدریجی قیمت‬ ‫بازنشستگی‪ ،‬و کمک هزینه های معیشتی برای جربان اثرات تورم باال‬ ‫انرژی و ایجاد درآمدهای پایدارتر از طریق بهبود جمع آوری مالیات و‬ ‫و افزایش هزینه های زندگی‪ ،‬افزایش یابد‪ .‬انتظار می رود کاهش قیمت‬ ‫کاهش معافیت ها باشد‪ .‬نظام بانکی با چالش های مزمن متعددی از‬ ‫نفت نیز بر فشارهای بودجه ‌ای بیفزاید‪ .‬چشم انداز ایجاد شغل به دلیل‬ ‫جمله نسبت کفایت رسمایه منفی و تسهیالت غیرجاری باال مواجه است‪.‬‬ ‫کمبود آب در بخش کشاورزی و عدم اطمینان در محیط رسمایه گذاری‬ ‫رسیدگی به این چالش ها مستلزم افزایش نظارت بانکی‪ ،‬اجرای مقررات‬ ‫ضعیف است‪ .‬پیش بینی می شود که انتظارات تورمی‪ ،‬فشارهای ارزی و‬ ‫بین املللی و بهرتین شیوه های جهانی برای طبقه بندی دارایی ها‪،‬‬ ‫کرسی بودجه رو به افزایش‪ ،‬تورم را در میان مدت باال نگه دارد‪ .‬تورم باال‬ ‫مدیریت نقدینگی و کنرتل های داخلی است‪ .‬از دیگر اولویت های‬ ‫و رسعت کند ایجاد شغل به نوبه خود بر رفاه خانوارها ‪-‬علیرغم کمک‬ ‫اصالحات بانکی می توان به موارد زیر اشاره کرد‪ :‬ایجاد چارچوب جامع‬ ‫هزینه های معیشتی دولتی‪ -‬تأثیر منفی می گذارد‪ .‬در بخش خارجی‪،‬‬ ‫مدیریت بحران‪ ،‬تقویت فرآیند بررسی کیفیت دارایی ها‪ ،‬انجام بررسی‬ ‫انتظار می رود که تراز حساب جاری به دلیل کاهش قیمت نفت همراه‬ ‫کیفیت دارایی ها برای شناسایی بانک های قابل احیا برای افزایش‬ ‫با کاهش تقاضای جهانی و رقابت رو به افزایش برای صادرات نفت – به‬ ‫رسمایه و بهبود حائل های رسمایه و نقدینگی و حل و فصل بانک های‬ ‫ویژه با روسیه ‪ -‬در مقاصد اصلی صادراتی ایران‪ ،‬ضعیف باقی مباند‪ .‬در‬ ‫غیرقابل احیا‪ ،‬و استفاده از اوراق بدهی برای ایجاد جریان نقدی برای‬ ‫عین حال‪ ،‬افزایش خروج رسمایه و دسرتسی محدود به ذخایر بین املللی‬ ‫بانک ها و استفاده به عنوان وثیقه در بازار بین بانکی‪.‬‬ ‫فشار بر ذخایر ارزی خواهد افزود‪.‬‬ ‫‪xiv‬‬ ‫‪IRAN ECONOMIC MONITOR: MODERATE GROWTH AMID ECONOMIC UNCERTAINTY‬‬ 1 RECENT ECONOMIC AND POLICY DEVELOPMENTS Output and Demand 8.8 percent in 2022/23. While the average price of Iran’s crude surged by 21.2 percent in line with the Iran’s economy continued to grow for the third historical Brent premium (Figure 3), the final selling consecutive year in 2022/23,2 albeit at a slower price is likely to have been lower due to sanctions- pace than in 2021/22. Real gross domestic prod- related heavy discounts. Oil production reached a uct (GDP) grew by 3.8 percent in 2022/23, driven four-year high in June 2023 (Iran is exempt from by both oil and non-oil sectors (Figure 1). A rebound OPEC’s quota). However, oil production remained in economic activity led to an expansion in services 1.1 million barrels per day (mbpd) below pre-sanc- and manufacturing, driving non-oil sector growth of tions level of 2018. The oil and gas sector has 3.5 percent. The oil sector also expanded by 10 per- suffered from years of under-investment, leading cent, partly due to the tight global oil market. Favorable to a 22 percent decline in net capital stock in the weather conditions and a moderate increase in rain- sector in 2021/22 compared to a decade earlier, fall helped agriculture production to grow marginally limiting the prospects of a significant expansion in by 1.1 percent (Figure 2). The recent economic recov- production capacity in the near term. ery helped to narrow the income gap with income Non-oil industries expanded strongly in peers; this gap had previously widened with a decade 2022/23 despite challenges from energy short- of stagnation in Iran (2010/11–2019/20). ages, strikes, and an uncertain investment envi- Oil production volumes grew moderately ronment. The non-oil industries grew by 6.5 percent by 3.3 percent in 2022/23, thanks to tighter global oil markets.3 However, Iran’s crude oil pro- 2 The Iranian calendar year begins on March 21 and ends duction growth rate was below the average growth on March 20 of the following year. rates in OPEC countries which recorded a 7 per- 3 As per OPEC’s secondary sources. Official data on pro- cent increase. As a result, Iran’s share in OPEC duction and exports have not been published since the production declined from 9.2 percent in 2021/22 to re-imposition of US sanctions in 2018. 1 FIGURE 1 • GDP Continued Its Moderate Growth …Driven by an Expansion in Non-Oil FIGURE 2 •  in 2022/23… Industries and Services 20 80 8 15 60 Contribution to y/y GDP growth, pp 4 10 40 Percent Percent 5 20 0 0 0 –4 –5 –20 –8 –10 –40 2013/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 –12 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2018/19 2019/20 2020/21 2021/22 2022/23 Non-oil GDP growth rate (LHS) GDP growth rate (LHS) Oil Agriculture Non-oil industries Oil GDP growth rate (RHS) Services GDP at factor price Source: Central Bank of Iran (CBI) and World Bank staff calculations. Source: CBI and World Bank staff calculations. FIGURE 3 • Subdued Global Oil Demand FIGURE 4 • …but Manufacturing Production Grew Recovery Impacted the Country’s Oil Significantly, Thanks to Automotive Production and Export Price Industries Growth 4 140 40 120 30 3 100 Growth rate, percent 20 80 10 US$/bbl Mbpd 2 60 0 -10 40 1 -20 20 -30 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 0 0 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jan Apr Jul Oct 2018 2019 2020 2021 2022 2023 Chemical industries Basic metals Iran's oil production (LHS) Iran Heavy oil price (RHS) Automobile and parts Industrial production Index Source: OPEC Monthly Oil Market Report. Source: Monetary and Banking Research Institute (MBRI). in 2022/23, with manufacturing leading the growth in Iran, stagnated since October 2022 due to subdued (9.5 percent). The Industrial Production Index (IPI)4 of global demand for commodities. selected industries in the stock market has been on an upward trend since April 2022 (Figure 4), driven by a 4 The Monetary and Banking Research Institute (MBRI) strong expansion in the automotive industry and basic publishes the index, covering over 280 industrial compa- nies listed on the stock exchange that account for more metals after contracting in 2021 due to power outages, than half of Iran’s manufacturing production. microchip shortages in the aftermath of the pandemic, 5 Nevertheless, the automobile industry recorded a nega- and increased restrictions on imports.5 However, petro- tive total net profit, and the total losses in H1-22/23 were chemical products, the largest manufacturing industry twice the losses in H1-21/22 2 IRAN ECONOMIC MONITOR: MODERATE GROWTH AMID ECONOMIC UNCERTAINTY FIGURE 5 • Construction Sector in a Decade- FIGURE 6 • Consumption Was the Main Driver of Long Recession GDP Growth on the Demand Side 35,000 1,200 20 30,000 15 Contribution to y/y GDP growth, pp 1,000 25,000 10 800 Trillion Rials 20,000 5 600 15,000 0 400 –5 10,000 200 –10 5,000 –15 0 0 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 –20 Q1Q2 Q3 Q4 Q1Q2 Q3 Q4 Q1Q2 Q3 Q4 Q1Q2 Q3 Q4 Q1Q2 Q3 Q4 2018/19 2019/20 2020/21 2021/22 2022/23 Building permits issued for construction in Tehran Private consumption Gov. consumption Investment Construction value added in real term (2016/17=100) Exports Imports Inventory & SD GDP Source: CBI, Statistical Center of Iran (SCI), and World Bank staff calculations. Source: CBI and World Bank staff calculations. Limited financing and rising production in the guaranteed purchase price of agricultural prod- costs caused a contraction in the construc- ucts, the recent elimination of the subsidized exchange tion sector. A declining share of bank credit to the rate has pushed the prices of fertilizers and other agri- construction sector (from 13 percent in 2018/19 cultural inputs up, increasing production costs and to 7.1 percent in 2022/236) coupled with skyrocket- impacting domestic food production. To overcome ing prices of construction materials and land (over challenges in the agricultural sector, it is crucial that 280 and 150 percent over the past three years, re- appropriate policies are implemented to address water spectively) have maintained the construction sector scarcity, climate change, and high production costs to in a decade-long recession (Figure 5). Demand for contribute to food security and reduce import needs housing has also been impacted by soaring housing prices, which has not only made house ownership un- 6 Since 2016/17, with the exception of 2018/19, the share affordable for many Iranians but also pushed up rent of credit allocated to housing has been below 10 percent. prices.7 To boost construction, the government had 7 Despite a 25 percent cap on rent increase, the average announced plans to more than double housing pro- rent in Tehran registered a record high with a 59 percent duction and build one million affordable houses per increase in 2021/22. year in the next four years but is reported to have met 8 Many banks find it not cost-effective to provide credit to only about a quarter of its goal in the first year. The the construction sector. This is because the cost of pro- viding money is higher than the approved interest rate government-mandated credit to the construction sec- on bank credit. Moreover, there is a maturity mismatch tor was 20 percent of total bank credits but allocations of deposits and loans that puts more pressure on banks. did not materialize in 2022/23.8 9 The water crisis in Iran is not solely caused by a natural The agricultural sector in Iran has shown scarcity of water but is also a result of mismanagement moderate growth of 1.1 percent in 2022/23, and poor governance of water resources. The root driven by more favorable weather conditions. How- causes of water scarcity include rapid population growth and improper patterns of settlement, the location of ever, this sector continues to grapple with numerous water-consuming industries (such as steel) in provinces challenges, particularly water shortages,9 that pose a with water stress, inefficient agriculture production, and threat to both agricultural production and food secu- mismanagement in the distribution of water resources. rity. Despite better growing conditions and an increase See Chapter 7 in Azadi et. al (2022). Recent Economic and Policy Developments 3 (for more information, see the Special Focus chapter the agriculture sector, which lost 10.2 percent of its in the Iran Economic Monitor, Spring 2022). employment due to drought and water shortages. The service sector was one of the main driv- The service sector has seen a strong expansion after ers of non-oil growth during the last two years. The the pandemic (over 13 percent), but this has not fully sector continued its expansion in 2022/23 (2.7 per- translated into employment and the sector remains cent, y/y), following a strong expansion in 2021/21 slightly below its pre-pandemic level. (6.5 percent). This growth was mainly driven by a Even with a growing working-age popula- rebound in “transport and storage” and “wholesale tion, labor force participation remained low in part and retail” services, as well as the sustained growth of due to inadequate job opportunities. Labor force “Information and telecommunication services (ITS)”. participation in 2022/23 remained low at 40.9 per- Over the last decade, the expansion of the ITS and cent, 3.2 pp below pre-pandemic level in 2019/20 banking and insurance sectors has been the primary and with a significant gender gap (13.6 percent and driver of growth in the service sector, with average 68.2 percent for females and males, respectively). annual real growth rates of 17 percent and 10.5 per- During the past three years, the working-age pop- cent, respectively. The gig economy, however, is ulation has increased by 2.1 million,11 but the active facing challenges related to shortages of high-skilled population has declined by 1.1 million compared to labor and concerns about the quality and stability of 2019/20 (Figure 8). The decline in the active popula- the internet.10 The service sector is crucial for non-oil tion was partly due to the lack of job opportunities in growth in Iran, and its sustained expansion will be crit- the agriculture sector, especially in rural areas (4.5 pp ical for future economic development. decline, from 47.3 percent in 2019/20). On the expenditure side, private consump- The decline in the unemployment rate does tion was the main driver of GDP growth in 2022/23, not fully reflect labor market challenges. While expanding strongly by 8.7 percent. This higher con- the unemployment rate declined to a record low sumption was driven by the continued rebound after of 9 percent in 2022/23, this decline was driven by the pandemic, but also inflation hedging through the the above-mentioned reduction in the economically purchase of durable goods due to negative real interest active population as more long term unemployed rates, increased uncertainty, and elevated inflationary stopped looking for work (e.g., discouraged workers). expectations. Meanwhile, government consumption Unemployment also varies significantly among differ- contracted by 3.6 percent due to the under-realization ent subgroups. While male unemployment registered of revenues, following a sharp expansionary budget in a low of 7.7 percent in 2022/23, the unemployment 2021/22. Exports and imports expanded by 8.2 per- cent and 7.5 percent, respectively. Investment also 10 Recently, Iran faced further challenges with internet expanded by 6.7 percent in 2022/23 driven by machin- disruptions and limited access to certain online plat- ery investment. Nonetheless, the contraction of gross forms and applications in the aftermath of protests in fixed capital formation by over 50 percent in the past the country. According to an online survey conducted by the computer union organization, during the internet decade points to a significant decline in long-term disruption in September 2022, over 41 percent of com- investments, which could have negative implications panies experienced a loss of 25 to 50 percent of their for the future growth and development. income, while 47 percent of them lost more than half of their sales. The cost of internet disruptions is estimated to be as high as US$36 million per day (according to Net Labor Market and Jobs Blocks). Furthermore, Iran’s rank in the fixed broadband speed test is 147 out of 181 countries, highlighting its The labor market in Iran has remained weak due slow internet speed (speedtest.net). 11 The growth of the working-age population has been to sluggish job creation. Employment grew mod- uneven in Iran, with urban areas experiencing an increase erately by 1.1 percent in 2022/23, but employment of 2.3 million, while rural areas have seen a decline of figures still fall 0.7 million jobs short of those registered 0.2 million. This suggests a trend of migration from rural in 2019/20 (Figure 7). Job losses occurred mainly in to urban areas. 4 IRAN ECONOMIC MONITOR: MODERATE GROWTH AMID ECONOMIC UNCERTAINTY FIGURE 7 • Employment Reached the Highest FIGURE 8 • Unemployment Rate also Declined Level after the Pandemic but Is Still but Mainly due to a Lower Labor Below Its pre-Pandemic Level Force Participation Rate 30 48 12 46 10 28 Population, million 44 8 26 Percent Percent 42 6 24 40 4 22 38 2 20 36 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019/20 2020/21 2021/22 2022/23 2019/20 2020/21 2021/22 2022/23 Employment Active population Labor force participation rate (LHS) Unemployment rate (RHS) Source: SCI and World Bank staff calculations. Source: SCI and World Bank staff calculations. rate among females, youth, and university graduates significant economic and social implications, includ- was 15.8 percent, 22.6 percent, and 12.9 percent, ing social unrest, lower productivity, lower economic respectively. Underemployment also remained high growth, and higher levels of poverty and inequality. at 9.5 percent in 2022/23, which also highlights the Addressing these challenges will require a comprehen- weak labor market in Iran. sive approach that includes policies to stimulate job The disproportionate impact of the pan- creation, improve access to education and training, and demic on female employment persists. While male promote greater gender equality in the labor market. employment in 2022/23 was slightly above its pre-cri- Increased emigration of skilled workers sis level in 2019/20 (0.6 percent), female employment adds to labor market challenges. Iran ranks among declined by 15.5 percent (see the Special Focus the countries with the highest rates of brain drain.13 This chapter for a more detailed analysis on the gendered trend has been ongoing for the past four decades, with impact of COVID-19 on the labor market). Compared a recent acceleration particularly among technicians in to before the pandemic, the employment-to-working- the oil and energy industries, ICT experts, and health- age population ratio and labor force participation rate care workers such as nurses and surgeons.14 Along with for females were 2.6 pp and 3.4 pp lower in 2022/23, adding to pre-existing gender disparities in labor mar- ket outcomes.12 Despite a low participation rate, the 12 Despite having a highly educated female population, Iran’s female participation rate is among the five low- female unemployment rate in 2022/23 (15.8 percent) est in the world. Additionally, Iran’s ranking in the 2022 was higher than for men (7.7 percent). Global Gender Gap Index is 143 out of 146 countries The combination of low labor force partici- (World Economic Forum). The index takes into account pation, high unemployment and underemployment four key areas: economic participation and opportunity, is indicative of significant labor market challenges. educational attainment, health and survival, and political Iran’s economy is not creating enough jobs to keep empowerment. 13 While the exact number of Iranians living abroad is dif- pace with the growing working-age population. There ficult to determine, a report by the Ministry of Foreign are further significant disparities in job opportunities Affairs estimates it to be over 4 million people. The US across different groups, particularly for women, youth, has the highest number of Iranian migrants at 1.5 million, and university graduates. These challenges can have followed by Canada with 400 thousand. Recent Economic and Policy Developments 5 FIGURE 9 • The Pandemic Worsened Gender Disparities in Iran’s Labor Market 80 70 60 50 Percent 40 30 20 10 0 Men Women Men Women Men Women Labor force participation rate Employment ratio Unemployment rate Pre-pandemic 2019/20 Post-pandemic 2022/23 Source: SCI and World Bank staff calculations. additional challenges such as the shortage in experts, due to a strong expansion in corporate tax (62 per- internet disruptions, and an uncertain investment envi- cent). Corporate tax accounted for about two-thirds of ronment, this trend has driven the relocation of startups direct tax revenue, followed by income tax (29 percent) in Iran to neighboring countries. Despite certain initia- and wealth tax (7 percent). In 2022/23, sales and tives, such as the council for elites, support programs consumption tax also met 84 percent of its planned for the Iranian diaspora and skilled professionals, the budget target, in part aided by the inflation effect on outflow of skilled workers continues. Addressing this the nominal growth of the tax base. The sale of govern- issue will require comprehensive measures to retain ment assets also met 23 percent of its budget target. and attract skilled workers, including providing them Improved oil revenue and tax revenues with better job opportunities and incentives for staying in 2022/23 helped the government cover most in the country. expenditures and curb the fiscal deficit. Bud- get expenditures grew nominally due to higher cash transfers and higher import bills to mitigate the effect Public Sector Finance15 of high inflation16 coupled with higher wage bills and In 2022/23, the government fiscal account was supported by improved oil income and tax reve- 14 According to the Iran Migration Outlook report (2021), nues. With tighter global oil markets and nuclear talks the number of migrant students has tripled over the past in the background, high oil prices and oil exports led two decades. 15 Latest official fiscal data available is for 2020/21. The to significant growth in oil revenues in 2022/23 (over information reported for subsequent years is primarily 70 percent growth rate), reaching 4.3 percent of GDP, based on reports and interviews of authorities reported the highest level since sanctions were reimposed. The in the media. growth in oil revenue, however, met only about 80 per- 16 In May 2022, the government discontinued the subsi- cent of the optimistic budget target (Figure 10). Tax dized exchange rate for imports of major food staples revenues were also fully realized and contributed to including wheat, poultry, eggs, dairy, and cooking oil, and replace them with a combination of direct transfers and over 40 percent of government revenues despite an electronic coupons. This measure also aims to manage under-realization of import tax but remained stable domestic consumption and curb the smuggling of sub- as a share of GDP at 5.1 percent. In 2022/23, direct sidized food to neighboring countries. For more details, tax revenues nominally grew by 56 percent, mainly see Iran Economic Monitor, Spring 2022. 6 IRAN ECONOMIC MONITOR: MODERATE GROWTH AMID ECONOMIC UNCERTAINTY FIGURE 10 • Tax and Oil Revenues Grew in …which Helped Narrow the Fiscal FIGURE 11 •  2022/23… Deficit as a Share of GDP 500 20 15 400 10 Growth rate, percent Percent of GDP 300 5 200 0 5 100 10 0 15 –100 20 2016/17 2017/18 2018/19 2019/20 2020/21 2022/23 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 Oil revenues Tax revenues Other revenues Current expenditures Capital expenditures Fiscal deficit Oil revenue growth Tax revenue growth Source: CBI, Plan and Budget Organization (PBO), media, and World Bank staff Source: CBI, PBO, media, and World Bank staff calculations. calculations. adjustments to pensions, but it declined to 13.2 per- in recent months. This lower implicit exchange rate cent of GDP. The current expenditure met 97 percent acts as a potential buffer for filling the possible short- of the planned budget while the capital expenditure fall in oil revenues denominated in local currency if fully realized (Figure 11). As a large portion of the gov- needed. Current expenditures are expected to grow ernment-issued bonds was used for servicing existing by 51 percent compared to 44 percent for investment debt, the remaining budget deficit was financed expenditures. The public sector wages and pensions through the National Development Fund and borrow- are to increase by an average of 20 percent—implying ing from the banking system. a real wage cut given the high inflation rate (above Expenditures in the 2023/24 Budget Law 40 percent). Like previous years, the public wage are set to grow more than revenues, resulting in increase would be progressive with higher wage higher financing needs. The government plans to increases for employees with lower salaries. rely more on tax revenues, which are projected to grow Despite the flat budget compared to the by 67.6 percent and make up about half of total reve- previous year, the 2023/24 budget would result nues, marking a significant increase from the share in in a more than doubling of the fiscal deficit com- the previous year’s budget law (44 percent). The high- pared to the 2022/23. The deficit is planned to est expected increase in tax revenues relative to the be financed primarily through government bonds previous year’s budget law is corporate taxes, which (63 percent) and privatization proceeds (36 percent). are planned to grow by 118 percent.17 Oil export rev- Bond issuance is planned to increase by 80 percent enues are calculated based on an oil export volume but over 90 percent will be used to service existing of 1.4 mbpd and an average oil price of US$85/bbl. debt. The sale of government assets is expected to Given the competition from the discounted price of expand by 49 percent. Russian oil, the realized oil exports in 2022/23, and softening global oil demand next year, it seems both 17 This increase seems optimistic as many businesses have oil price and export volume assumptions are opti- been struggling with the pandemic, investment uncer- mistic. The implicit exchange rate assumed in the tainties, and weak demand due to declining purchasing bill is IRR230,000/US$, the same rate as last year’s, power during recent years, while many semi-governmental despite a sharp depreciation of the domestic currency entities remain tax exempt. Recent Economic and Policy Developments 7 TABLE 1 • 2023/24 Budget Law Expanded at the Same Rate as Inflation 2022/23-Budget Law 2023/24-Budget Law (IRR Trillion) Percent of GDP (IRR Trillion) Percent of GDP (US$ billion)a Growth (%) Total revenues 12,173 12.0 17,863 12.3 78 46.7 Current revenues 6,977 6.9 10,541 7.3 46 51.1 Tax revenues 5,324 5.2 8,925 6.2 39 67.6 Direct taxes 2,476 2.4 4,430 3.1 19 78.9 Indirect taxes 2,848 2.8 4,495 3.1 20 57.8 Other revenues 1,653 1.6 1,616 1.1 7 –2.2 Disposal of non-financial assets 5,196 5.1 7,322 5.0 32 40.9 Total expenditures 12,591 12.4 18,838 13.0 82 49.6 Current expenditures 9,990 9.8 15,088 10.4 66 51.0 Capital expenditures 2,601 2.6 3,750 2.6 16 44.2 Operational balance –3,013 –3.0 –4,548 –3.1 –20 50.9 Budget balance –418 –0.4 –975 –0.7 –4 133.4 Disposal of financial assets 1,768 1.7 2,940 2.0 13 66.3 Acquisition of financial assets 1,350 1.3 2,018 1.4 9 49.5 Net disposal of financial assets 418 0.4 922 0.6 4 120.7 Government general resources 13,941 13.7 19,840 13.7 86 42.3 Source: PBO and World Bank staff calculations. Note: a Converted using the implicit exchange rate of IRR230,000 /USD. Overall, the 2023/24 budget law lacks a over 40 percent for the fourth consecutive year. comprehensive reform plan to tackle structural The headline and core inflation rose to 48.7 percent challenges, including curbing inflation, promoting and 42.4 percent in 2022/23, respectively (Figure 12). investment (e.g., in climate change resilience), and Food prices were the main contributor to high inflation, enabling job creation that would address the current accounting for about 40 percent of inflation, followed political and economic situation. Despite rising imbal- by housing (Figure 13). The phasing out of essential ances in the banking sector, the budget does not goods’ import subsidies and the global surge in com- include measures to alleviate these pressures includ- modity prices after the war in Ukraine drove the increase ing repaying government arrears to banks. Similarly, in food prices. High inflation disproportionately affects the unsustainable pension system is left unaddressed lower-income households, whose food and housing despite the rapid rising burden on the budget includ- expenses account for about 80 percent of their budgets, ing the government backtracking on an earlier plan to while their real wages decline (see Box 1 for more infor- raise the retirement age.18 mation on the impact of inflation across deciles). Monetary Policy and Prices 18 Over the past decade, there has been a significant increase in the budget allocated to the four major pension funds, with an 11-fold increase observed. In the 2023/24 Consumer price inflation (CPI) accelerated sharply budget law, the government has allocated about 22 per- in 2022/23 following the new food import poli- cent of the current expenditure to these funds, which cies and global inflation, registering inflation of could potentially strain the government’s finances. 8 IRAN ECONOMIC MONITOR: MODERATE GROWTH AMID ECONOMIC UNCERTAINTY Inflation Accelerated Further in FIGURE 12 •  FIGURE 13 • …Driven Mainly by Higher Food 2022/23… Prices Due to the Food Price and Import Subsidy Measures 100 60 40 80 Contribution to CPI, pp 30 Inflation y/y, percent 40 60 20 Percent 17.4 20 12.0 40 10 3.9 2.3 2.2 20 0 0 CPI Food & beverages Housing, water, electricity, & gas Transport Clothing & footwear Health 0 Feb-21 Apr-21 Jun-21 Aug-21 Oct-21 Dec-21 Feb-22 Apr-22 Jun-22 Aug-22 Oct-22 Dec-22 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-23 Inflation, y/y (LHS) Headline inflation, y/y Food inflation, y/y Core inflation, y/y Contribution to headline CPI, pp (RHS) Source: CBI and World Bank staff calculations. Source: CBI and World Bank staff calculations. BOX 1  HOW INFLATION AFFECTS INCOME GROUPS High consumer price inflation has been a chronic economic challenge in Iran, with annual inflation rates averaging above 20 percent in the last four decades. In recent years, the situation has worsened, with a record four-year streak of inflation above 40 percent impacting the livelihoods of low-income households. The main drivers of high inflation are the budget deficit and imbalances in banks’ balance sheets, reflected in an inflated monetary aggregate growth rate and the depreciation of the domestic currency. The reimposition of US sanctions has further exacerbated these challenges, leading to a significant budget deficit and a sharp depreciation of the rial. More recently these pressures were intensified by rising global inflation following the Russia-Ukraine war and skyrocketed with the recent food price measures.a Implementing sound macroeconomic policies, such as prudent fiscal management, monetary policy, and structural reforms, will be crucial in tackling inflation and restoring economic stability in Iran. Inflation has had a disproportionate impact on lower-income households, despite being broad-based. Besides the general impact of inflation on worsening income inequality, the current inflation was felt the most by vulnerable households. Inflation has been higher in rural areas than in urban areas over the past few years (Figure B1.1). The inflation gap (the difference between the bottom and top deciles) was in favor of low-income families up to late 2020, but since April 2021, the low earners have been experiencing higher inflation, which has been worsened by the recent policy reform in June 2022 (Figure B1.2). Over the past five years, cumulative inflation has been 25 percentage points higher for the bottom three income deciles than for the top three deciles. Inflation disproportionately impacts the poor as they consume items that have experienced a significant price surge, as shown in Figure B1.3 Food, Housing, and Transport are the main contributors to inflation. Food and housing make up about 80 percent of the expenditure basket for the lowest income decile, compared to only 50 percent for the highest decile. These two categories were also the primary drivers of headline inflation, accounting for over 50 percent of it, particularly after the recent policy reform that caused a surge in food prices. Despite the surge in prices caused by the recent policy reform, the overall impact of the reform, when combined with cash transfers, could improve the welfare of low-income deciles. An initial assessment shows that under the assumption of having the same consumption patterns as the previous year (based on household budget survey data), the increase in average expenditure due to higher prices is higher for higher-income groups because they tend to spend more. Taking into account the cash transfers and the increase in expenditures for each income group, the overall impact of the policy is positive for the bottom four income groups. The impact on the middle-income groups (decile 5 to 7) is minimal, and the policy has an adverse effect on the top three income groups, particularly the top income decile, as reported by Salehi-Isfahani (2022). a In May 2022, the government stopped subsidizing imports of certain essential foods and increased the administered price of some essential foods including chicken, eggs, dairy, and cooking oil. To shield low-income families from soaring prices, a direct cash transfer of US$14 (US$12) per individual per month (inclusive of existing cash transfers) was also provided to the lowest three deciles (the remaining deciles except for the top decile). For further information refer to Iran Economic Monitor, Spring 2022. (continued on next page) Recent Economic and Policy Developments 9 BOX 1  HOW INFLATION AFFECTS INCOME GROUPS (continued) Consumer Price Inflation in FIGURE B1.1 •  The Inflation Felt by the Lowest FIGURE B1.2 •  Rural Areas Has Been Higher in Income Deciles Has Surpassed Recent Years Those for Top Deciles, Especially after the Recent Food Price 70 Measures in June 2022 80 60 70 50 60 50 Percent 40 40 Percent 30 30 20 20 10 10 0 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21 Aug-21 Oct-21 Dec-21 Feb-22 Apr-22 Jun-22 Aug-22 Oct-22 Dec-22 Feb-23 Feb-21 Apr-21 Jun-21 Aug-21 Oct-21 Dec-21 Feb-23 Feb-22 Apr-22 Jun-22 Aug-22 Oct-22 Dec-22 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Source: SCI and World Bank staff calculations Inflation-rural Inflation-urban Inflation Note: The inflation gap is the difference between inflation at the bottom and top decile. The green indicates higher inflation for the top decile and the blue indicates Source: SCI and World Bank staff calculations. higher inflation for the low decile. Food, Housing, and Transport Are the Main Contributors to Inflation FIGURE B1.3 •  60 50 Contribution to inflation, Percent 40 30 20 10 0 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-20 Apr-20 Jul-20 Oct-20 Apr-19 Jul-19 Oct-19 Jan-23 Food and beverages Housing and utilities Transport Others Source: SCI and World Bank staff calculations. 10 IRAN ECONOMIC MONITOR: MODERATE GROWTH AMID ECONOMIC UNCERTAINTY The depreciation of the rial and inflation- FIGURE 14 • Economic Uncertainties Drove ary expectations fueled high inflation. Following a Fluctuations in the Rial’s Value Against the Dollar stalemate in the nuclear talks along with prolonged protests, the rial depreciated by about 40 percent 500 12 in 2022/23, and the gap between the parallel mar- 450 10 ket and Central Bank’s auction exchange rate (NIMA 400 Thousand Rials per 1 US$ rate) widened significantly, indicating elevated infla- 350 8 tionary expectations (Figure 14). In response to high Percent (m/m) 300 fluctuations in the foreign exchange market and only 250 6 six months after the elimination of the subsidized 200 exchange rate, the CBI announced a fixed rate at 4 150 IRR285,000/US$ for the import of essential goods 100 2 and equipment and intermediate goods, which was 50 later limited to essential goods only. The deprecia- 0 0 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 tion in the rial against the dollar combined with the increase in global prices led to the rapid growth of import prices, which translated to a further surge in Inflation, m/m (RHS) Parallel market ER (LHS) NIMA ER (LHS) the producer price index in 10M-2022/23 (33.3 per- Source: CBI and World Bank staff calculations. cent, y/y). One of the main drivers of inflation in the Note: NIMA, the Persian acronym for “integrated system of foreign exchange transactions”, is a foreign exchange auction system administered by the CBI for producer price index was a 52.9 percent increase in facilitating foreign currency exchange between exporters and importers. agriculture prices due to the elimination of subsidized exchange rates on imported agriculture inputs. The expansions of monetary aggregates 2022/23 thanks to measures that capped banks’ bal- contributed to inflationary pressures. The mon- ance sheets and an increase in the required reserves etary base (M0) grew by 42.4 percent, above its for more risky banks (Figure 15). The main driver in long-term average, indicating challenges in controlling M0 growth in 2022/23 was central bank’s claims the growth of the money supply. However, the broad on banks, reflecting intensified liquidity problems money (M2) growth slowed to 31.6 percent (y/y) in (Figure 16). The share of quasi-money in M2 reached FIGURE 15 • M2 Growth Decelerated but M0 FIGURE 16 • …M0 Growth Was Led by Claims on Growth Accelerated Banks in 2022/23 50 80 Contribution to M0 growth, pp 40 60 30 40 20 10 20 Percent 0 0 –10 –20 –20 –40 –30 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 –40 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Net Foreign Assets (NFA) Net claims on government Claims on banks Other items net M0 growth rate M2 growth rate Real interest rate M0 growth Source: CBI and World Bank staff calculations. Source: CBI and World Bank staff calculations. Recent Economic and Policy Developments 11 a record low of 74 percent, down from 83 percent two FIGURE 17 • The Stock Market Stagnated Earlier years ago, this further highlights growing inflationary this Year but Rebound Strongly due to Inflationary Expectations expectations. To control the money supply and skyrocket- 2,600 ing inflation, the CBI raised interest rates after three 2,400 years. The CBI implemented inflation targeting for the 2,200 TSEM Index (thousands) first time in May 2020 and set the corridor for interest 2,000 rate between 14 percent and 22 percent. In February 2023, the CBI increased the floor rate to 17 percent 1,800 and the cap rate to 24 percent, due to increased money 1,600 market demand which had pushed the interbank inter- 1,400 est rates to a record high. In addition, the CBI allowed banks to increase interest rates on deposits and loans 1,200 by an average of 5 percent. The maximum interest rates 1,000 4/1/22 5/1/22 6/1/22 7/1/22 8/1/22 9/1/22 10/1/22 11/1/22 12/1/22 1/1/23 2/1/23 3/1/23 4/1/23 5/1/23 on long-term deposits are about 25 percent, still far below the inflation of about 45 percent. The banking system is currently grappling Source: Tehran stock exchange market. with multiple challenges which require immedi- ate reforms. Over 70 percent of banks in Iran do not The stock market in 2022/23 was vola- meet the capital adequacy ratio (CAR) and almost tile before adjusting to the currency depreciation half of them have negative CAR. This poses a seri- in 2023/24. After experiencing some gains in early ous risk of bankruptcy, which is exacerbated by the 2022/23 due to progress on nuclear talks and higher increased provision of directed credit by the govern- global energy prices, the selloff in the stock market con- ment. Despite having a high average non-performing tinued due to dampened market sentiments. The latter loan (NPL) ratio19 of 16.2 percent in 2021/22, this was driven by the deadlock in nuclear negotiations and does not include rollover loans, which make up a sig- the stagnation in global markets. The market, however, nificant portion of the loans. The accumulation of rebounded significantly due to elevated inflationary NPLs and insufficient capital creates a fertile ground expectations and the depreciation of rial (Figure 17). for bank failure, increasing the risk of a financial cri- In March and April 2023, the stock market registered a sis. These challenges are rooted in fiscal dominance, record high, driven by the depreciation of the rial that institutional weakness in the central bank, and gen- makes exporting companies, including the petrochem- eral misconduct by banks, including corruption. ical industry, more profitable in local currency terms. Reforming the banking sector presents several chal- lenges, including the size of some distressed banks, which are deemed “too big to fail,” making it difficult to External Sector avoid the risk of a bank run. To mitigate the risks in the The surge in oil prices was the main driver of the banking system, the central bank has recently taken current account surplus in H1-22/23. Exports some steps, such as increasing the required reserve grew by 40 percent in H1-22/23 and surpassed ratio to 15 percent and limiting banks’ balance sheet expansion to 1.5 to 2.5 percent. These measures have helped to moderate the growth rate of M2. How- 19 There are several factors contributing to high non-per- ever, banks still face liquidity shortages and run risks forming loans (NPLs) in Iran, including the lack of proper credit risk assessment, the use of non-financial criteria because customers are withdrawing cash deposits. for loans, moral hazard behavior in projects guaranteed As a result, banks have had to limit large withdrawal by the government, and poor supervision by the central amounts and offer higher interest rates on deposits bank, for further information see Zahedi & Azadi (2018) to avoid further exacerbating their liquidity problems. and Azadi et al. (2022). 12 IRAN ECONOMIC MONITOR: MODERATE GROWTH AMID ECONOMIC UNCERTAINTY FIGURE 18 • The CAB Registered a Surplus Due FIGURE 19 • …but the Capital Account to Increasing Oil Exports Proceed… Registered a Deficit in H1-22/23 for the Seventh Consecutive Year 50 30 40 30 20 20 10 US$ billion US$ billion 10 0 0 –10 –10 –20 –20 –30 –30 2020/21 2021/22 2017/18 2019/20 2018/19 H1-22/23 –40 2019/20 2020/21 2021/22 H1-22/23 Goods account-oil Goods account-non-oil Current account Net capital account Services account Income and current transfer Net errors and BOP (change in reserve Current account balance account omissions assets) Source: CBI and World Bank staff calculations. Source: CBI and World Bank staff calculations. growth in imports (21 percent), leading to a cur- Afghanistan where exports declined by 11.2 percent rent account surplus of 3.4 percent of annual GDP due to the political situation and the lower purchasing (US$13.4 billion). Stronger growth of oil exports power. Petrochemical products accounted for 44.5 (57 percent) compared to non-oil exports (22 per- percent of total non-oil exports and liquid natural gas cent), drove the share of oil exports to 58 percent was the main non-oil export items, accounting for 14 in H1-22/23 (a three-year high). Services trade also percent of Iran’s non-oil exports. rebounded by 55 percent but remained slightly Imports continued to shift away from below their pre-pandemic level (Figure 18). This cur- Europe following the intensification of sanc- rent account surplus was largely offset by the net tions and Iran’s policy response. In 2022/23, UAE capital account deficit (US$ 12.8 billion), reflecting was the top exporter to Iran, accounting for about capital flight and low FDI inflows, and resulted in a one-third of Iran’s imports21 (Figure 22). Imports slight decline in international reserves (Figure 19).20 Rising international commodity prices con- 20 Over the past six years, Iran’s capital account balance tributed to higher non-oil trade in 2022/23. In has experienced consecutive deficits, which can be 2022/23, faster growth in imports (12.5 percent) attributed in part to significant capital flight caused by compared to non-oil exports (9.4 percent), led to a economic uncertainty in the country. This trend indi- widening of the non-oil trade deficit to about 2 percent cates a lack of confidence in the Iranian economy and its investment opportunities, which has led investors to of GDP (US$6.5 billion), its highest level since the re- seek out more stable and predictable investment options imposition of US sanctions in 2018 (Figure 20). Prices abroad. Addressing the underlying causes of economic were the main driver of trade dynamics as the total vol- uncertainty in Iran, such as inflation, sanctions, and polit- ume of exports and imports contracted by 0.6 percent ical instability, will be essential to reversing this trend and and 9.8 percent, respectively compared to 2021/22. attracting much-needed investment to the country. China remained the top destination of non- 21 It is worth noting that a significant portion of imports to Iran that is reported as originating from the UAE are actually oil exports in 2022/23. Other exporting partners transshipped through the country and originally come from include Iraq, UAE, Turkey, and India, accounting for other countries such as China. As a result, a more detailed over 71 percent of total exports (Figure 21). India analysis of product origin would likely reveal a larger returned to the top 5 export destinations, replacing share of imports coming from countries such as China. Recent Economic and Policy Developments 13 FIGURE 20 • Higher Import Prices Drove Imports China Remains the Top Importer of FIGURE 21 •  above Non-Oil Exports Iran’s Non-Oil Exports 20 60 16 50 US$ billion, share of exports (%) 12 12.9, 24% 40 12.5, 25% US$ billion 8 7.4, 14% 30 6.0, 12% 4 8.9, 25% 5.76, 10% 4.9, 10% 2.5, 7% 0 20 4.6, 13% 8.9, 18% 10.2, 19% 7.4, 21% –4.0 10 14.3, 29% 14.5, 27% 9, 25% –8.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 0 2020/21 2021/22 2022/23 2018/19 2019/20 2020/21 2021/22 2022/23 China Iraq UAE Net non-oil trade balance Non-oil exports Non-oil imports Turkey Others Source: Islamic Republic of Iran’s Customs Administration (IRICA) and World Bank Source: IRICA and World Bank staff calculations. staff calculations. FIGURE 22 • India Is once again among Iran’s Top from China increased by 23.5 percent in 2022/23, 5 Import Partners and imports from India also increased by 86.3 per- 60 cent overtaking Germany. Cellphones and essential food items such as rice, wheat, corn, and soybean 50 10.8, 24% were the top imported items in 2022/23. The con- US$ billion, share of imports (%) 14.8, 28% 2.8, 4% centration of trade among key import partners has 40 1.9, 3% 6, 10% increased with the top four importers accounting for 30 11.1, 28% 5.2, 9% 72.2 percent of total imports in 2022/23 compared 2, 5% 18.3, 30% to 68.9 percent in 2021/22 (see Box 2 for more 20 4, 11% 16.5, 31% details on recent trends in Iran’s trade). While the 9.7, 25% country is shifting away from Europe to Asian coun- 10 tries to mitigate the impact of any future sanctions or 15.7, 26% 12.7, 24% 9.8, 25% disruptions in global trade, increased concentration 0 2020/21 2021/22 2022/23 makes the country vulnerable to shocks from a few China Iraq UAE Turkey key import partners. Germany India Others Source: IRICA and World Bank staff calculations. 14 IRAN ECONOMIC MONITOR: MODERATE GROWTH AMID ECONOMIC UNCERTAINTY BOX 2  IRAN’S INTERNATIONAL TRADE ADJUSTMENT Iran’s external trade has been influenced by various factors over the past decade, including economic sanctions, oil price fluctuations, the pandemic, and the country’s trade policies (Figure B2.1). The negative impact of sanctions on Iran’s exports has been significant, with annual export declines of 17 percent between 2012 and 2014 during the first round of sanctions and 26 percent between 2019 and 2020 due to the reimplementation of US sanctions and the pandemic’s effects. Sanctions restricted Iran’s export market and increased transaction costs. In addition, sanctions have adversely impacted technology transfer and modernization of production processes as well as attracting foreign investment. Furthermore, domestic producers’ competitiveness has been weakened by higher prices of imported equipment caused by a combination of the significant depreciation of the domestic currency and restrictions on international banking and services. Over the past few decades, a notable shift in trade from Europe to Asia helped to lessen the impact of the economic sanctions. Since the late 1990s, the share of trade with Asian countries has been increasing at the expense of European partners (Figure B2.2). This trend has become more pronounced during the sanction period. The primary driver of this shift in trade destinations has been the significant increase in trade with China. In the late 1990s, China accounted for only about four percent of Iran’s total trade, but this figure has since grown to around 30 percent (Figure B2.3). In recent years, trade has become increasingly concentrated. This trend is illustrated in Figure B2.4, which shows that the share of Iran’s top trading partners has increased from about 50 percent in the early 2000s to over 70 percent in recent years, indicating stronger ties with these partners. This concentration of trade is a cause for concern as over 90 percent of Iran’s trade is only with 15 partners, making it more vulnerable to any risks associated with their economic activity. Moreover, despite efforts to diversify its trade composition, non-oil exports are still dominated by petrochemical products and oil derivatives (HS27, HS29, and HS39a), which account for about half of Iran’s non-oil exports. This overreliance on a few sectors and products for non-oil exports leaves Iran’s economy vulnerable to fluctuations in global demand and prices, posing a risk to the sustainability of its trade. Developing strategies to promote non-oil exports as well as diversifying export destinations and import sources can help address trade imbalances and support the country’s external stability. In response to the shifts in trade and the impact of economic sanctions, some domestic firms have adjusted their business strategies. For instance, exporting firms have increased their presence in the domestic market, thereby transferring most of the shock from the sanctions to non-exporting firms as they face greater competition (Ebadi, 2022). Additionally, around two-thirds of Iran’s non-oil exports were redirected to non-sanctioning countries, mitigating some of the impact of export sanctions (Haidar, 2017). Micro-firms have shown more resilience to the impact of sanctions compared to larger firms. This can be attributed to their smaller scale, limited access to formal financing, higher focus on local markets, and lesser export orientation (Cheratian et al., 2022). These adjustments have helped to partially offset the effects of sanctions on employment and the supply of goods and services. Despite these adjustments, the private sector also faces an uncertain investment environment. These relate to high fluctuations in exchange rates in the absence of financial hedging instruments, frequent policy changes together with government intervention in the markets rendering long-term investments unattractive. Furthermore, underinvestment in infrastructure and limited access to finance reduce productivity and profitability. Addressing these challenges will be critical to foster a more diversified and resilient private sector that can withstand the impact of external shocks. Iran’s External Trade Has Been FIGURE B2.1 •  …and Has Shifted from Europe FIGURE B2.2 •  Fluctuating Significantly over toward Asia… the Last Decades… 100 140 120 80 Share of exports, percent 100 60 Billion US$ 80 60 40 40 20 20 0 0 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 Oil exports Non-oil exports Imports Europe Asia Others Source: CBI, IRICA, and World Bank staff calculations. Source: CBI, IRICA, and World Bank staff calculations. (continued on next page) Recent Economic and Policy Developments 15 BOX 2  IRAN’S INTERNATIONAL TRADE ADJUSTMENT (continued) …Mainly due to the Increasing FIGURE B2.3 •  Iran’s Trade Concentration Has FIGURE B2.4 •  Role of China in Iran’s Trade Increased during the Last Two Decades 80 80 Share of exports, percent 60 70 Share, percent 40 60 20 50 0 40 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 Europe Asia excluding China China Others Top five export partners Top five import partners Source: CBI, IRICA, and World Bank staff calculations. Source: CBI, IRICA, and World Bank staff calculations. a HS27: Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes, HS29: Organic chemicals, and HS39: Plastics and articles thereof. 16 IRAN ECONOMIC MONITOR: MODERATE GROWTH AMID ECONOMIC UNCERTAINTY 2 OUTLOOK I ran’s economic outlook is shaped by ongoing revenues are projected to decrease. In addition, gov- economic sanctions, declining global demand, ernment expenditures are expected to increase due and energy and water shortages. Real GDP to higher wage bills and transfers to compensate for growth is predicted to moderate to an annual aver- the high inflation and the increased cost of living. Fur- age of 2.1 percent in 2023/24 to 2025/26, lower than thermore, in an environment of high inflation nominal in other major oil exporters due to the impact of sanc- revenues are also expected to come under pressure tions on both oil and non-oil sectors (see Table 2 for as the time lag between economic activity and tax col- details). Oil GDP is expected to grow slowly, partly lection would translate to lower real revenues.22 As a because of weaker global demand. Non-oil GDP result, the fiscal deficit is forecast to gradually widen in growth is projected to remain below potential due to the medium term, to 2.4 percent of GDP by 2025/26. a lack of investment in recent years. The agriculture High inflation and continued tepid job cre- sector is expected to remain vulnerable to droughts ation are projected to have a negative impact on and the impact of climate change. Non-oil industries households’ welfare. Inflationary expectations, pres- and services are also anticipated to grow but remain sures on the currency, and a growing budget deficit constrained by ongoing production capacity expan- are expected to keep inflationary pressure elevated sion challenges. Domestic consumption, which has in the medium term (over 40 percent in 2023/24– been the main driver of growth in previous years, is 2025/26). In addition, the prospect of job creation expected to remain weak as purchasing power has remains challenging. Agriculture, a labor-intensive declined after four years of high inflation. sector, is adversely affected by water scarcity and Fiscal pressures are forecast to remain high high temperatures, while slower growth in non-oil as expenditures are rising and oil revenue growth is limited. Despite the recent progress in tax col- 22 As per the “Tanzi Effect”. See, Tanzi, V., “Inflation, Lags in lection, the subdued economic activity due to weak Collection, and the Real Value of Tax Revenue”, IMF Staff non-oil growth is likely to limit tax income, while oil Papers, https://doi.org/10.5089/9781451956443.024. 17 sectors, especially the services sector, the largest Iran, however, continues to face significant employer in the economy, is anticipated to fall short climate change challenges that can adversely of needed job creation. The private sector also contin- impact economic prospects. Recurring droughts and ues to encounter challenges such as macroeconomic declining precipitation threaten agricultural production volatilities and an uncertain investment environment. and employment in the sector, posing significant risks These factors are expected to reduce household wel- to food security and livelihoods. To overcome the water fare and disposable income. Although government shortage in agriculture, effective water resource man- transfers can alleviate some of these pressures, this agement, improved water use efficiency with water will come at a fiscal cost that could reinforce inflation- demand management policies, developing suitable ary pressures and reduce fiscal space required for institutions and policies, and collaborating with riparian pro-growth investments. countries can mitigate part of the challenge.23 More- On the external side, the current account over, extreme temperatures increase the demand for surplus is projected to gradually decrease (to energy, while lower rainfall decreases the supply of 2.8 percent of GDP by 2025/26) due to the pro- energy, particularly hydropower energy. In the absence jected decline in oil prices and subdued global of necessary investments and energy price reforms, demand. Oil exports face growing competition from this can lead to energy shortages and adversely impact other major exporters in Iran’s primary export destina- industrial production. Gradual energy price reforms, tions. At the same time, higher capital outflows and investment in renewable energy, and improving energy limited access to international reserves will add pres- efficiency are crucial measures for adaptation and mit- sure to foreign reserves and the value of the rial. igation of these risks. Setting realistic goals in the next develop- ment plan and outlining a detailed path to enable Risks and Opportunities future growth and mitigate risks will be crucial to overcome economic challenges. The seventh devel- Risks to the economic outlook primarily relate to opment plan targets an annual average economic the trajectory of economic sanctions and global growth rate of 8 percent between 2022/23 to 2026/27, economic developments, especially in the oil with a focus on boosting productivity and keeping market. Iran’s growing economic exposure to China inflation at single digits. However, given the current eco- and overall trade concentration leaves it vulnerable nomic situation and the track record of previous plans, to disruptions to existing trade and finance channels. the plan’s ambitions need to be evaluated.24 The low A sharper fall in oil prices due to a decline in global performance of previous development plans can be demand following tighter global monetary policy and attributed to various factors, including sanctions, the reduced growth projections in China would negatively impact the growth outlook. On the domestic front, resumption of social protests, industrial strikes, and 23 For more information see the Special Focus chapter in internet disruptions could have harmful and long-lasting the Iran Economic Monitor, Spring 2022. effects on employment and economic activities. More- 24 The sixth five-year development plan (2017/18–2021/22) fell short of reaching most of its targets. Despite an annual over, lower rainfall can pose a threat to the agriculture economic growth target of 8 percent, growth was 1.2 per- sector and lead to energy shortages. On the upside, cent per annum. Inflation was about 5 times higher than a partial waiver or full removal of sanctions would pro- the plan goal of 8.8 percent annually. Contrary to the pro- vide a significant boost to oil and non-oil growth over jected 21.4 percent annual growth in investment, capital the projection period. Recent improvement in relations formation fell short of depreciation costs and contracted with Saudi Arabia and other southern neighbors if fol- by 5.8 percent annually. The FDI and portfolio investment targets of US$15 billion and US$20 billion, respectively, lowed with economic links and investments would help did not materialize and the external account witnessed meet part of the financing of development needs and US$45 billion of capital outflow during the period. Annual trade linkages through regional integration could cre- productivity growth was negligible while the target envi- ate new growth opportunities. sioned an annual growth of 2.8 percent. 18 IRAN ECONOMIC MONITOR: MODERATE GROWTH AMID ECONOMIC UNCERTAINTY pandemic, poor governance, and other shortcomings FIGURE 23 • The New Development Plan Goals in achieving pre-conditions for growth. To achieve sus- Are Ambitious tainable economic growth, the plan needs to prioritize 10 structural reforms and address key challenges such as 8 lack of jobs, low productivity, and inadequate infrastruc- 6 ture. A focus on private sector-led development, export diversification, and promotion of foreign investment can 4 Percent help the economy move towards the plan’s goals. 2 Coordination between monetary and fiscal 0 policies will be crucial in achieving sustainable –2 economic growth while managing inflation. Fiscal –4 policy would also be required to be geared towards –6 managing the budget deficit by reducing tax exemp- 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 2024/25 2025/26 2026/27 tions, cutting back on unnecessary and unproductive current expenditures, rationalizing current expen- ditures while protecting the most vulnerable, and GDP growth 7th development plan target improving the efficiency of public investment. Financ- Source: CBI and World Bank staff calculations. ing of the fiscal deficit should be prioritized through bond issuance to avoid monetization of the deficit, which could exacerbate inflationary pressures. To asset quality review to identify viable banks for recap- anchor inflation expectations, the central bank needs italization and to improve capital and liquidity buffers to prioritize price stability, avoid directed lending and and resolving non-viable banks, and securitizing gov- ensure the capital market and banking system stabil- ernment debt to generate cash flow for the banks to ity.25 Addressing banking system challenges requires use as collateral in the interbank market. enhanced bank supervision, the implementation of international reporting standards and best practices for asset classification, liquidity management, and 25 Implementing a medium-term plan to curb inflation can provide breathing room for banks to adjust their balance internal controls. Other priorities for banking reform sheets and for economic participants to plan for their include creating a comprehensive framework for con- economic activities with more confidence. It can also tingency and crisis management, strengthening the help to establish credible signals that inflation expecta- asset quality examination process, conducting an tions will be managed effectively. Outlook 19 Iran: Selected Economic and Financial Indicators, 2019/20–2025/26 TABLE 2 •  2019/20 2020/21 2021/22 2022/23 2023/24 2024/25 2025/26 Act. Act. Act. Est. Proj. Proj. Proj. Real sector (Annual percentage change, unless otherwise stated) Real GDP at market prices –2.7 3.3 4.7 3.8 2.4 2.1 2.0 Real GDP at factor cost –2.4 4.1 4.4 4.0 2.4 2.1 2.0 Real GDP per capita –3.7 2.5 4.0 3.1 1.7 1.3 1.3 Real non-oil GDP 1.7 3.6 3.9 2.6 1.9 1.6 1.5 Real oil GDP –36.2 9.6 10.1 9.8 4.0 3.8 3.8 Total crude oil production (mbpd) 2.2 2.0 2.5 2.7 2.8 2.9 3.1 (GDP supply side components) Agriculture 9.2 3.2 –2.6 1.1 1.0 0.9 0.9 Industry (including oil) –9.7 7.8 3.2 7.4 3.1 2.1 1.9 Services –0.2 2.2 6.5 2.7 2.4 2.3 2.2 (GDP demand side components) Private consumption –4.8 0.5 3.9 8.7 2.2 1.8 1.7 Government consumption –5.8 –0.9 8.3 –3.6 2.3 2.4 2.6 Gross fixed capital formation –7.0 3.2 0.0 6.7 3.7 2.9 2.9 Exports, goods and services –17.3 –12.8 5.2 8.2 4.6 4.1 3.3 Imports, goods and services –32.5 –29.7 24.1 7.5 4.2 3.3 3.0 Money and prices Oil price (US$/bbl) 68 61 41 100 85 83 81.7 CPI Inflation (p.a.) 41.2 47.1 46.2 46.1 49.6 44.8 40.9 Monetary base (M0) 32.8 30.1 31.6 42.4 n/a n/a n/a Broad money (M2) 31.3 40.6 39 31.6 n/a n/a n/a Banking system credit 26 94.8 56.3 n/a n/a n/a n/a Nominal interest rate (percent) 18.9 17.5 19.6 n/a n/a n/a n/a Nominal exchange rate, parallel 129,183 228,872 259,476 334,103 n/a n/a n/a market (IRR/USD) (Percent of GDP, unless otherwise stated) Investment & saving Gross capital formation 29.9 34.8 31.8 32.8 31.0 29.1 27.7 Gross national savings 29.5 34.4 35.4 36.8 34.5 32.3 30.5 Government finance Total revenues 9.7 7.3 11.0 10.6 10.5 10.8 10.8 Tax revenues 5.9 4.8 5.1 5.1 5 5.2 5.3 Total expenditures 14.2 13.0 13.3 12.8 12.8 13.1 13.3 Current expenditures 12.3 11.1 11.2 11.4 11.8 12.1 12.4 (continued on next page) 20 IRAN ECONOMIC MONITOR: MODERATE GROWTH AMID ECONOMIC UNCERTAINTY Iran: Selected Economic and Financial Indicators, 2019/20–2025/26 (continued) TABLE 2 •  2019/20 2020/21 2021/22 2022/23 2023/24 2024/25 2025/26 Act. Act. Act. Est. Proj. Proj. Proj. Net lending/borrowing (overall –4.5 –5.8 –2.3 –2.2 –2.3 –2.3 –2.4 balance) External sector Current account balance –0.4 –0.4 3.5 4.0 3.4 3.2 2.8 Population and labor market Population (million) 82.7 83.4 84.1 84.7 85.3 86 86.6 Participation rate (percent) 44.1 41.3 40.9 40.9 n/a n/a n/a Unemployment rate (percent) 10.7 9.6 9.2 9 n/a n/a n/a Memorandum Items: Nominal GDP (IRR billion) 27,364,013 40,791,377 66,774,504 108,130,358 153,467,525 213,049,362 292,799,331 Outlook 21 SPECIAL FOCUS: THE GENDERED IMPACT OF THE COVID-19 CRISIS ON THE LABOR MARKET IN IRAN T he first year of the COVID-19 pandemic household allocation of care responsibilities, which is saw a marked deterioration in labor mar- associated with prevailing gender norms, pushed Ira- ket outcomes. Despite sizeable government nian women with children out of the labor force. interventions to sustain the economy, approximately The COVID-19 crisis has had a dramatic 1 million jobs were lost, and labor force participation impact on the labor market of both developed and contracted by 3 percentage points. Iranian women developing countries. From a labor market perspec- were the most affected: two out of three jobs that tive, the COVID-19 crisis can be characterized as both a were lost between 2019/20 and 2020/21 were pre- negative shock to labor demand, with closures or restric- viously held by women. The gendered impact of the tions in operating capacity of businesses in sectors crisis contributed to widening the disadvantage of Ira- more affected by health-related containment measures, nian women in the labor market. Most importantly, the and as a shock to labor supply. For example, because gains in female labor force participation, slowly accu- workers are concerned about health risks or because mulated since 2011, vanished. Consistent with what the closing of schools and nurseries due to lockdown was observed in other countries, women with young measures implied an increase in care responsibilities children were the most affected by the crisis. The within the household and hence a reduction in the time combined effect of school closures and unequal intra- potentially available for paid work on the labor market. 23 FIGURE 24 • Stringency of COVID-19 Containment Measures in Iran and Selected Mashreq Countries 120 100 80 60 40 20 0 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Iran Iraq Jordan Lebanon Source: OurWorldInData.org citing The Oxford Coronavirus Government Response Tracker data. A common finding across the international literature on countries, Iran sustained relatively less stringent health- the subject is the differential employment impact of the related containment measures throughout the entire pandemic across groups, with women, youth, and infor- first year of the COVID-19 pandemic (Figure 24). mal sector workers being among the most affected. Containment measures imposed by the gov- In particular, the issue of a gendered labor market ernment to limit the spread of the pandemic were impact of the COVID-19 pandemic has been analyzed accompanied by a substantial recovery stimulus in several countries. Depending on the context, the gen- package. Government support to both households dered impact of the crisis has been related to a gender and firms was sizeable, amounting to approximately IRR bias in labor demand shocks—for example, because 1,000 trillion or close to 5 percent of GDP. To support women were more likely to work in sectors or jobs more households, the government introduced an emergency exposed to the crisis—or a gender bias in labor sup- cash transfer benefiting 4.3 million households (cor- ply shock—due to prevailing differences in care and responding to 18 percent of the total population), in domestic responsibilities between men and women—or addition to providing micro-small loans and expansion a combination of the two. Iran was among the world’s early epicenters of the pandemic and the worst-hit country in the 26 The education sector was among the most affected by Middle East. The Islamic Republic of Iran has been hit the government’s measures put in place to contain the hard by the COVID-19 pandemic, which has claimed spread of the pandemic. Schools, starting from kinder- over 145 thousand lives and affected close to 7.56 mil- gartens, remained fully closed nationally during the first three months of the crisis. Starting May 16th, schools lion people out of a population of 85 million. The first were allowed to reopen only in areas classified at low COVID-19 case was recorded as early as February 19th, risk of COVID-19 transmission and with caps in terms of 2020, and, by March 4th, authorities announced that the in-person attendance. Full nationwide in-person reopen- virus had spread to nearly every province. Lockdown ing of schools was only achieved in April 2022, more measures ensued by the end of March, with travel bans, than two years after the start of the pandemic. closure of economic activities, religious sites (including 27 Starting April 26, 2020, the management of COVID-19 related restrictions was implemented depending on the mosques), and all grades of educational institutions.26 number of cases recorded at the regional level. In particular, Starting end of April, restrictions began to ease, albeit regions, provinces, and counties were classified accord- at a different rate depending on the local evolution of ing to a three tiers system (red, yellow, white) depending the pandemic.27 Overall, compared to other Mashreq on the local number of COVID-19 infections and deaths. 24 IRAN ECONOMIC MONITOR: MODERATE GROWTH AMID ECONOMIC UNCERTAINTY of unemployment insurance and minimum wages.28 out of three jobs that were lost between 2019/20 and Furthermore, businesses were also supported through 2020/21 were previously held by women. Moreover, concessional loans and a moratorium on all payments to the higher decline in employment for Iranian women the government for three months (including taxes, social was accompanied by a relatively stronger reduction in security contributions, interests on loans, and utility bills). female labor force participation. The gendered impact of Nevertheless, approximately 1 million the pandemic is clearly seen on the extensive margin, jobs were lost in the first year of the pandemic. with Iranian women being more likely than Iranian men to Despite sizable government intervention and positive withdraw from the labor force, after either losing their jobs GDP growth, the employment to working age pop- (higher reduction in female employment rate compared ulation (WAP) rate declined by 2 percentage points to men) or after terminating their search for employment between 2019/20 and 2020/21, corresponding to (higher reduction in female unemployment rate com- approximately one million jobs being lost among the pared to men)—Table 3. On the other hand, Iranian men population aged 15 and above. Interestingly, and con- were more likely than women to reduce the intensity of trary to what was observed in other countries, the their labor market engagement, as shown by a relatively decline in employment did not translate into a higher larger reduction in hours worked an increase in under- level of unemployment—unemployment even dropped employment compared to Iranian women (Table 4). during the period, but into a decline in labor force par- ticipation. Overall, between 2019/20 and 2020/21, 28 The stimulus package supporting households included labor force participation declined by 3 percentage the following: (i) IRR80 trillion allocated for interest-free loans of 10 million Rials (20 million Rials for female- points, going from 44.05 to 41.26 percent, and unem- headed households); (ii) IRR120 trillion allocated for ployment declined from 10.65 to 9.61 percent. purchasing medical equipment; (iii) IRR 50 trillion allo- Iranian women were most affected by the cated to the unemployment insurance fund, and (iv) labor market impact of the pandemic. In Iran, two raising of legal minimum wage by 20 percent. TABLE 3 • Changes in Participation and Unemployment 2019/20 and 2020/21, by Gender Participation rate Employment to WAP rate Unemployment rate Female Male Female Male Female Male 2019/20 17 71.1 14.02 64.69 17.53 9.01 2020/21 13.9 68.66 11.72 62.9 15.65 8.39 Difference (y/y) pc points –3.1*** –2.44*** –2.3*** –1.79*** –1.88*** –0.62*** Differential covid impact (F/M) 1.27*** 1.28*** 3.03*** Source: LFS 2019/20, 2020/21. Note: Stars indicate levels of significance of t-test on equality of means between the two years: * p<0.1, ** p<0.05, *** p<0.01. Survey weights were used in the analysis. TABLE 4 • Changes in Work Hours and Underemployment 2019/20,2020/21, by Gender Hours worked (total) Hours worked (main job) Under-employment rate Female Male Female Male Female Male 2019/20 32.6 46.7 33.8 48.9 10.5 13.4 2020/21 31.2 44.1 34.0 47.5 11 16.3 Difference (y/y) –1.4*** –2.6*** 0.2 –1.4*** 0.5** 2.9*** Differential covid impact (F/M) 0.54*** –0.12*** 0.17*** Source: LFS 2019/20, 2020/21. Notes: Underemployment is defined as the share of employed individuals working less than 44 hours per week and willing/able to work more hours. Stars indicate levels of significance of t-test on equality of means between the two years: * p<0.1, ** p<0.05, *** p<0.01. Survey weights were used in the analysis. Special Focus: The Gendered Impact of the COVID-19 Crisis on the Labor Market in Iran 25 FIGURE 25 • Distribution of Employment by Changes in Employment 2019/20– FIGURE 26 •  Type of Job and Gender, 2019/20 2020/21, by Gender and Type (pre-COVID) of job 200000 100000 Women 42.7% 34.1% 22.1% 0 1.1% –100000 –200000 –300000 Men 41.8% 40.8% 13.1% 4.2% –400000 –500000 Informal Salaried private Salaried public Employer sector sector Informal Salaried private sector Salaried public sector Employer Men Women Source: LFS 2019/20. Source: LFS 2019/20, 2020/21. The impact of the pandemic has been het- Irrespective of the job type, sector of employ- erogeneous across job types, with men and ment or individual characteristics, Iranian women women working in the informal sector29 being the who worked in 2019/20 are less likely than men most affected. Similar to what was observed in other to have retained their jobs one year into the pan- countries, informal sector workers were among the demic. While differences in job type do not seem to most affected by the pandemic. Overall, while the infor- explain the observed differential employment impact mal sector accounted for 42 percent of employment of the pandemic between Iranian men and women, in 2019/20, 62 percent of the jobs lost in 2020/21 other factors—such as differences in individual char- were in this sector.30 However, differences in informal acteristics or sector of employment—could still be at sector employment between Iranian men and women play. However, after controlling for individual and job are not large enough to explain observed gendered characteristics in regression settings, results indicate impact of the pandemic. In fact, as shown in Figure 25, that, compared to men, Iranian women who were work- in 2019/20, female workers were only 1 percentage ing before the pandemic are significantly less likely point more likely to be in the informal sector compared to have retained their jobs one year into the crisis.31 to men. Moreover, salaried women were more likely to be employed in the public sector, and therefore poten- 29 In this analysis, the definition of the informal sector tially more protected against layoff during the crisis. encompasses self-employment in agriculture and non- Interestingly, as shown in Figure 26, while the bulk of agriculture sectors, contributing family workers, and job losses for both male and female workers was con- unpaid apprentices. centrated in the informal sector, the gendered impact 30 Between 2019/20 and 2020/21, employment in the of the pandemic was particularly evident among sal- informal sector declined by 6 percent, against 3 percent aried workers in the private sector. In fact, while drop in formal sector employment, leading to a one per- centage point decline in informality. male employment among private sector employees 31 In order to better investigate the differential gendered increased by approximately 133 thousand units dur- impact of the pandemic we take advantage of the rotat- ing the first year of the pandemic, female employment ing panel component of the LFS and restrict the sample declined by 242 thousand units. to individuals who were interviewed at least one-time pre 26 IRAN ECONOMIC MONITOR: MODERATE GROWTH AMID ECONOMIC UNCERTAINTY On average, women who were employed in the infor- Trends in Female Labor Force FIGURE 27 •  mal sector had 32 percentage points lower probability Participation and Tertiary Educated Women in the Working Age to remain employed during the first year of the pan- Population demic compared to men also working in the informal sector, whereas the corresponding gap is the lowest 20 (5 percentage points) among women working in the 18 16 public sector. Women’s disadvantage is considerable 14 among salaried workers in the private sector where the 12 Percent gender gap is as high as 26 percentage points.32 10 Increased family care responsibilities dur- 8 ing the first year of the pandemic have played 6 an important role in determining a worsen- 4 ing of Iranian women’s labor market outcomes. 2 0 Changes in family responsibilities due to COVID-19 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 school closures played a significant role in deter- mining employment losses among women. In fact, irrespective of job type, sector of employment, and Female labor force participation Share of tertiary educated women in the WAP individual characteristics, the gender gap was the highest among individuals with children in the 0–5 Source: LFS various years. age group, while significantly narrows among indi- viduals with no children below the age of 14. In and post-March 2020 and who were employed before the addition to determining a lower probability to retain pandemic. In particular, we estimate the following model: employment for women who were employed before the start of the pandemic, childcare responsibilities Pr(Yi,2020|Yi,j2019== 1) = a0 + b Femalei + Jobtypei,j2019 + d (Femalei * Jobtypei,j2019) + h Xi + g Zi,j2019 + ei have also played an important role in determining a higher reduction in female labor force participation where the dependent variable is the probability of being compared to men. In fact, controlling for individual employed in 2020/21 for individual i conditional on him/ characteristics,33 the impact of the pandemic on the her holding a job j before the start of the pandemic. The gender gap in labor force participation was the stron- main variable of interest is the interaction term between a gest for individuals with young children in the 0–5 dummy indicating female workers and a categorical vari- able indicating the job type before the pandemic, which age group, whereas it disappears once restricting can be either informal (omitted category), a salaried the sample to men and women without any children worker in the private sector, or a salaried worker in the below the age of 14. public sector. Controls include a set of individual charac- The decline in female labor force participa- teristics Xi which includes age, age squared, education, tion during the first year of the pandemic eroded marital status, urban residence, and province dummies. 10 years of progress. Over the last decade, the Moreover, in order to capture the fact that some sectors might have been disproportionately affected by the cri- Iranian economy has benefited from a progressive sis, sector dummies for the job held in 2019/20 were increase in female labor force participation, which included in the model. went hand in hand with an increase in the educa- 32 Descriptive analysis further reveals that women working tion level of women in the working-age population as private sector employees tend to have shorter job ten- (Figure 27: Trends in female labor force participation ure compared to their male counterparts and they are and tertiary educated women in the working age pop- less likely to be employed in micro-businesses. Still, even after controlling for differences in observable character- ulation). The COVID-19 pandemic has dramatically istics, a sizeable gender gap persists. reversed this trend, basically eroding 10 years of hard- 33 Controls included in regression analysis are age, age won progress. The results of the analysis indicate that squared, education, marital status as well as season, Iranian women and mothers in particular have been urban, and province dummies. Special Focus: The Gendered Impact of the COVID-19 Crisis on the Labor Market in Iran 27 more vulnerable to the labor market shock induced from the crisis remains to be seen and might require by the pandemic. Whether or not this negative shock addressing challenges that women face in reconciling can be reversed as the management of the COVID-19 family and work responsibilities as well as any residual pandemic is normalized and the economy recovers discrimination on the labor market. 28 IRAN ECONOMIC MONITOR: MODERATE GROWTH AMID ECONOMIC UNCERTAINTY REFERENCES Azadi, P., Mesgaran, M. B., & Mirramezani, M. 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