IRAN ECONOMIC MONITOR Managing Economic Uncertainties Spring 2022 Iran Economic Monitor Managing Economic Uncertainties With a Special Focus Preparing for an Uncertain Water Future Spring 2022 Middle East and North Africa Region © 2022 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 conclusions 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Public Sector Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Monetary Policy and Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 External Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2.  Outlook and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Risks and Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Special Focus Chapter: Preparing for an Uncertain Water Future . . . . . . . . . . . . . . . . . . . . . . . .23 Water Stress and Climate Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 Economic Impacts of Climate Change through Reduced Water Availability and Temperature Impacts on Crop Yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 Looking Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 iii List of Figures Figure 1 GDP Rebounded in 2021/22… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 2 …Driven by a Rebound in Oil and Services Sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 3 Global Oil Demand Recovery Drove Oil Production and Export Price… . . . . . . . . . . . . . . . . . . . . . . .2 Figure 4 …but Oil Production Capacity Remained Constrained by Declining Capital Stock . . . . . . . . . . . . . 2 Figure 5 Iran Underwent Six Waves of COVID-19 Infections… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Figure 6 …and the End of Last Wave Improved Market Sentiments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Figure 7 Consumption Was the Main Driver of GDP Growth on the Demand Side . . . . . . . . . . . . . . . . . . . . . 4 Figure 8 The Capital Stock Has Declined Over the Last Decade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Figure 9 The Pandemic Deteriorated Gender Disparities in Iran’s Labor Market . . . . . . . . . . . . . . . . . . . . . . 5 Figure 10 Significant Regional Disparities Exist in Iran’s Labor Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Figure 11 Tax and Oil Revenues Improved in 2021/22… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Figure 12 …which Helped Moderate the Previous Year’s Growing Fiscal Deficit . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 13 Inflation Rose Further in 2021/22… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Figure 14 … Driven by Higher Food Prices and Rental Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Figure 15 Economic Uncertainties Drove Fluctuations in Rial’s Value against the Dollar . . . . . . . . . . . . . . . 13 Figure 16 Currency Depreciation and Global Inflation Drove Up the Price of Imports . . . . . . . . . . . . . . . . . . .13 Figure 17 MB Growth Was Led by Foreign Asset Revaluation, NFA, and CBI Claims on Banks . . . . . . . . . . 14 Figure 18 Banking Sector Credit as a Share of GDP Grew Further in 2021/22 . . . . . . . . . . . . . . . . . . . . . . . .14 Figure 19 After Experiencing Some Volatility, the Stock Market Edged Up . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Figure 20 The Real Return of All Assets Was Negative in 2021/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Figure 21 The Capital Account Registered a Deficit in 2021/22… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Figure 22 …while the CAB Registered Surplus Due to Increasing Oil Exports Proceed . . . . . . . . . . . . . . . . .15 Figure 23 Higher Oil Price and Increase in Exports Increased Share of Oil in Total Exports… . . . . . . . . . . . . 16 Figure 24 ...and Non-Oil Exports also Rose to a Record-High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Figure 25 A Surge in Exports of Petrochemical and Mining Products Compensated for the Contraction in Agricultural Exports in 2021/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Figure 26 Iran’s Top Exporting Destinations Remained the Same . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Figure 27 UAE Became Iran’s Main Importing Partner in 2021/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Figure 28 Agricultural Water Productivity and Per Capita Water Withdrawals in MENA (2018) . . . . . . . . . . . 24 Figure 29 Changes in Real GDP under Reduced Water Availability Scenarios S3 and SC in Iran by 2050 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 Figure 30 Changes in the Real GDP with and without Water Use Efficiency in Iran 2050 . . . . . . . . . . . . . . . . 26 Figure 31 Impacts of Reduced Water Availability (S3) on Sectoral Outputs in Iran by 2050 . . . . . . . . . . . . . .26 Figure 32 Changes in Demand for Unskilled Labor in Agricultural and Nonagricultural Activities in Iran 27 Figure 33 Impacts of Climate Change on Crop Price Index for Producers and Consumers in Iran by 2050 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 List of Tables Table 1 The 2022/23 Budget Law is Less Accommodative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Table 2 Selected Economic and Financial Indicators, 2019/20–2024/25 . . . . . . . . . . . . . . . . . . . . . . . . . . .21 List of Boxes Box 1 Informal Employment in Iran . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Box 2 Food Security in Iran . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Box 3 Description of the GTAP-BIO-W Model and Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 iv ABBREVIATIONS AND ACRONYMS CAB Current account balance mm Millimeters CBI Central Bank of Iran NIMA Unified system of foreign exchange COVID-19 Corona Virus Disease 2019 (Novel transactions (Persian acronym) Coronavirus) OPEC Organization of Petroleum Exporting CPI Consumer price inflation Countries bbl Barrel of crude oil PBO Plan and Budget Organization GDP Gross domestic product PMI Purchasing Managers’ Index ICCIMA Iran Chamber of Commerce, Industries, pp Percentage point Mines & Agriculture RHS Right-hand-side IEM Iran Economic Monitor q/q Quarter-on-quarter IRICA Islamic Republic of Iran’s Customs SCI Statistical Centre of Iran Administration TEDPIX Tehran Stock Exchange main index LHS Left-hand-side TSE Tehran Stock Exchange mbpd Million barrels per day US(A) United States of America MENA Middle East and North Africa US$/USD United States Dollar m/m Month-on-month y/y Year-on-year v PREFACE T he Iran Economic Monitor (IEM) provides from comments received from Luan Zhao (Senior an update on key economic developments Economist, EMNMT). The special focus chapter on and policies. It examines these economic water and climate was prepared by a water sector developments and policies in a longer-term and team (SMNWA) consisting of Amal Talbi (Lead global context and assesses their implications for Water Resource Management Specialist), Anders the outlook for the country. The IEM’s coverage Jagerskog (Senior Water Resource Management ranges from the macro-economy to financial markets Specialist), Elvira Cusiqoyllor Broeks Motta (Water to indicators of human welfare and development. Sector Specialist), and Luis Gonzaga Alvarez Garcia It is intended for a wide audience, including Moran (Analyst) under the guidance of Michael policy makers, business leaders, financial market Haney (Practice Manager, SMNWA). Muna Abed participants, and the community of analysts and Salim (Senior Program Assistant) print-produced the professionals engaged on Iran. report. The Iran Economic Monitor is a product of the The findings, interpretations, and conclusions World Bank’s Global Practice for Macroeconomics, expressed in this Monitor are those of World Bank Trade and Investment (MTI) team within the Global staff and do not necessarily reflect the views of the Practice Group for Equitable Growth, Finance and Executive Board of the World Bank or the governments Innovation (EFI). The tenth issue of the IEM was they represent. prepared by Majid Kazemi (Economist, Task Team For questions and comments on the content Leader, EMNMT) and Razieh Zahedi (Consultant, of this publication, please contact Majid Kazemi EMNMT) under the general guidance of Saroj Kumar (mkazemi@worldbank.org) or Eric Le Borgne Jha (Regional Director), Eric Le Borgne (Practice (eleborgne@worldbank.org). Manager, EMNMT), and Norbert Fiess (Lead The data cut-off date for this report was July economist, EMNDR). The macro chapter benefitted 5, 2022. vii EXECUTIVE SUMMARY Recent Macroeconomic of purchasing power due to inflation, and rising import Developments and Outlook costs. On the revenue side, planned oil revenues are reported to have been fully realized in 2021/22 due to Iran’s economy continued its gradual recovery in higher oil prices and oil export volumes in the second 2021/221 following the rebound in domestic and half of the year. Despite some challenges, efforts to- external demand. Iran’s gross domestic product wards domestic revenue mobilization and expanding (GDP) grew by 4.7 percent in 2021/22, marking seven the tax base helped improve non-oil revenues. Tax rev- consecutive quarters of year on year (y/y) growth. enues met their planned budget target, in part aided The recovery in global oil demand along with the pick- by the impact of inflation on the nominal growth of the up in Iran’s oil exports drove a strong expansion in tax base. As a result, the fiscal deficit is estimated to oil production of 10.1 percent y/y during this period. have moderated to 5.3 percent of GDP in 2021/22 Less strict containment measures and an accelerated from 6.3 percent of GDP in 2020/21. vaccination rollout led to a 6.5 percent expansion Consumer price inflation accelerated due in services—the main driver of non-oil growth to a combination of supply-push and demand- (3.9 percent) in 2021/22. However, unprecedented pull factors, adding to pressures on the welfare droughts and energy shortages led the labor-intensive of lower-income households. In 2021/22, Iran agriculture and construction sectors to contract. As marked its third consecutive year of annual inflation such, despite experiencing two years of economic above 35 percent, driven by a rapid growth in growth, total employment has yet to recover to its pre- monetary aggregates, inflationary expectations, and pandemic level, especially among women. rising global commodity prices. Headline and core Despite a more accommodative fiscal policy inflation climbed to 40.2 percent and 36.7 percent in 2021/22, higher oil and tax revenues have im- in 2021/22, respectively, with headline inflation proved the fiscal deficit-to-GDP ratio. In 2021/22, registering the highest rate in a decade. The surge the government’s general budget resources (expen- in food prices following the war in Ukraine added ditures plus acquisition of financial assets) grew by to inflationary pressures and increased the fiscal 78 percent within the range of the two scenarios envi- burden of subsidized food imports. In response to sioned in the budget. The growth in expenditures was driven by an increase in public sector wages, adjust- 1 The Iranian calendar year starts on March 21 of every ments to pension payments to compensate for the loss year and ends on March 20 of the following year. ix the growing food import bill, the authorities ended the oil export revenues. If oil markets seek all available import subsidies for some essential goods, increased supply to ease price pressures, stronger demand the guaranteed purchase price for domestically could also lead to higher oil export volumes, thereby produced wheat, and raised the administered price of further improving fiscal and external balances. If eco- certain food items to reduce smuggling. To mitigate nomic sanctions are significantly eased or removed the impact on consumers, these measures were following a breakthrough in nuclear negotiations, this combined with the introduction of additional cash could further improve Iran’s economic prospects and transfers and announced plans for the deployment curb inflationary expectations. Downside risks re- of electronic coupons for purchase of essential late to the impact of surging global food prices, the food items. These measures led to monthly inflation resurgence of new COVID-19 variants, and a wors- increasing to 12.2 percent in June 2022 month-on- ening of the climate change impact. Soaring global month (m/m)—a record high for monthly inflation. food prices due to the war in Ukraine, if prolonged, Food prices increased by 25 percent m/m, which was could heavily impact crop and fertilizer supplies and felt most by lower income deciles and in rural areas. raise food security risks. Further price increases GDP growth is projected to remain modest would add to Iran’s import bill and put more pres- in the medium term, as the economy remains sure on the government and its limited accessible constrained by both global and domestic growth foreign exchange reserves. Persistent high inflation, bottlenecks. Higher inflation is forecast to weigh on if unmitigated, would increase pressures on lower-in- consumption and to keep demand sluggish after an come deciles and adds to existing social grievances. initial post-pandemic rebound. Growth projections for Addressing long-term development chal- Iran in 2022–24 have improved with higher projected lenges, including impending climate change oil prices and oil market supply gaps that allow the shocks, requires a comprehensive package of country to produce more oil and petroleum products economic reforms complemented by adequate to meet export demand. The non-oil sector is also social protection measures. Economic policies expected to benefit from spillovers from higher oil could be better geared towards creating much-needed export proceeds. However, the continuation of jobs. This could be achieved through investment in sanctions, subdued net capital formation particularly infrastructure, especially in under-developed regions, in the oil sector, energy shortages, global inflation, stimulating private sector activity via an improved and the scarring effects of the pandemic on the labor business environment and reducing distortive pricing market limit growth prospects. interventions. Decarbonizing infrastructure, transition A more favorable global oil market outlook towards sustainable sources of energy and acceler- is projected to improve Iran’s fiscal and external ated adoption of climate-smart water and agriculture balances. Higher projected oil prices in the outlook interventions will also be key in managing climate period and growth in oil export volumes considering change risks. Rightsizing current expenditures, includ- the tighter global oil market are forecast to improve ing reforming domestic energy prices, and increasing oil revenues. However, high growth in expenditures tax revenues through the removal of exemptions, due to a growing wage bill and pension spending as addressing tax evasion, and improving value-added well as higher food import costs and additional cash tax collection can create much needed fiscal space. transfers are projected to keep the fiscal balance in Relatively low public debt allows the government to a deficit of 4.4 percent of GDP per year in 2022– finance its deficit by issuing government bonds within 24. Iran’s current account balance is also forecast a well-defined medium-term fiscal framework; this to remain in surplus over the medium term due to reduces reliance on banks’ resources or the central improved oil market conditions. bank’s balance sheet. To address the potential income Iran’s economic outlook is subject to sig- and distributional impact of reforms, the most vulner- nificant risks. On the upside, further increases as able households need to be protected by well-targeted well as sustained high oil prices can result in higher social safety transfers. x Preparing for an Uncertain Water by 7 percent relative to the baseline (real GDP in 2016) Future or by about US$30 billion. Demand for labor would fall by up to 4.8 percent and 10 percent relative to the Iran is a water-stressed country where consump- 2016 baseline for agricultural and non-agricultural tion outstrips natural regeneration. Climate change activities, respectively. Consumer food prices would will widen the water supply and demand gap, worsen- increase by up to 8.2 percent. This analysis relies on ing water challenges for Iran and its neighbors. Irrigat- short to medium time likely changes in crop yields ed agriculture consumes the greatest share of water and water availability prior to 2050. Since reduced (92 percent), but that water is not used well in Iran: ag- water availability is one of the biggest economic im- ricultural water productivity is one of the lowest in the pacts of climate change, Iran can benefit from lessons region. Climate change will negatively affect the gross from countries that have coped with this issue. These domestic product (GDP), demand for labor, and food pathways include (i) effective water resources man- prices. According to the World Bank Water in the Bal- agement, (ii) improved water use efficiency with water ance report, in a scenario where water availability re- demand management policies, (iii) adept institutions duces by 20 percent and where higher temperatures and tailored policies, and (iv) collaboration with ripar- negatively impact crop yields, GDP would decrease ian countries. Executive Summary xi ‫چکیده مدیریتی‬ ‫تورم قیمت مرصف کننده به دلیل ترکیبی از عوامل فشار عرضه و‬ ‫تحوالت اخیر و و چشم‌انداز اقتصاد ایران‬ ‫کشش تقاضا شتاب گرفت و منجر به فشار مضاعف بر رفاه خانوارهای‬ ‫کم‌درآمد گردید‪ .‬ایران در سال ‪ ،1400‬برای سومین سال متوالی‪ ،‬تورم‬ ‫پس از رونق تقاضای داخلی و خارجی‪ ،‬اقتصاد ایران به روند بهبود‬ ‫ساالنه بیش از ‪ 35‬درصد را ثبت کرد که ناشی از رشد رسیع کل‌های‬ ‫تدریجی خود در سال ‪ 1400‬ادامه داد‪ .‬تولید ناخالص داخلی ایران در‬ ‫پولی‪ ،‬انتظارات تورمی و افزایش قیمت‌های جهانی کاالها بود‪ .‬تورم‬ ‫سال ‪ 1400‬با رشد ‪ 4.7‬درصد‪ ،‬هفتمین فصل متوالی رشد ساالنه را ثبت‬ ‫کل و تورم هسته به ترتیب به ‪ 40.2‬درصد و ‪ 36.7‬درصد در سال ‪1400‬‬ ‫کرد‪ .‬بهبود تقاضای جهانی نفت به همراه افزایش صادرات نفت ایران‬ ‫رسیدند که باالترین نرخ تورم در یک دهه اخیر بود‪ .‬افزایش قیمت مواد‬ ‫باعث افزایش شدید تولید نفت به میزان ‪ 10.1‬درصد شد‪ .‬اقدامات‬ ‫غذایی پس از جنگ در اوکراین‪ ،‬بر این فشارهای تورمی افزوده و بار‬ ‫سخت‌گیرانه محدودتر و واکسیناسیون گسرتده‪ ،‬منجر به رونق قابل‌‪‎‬توجه‬ ‫بودجه‌ای واردات یارانه‌ای مواد غذایی را افزایش داده است‪ .‬در واکنش‬ ‫بخش خدمات به میزان ‪ 6.5‬درصد شد که محرک اصلی رشد بخش‬ ‫به افزایش هزینه واردات مواد غذایی‪ ،‬مسئولین کشور‪ ،‬پرداخت یارانه‬ ‫غیرنفتی (‪ 3.9‬درصد) در سال ‪ 1400‬بود‪ .‬با این حال‪ ،‬خشکسالی بی‌سابقه‬ ‫به واردات برخی محصوالت اساسی را قطع کردند‪ ،‬قیمت خرید تضمینی‬ ‫و کمبود انرژی‪ ،‬منجر به رکود بخش‌های کاربر چون بخش کشاورزی و‬ ‫گندم تولید داخل را افزایش دادند و به منظور کاهش قاچاق کاالها‪،‬‬ ‫ساختامن شد‪ .‬با این وجود‪ ،‬علیرغم دو سال رشد اقتصادی‪ ،‬اشتغال کل‪،‬‬ ‫قیمت مصوب برخی از اقالم غذایی را افزایش دادند‪ .‬در عوض به منظور‬ ‫مخصوصاً اشتغال زنان‪ ،‬هنوز به سطح قبل از پاندمی کرونا نرسیده است‪.‬‬ ‫کاهش تأثیر بر مرصف‌کنندگان‪ ،‬این اقدامات همراه با پرداخت‌های‬ ‫نقدی جدید و ارائه برنامه‌هایی برای توسعه کوپن الکرتونیکی برای‬ ‫علی‌رغم سیاست مالی سازگارتر در سال ‪ ،1400‬افزایش درآمدهای‬ ‫خرید برخی مواد غذایی اساسی شد‪ .‬این اقدامات منجر به افزایش تورم‬ ‫نفتی و مالیاتی نسبت کرسی بودجه به تولید ناخالص داخلی را بهبود‬ ‫ماهانه در خرداد ‪ ،1401‬به ‪ 12.2‬درصد (در مقایسه با ماه قبل) شد‪،‬‬ ‫بخشید‪ .‬در سال ‪ ،1400‬منابع بودجه عمومی دولت (هزینه‌ها به عالوه‬ ‫که باالترین رکورد برای تورم ماهانه را ثبت کرد‪ .‬قیمت مواد غذایی ‪25‬‬ ‫متلک دارایی‌های مالی) ‪ ،‬در محدوده دو سقف قانون بودجه ‪78 ،1400‬‬ ‫درصد (نسبت به ماه قبل) افزایش یافت که در دهک‌های درآمدی پایین‬ ‫درصد رشد کرد‪ .‬رشد مخارج عمدتاً ناشی از افزایش دستمزدهای بخش‬ ‫و در مناطق روستایی‪ ،‬بیشرت احساس شد‪.‬‬ ‫دولتی‪ ،‬تعدیل مستمری بازنشستگان برای جربان کاهش قدرت خرید‬ ‫ناشی از تورم‪ ،‬و افزایش هزینه‌های واردات بود‪ .‬به دلیل افزایش قیمت‬ ‫پیش‌بینی می‌شود که رشد تولید ناخالص داخلی در میان‌مدت در حد‬ ‫نفت و افزایش حجم صادرات نفت در نیمه دوم سال‪،‬گزارش شده‌است‬ ‫متوسط باقی مباند‪ ،‬زیرا اقتصاد هم‌چنان متأثر از محدودیت‌های ناشی‬ ‫که درآمدهای نفتی برنامه‌ریزی شده به طور کامل در سال ‪ 1400‬محقق‬ ‫از تنگناهای رشد جهانی و داخلی است‪ .‬پس از بهبود اولیه بعد از‬ ‫شده‌اند‪ .‬علی‌رغم برخی چالش‌ها‪ ،‬تالش‌ برای تجمیع درآمدهای داخلی و‬ ‫پاندمی‪ ،‬انتظار می‌رود که تورم باالتر‪ ،‬مرصف را کاهش داده و منجر به‬ ‫گسرتش پایه مالیاتی به بهبود درآمدهای غیرنفتی کمک کرد‪ .‬درآمدهای‬ ‫کاهش تقاضا شود‪ .‬پیش‌بینی‌های رشد در سال‌های ‪ 1401–03‬برای ایران‬ ‫مالیاتی به طور کامل محقق شد‪ ،‬که تا حدی به دلیل تأثیر تورم در‬ ‫به دلیل قیمت‌های انتظاری باالتر نفت و شکاف عرضه در بازار نفت که‬ ‫رشد اسمی پایه مالیاتی بود‪ .‬در نتیجه‪ ،‬برآورد می‌شود که کرسی بودجه‬ ‫به کشور اجازه تولید بیشرت نفت و فرآورده‌های نفتی برای پاسخگویی‬ ‫از ‪ 6.3‬درصد تولید ناخالص داخلی در سال ‪ 1399‬به ‪ 5.3‬درصد تولید‬ ‫به تقاضای صادراتی می‌دهد‪ ،‬بهبود یافته است‪ .‬هم‌چنین انتظار می‌رود‬ ‫ناخالص داخلی در سال ‪ 1400‬تعدیل شده‌باشد‪.‬‬ ‫‪xiii‬‬ ‫بهبود محیط کسب‌وکار‪ ،‬و کاهش مداخالت قیمت‌گذاری حاصل شود‪.‬‬ ‫بخش غیرنفتی از رسریزهای حاصل از درآمدهای باالتر صادرات نفت‬ ‫همچنین‪ ،‬کربن‌زدایی زیرساخت‌ها‪ ،‬گذار به منابع پایدار انرژی و ترسیع‬ ‫بهره مند شود‪ .‬با این حال‪ ،‬تداوم تحریم‌ها‪ ،‬کاهش تشکیل رسمایه خالص‬ ‫در به‌کارگیری راهکارهای اقلیم‌محور در بخش آب و کشاورزی‪ ،‬در‬ ‫به‌ویژه در بخش نفت‪ ،‬کمبود انرژی‪ ،‬تورم جهانی و اثرات مخرب و‬ ‫مدیریت ریسک‌های اقلیمی مهم خواهند بود‪ .‬اصالح هزینه‌های جاری‪،‬‬ ‫ماندگار پاندمی کرونا بر بازار کار‪ ،‬چشم‌انداز رشد را محدود می‌کند‪.‬‬ ‫از جمله اصالح قیمت‌های داخلی انرژی‪ ،‬و افزایش درآمدهای مالیاتی‬ ‫از طریق حذف معافیت‌ها‪ ،‬رسیدگی به فرار مالیاتی و بهبود مالیات بر‬ ‫پیش‌بینی می‌شود که چشم‌انداز مطلوب‌تر بازار جهانی نفت‪ ،‬هم‌چنین‬ ‫ارزش افزوده‪ ،‬می‌تواند فضای بودجه‌ای مورد نیاز را ایجاد کند‪ .‬بدهی‬ ‫باعث بهبود ترازهای بودجه‌ای و خارجی ایران شود‪ .‬پیش‌بینی افزایش‬ ‫عمومی نسبتاً پایین به دولت این امکان را می‌دهد که کرسی بودجه‬ ‫قیمت نفت در دوره چشم انداز و انتظار رشد حجم صادرات نفت با‬ ‫خود را با انتشار اوراق بدهی دولتی در یک چارچوب مالی میان‌مدت‬ ‫توجه به تنگناهای بازار جهانی نفت باعث بهبود درآمدهای نفتی‌شود‪.‬‬ ‫مشخص تأمین کند‪ ،‬که این امر اتکا به منابع بانک‌ها یا ترازنامه بانک‬ ‫با این حال‪ ،‬انتظار می‌رود که رشد باالی مخارج دولت به دلیل افزایش‬ ‫مرکزی را کاهش می‌دهد‪ .‬برای حفظ درآمدها و تأثیر توزیعی بالقوه‬ ‫دستمزدها و هزینه‌های بازنشستگی‪ ،‬کرسی بودجه را در حد ‪ 4.4‬درصد‬ ‫این اصالحات‪ ،‬نیاز است که آسیب پذیرترین خانوارها با پرداخت‌های‬ ‫تولید ناخالص داخلی در سال‌‪‎‬های ‪ 1401–03‬حفظ کند‪ .‬هم‌چنین‬ ‫حامیتی هدفمند محافظت شوند‪.‬‬ ‫پیش‌بینی می‌شود که حساب جاری ایران در میان مدت به دلیل بهبود‬ ‫رشایط بازار نفت‪ ،‬در تراز مازاد باقی مباند‪.‬‬ ‫چشم انداز اقتصادی ایران در معرض ریسک‌های قابل توجهی است‪.‬‬ ‫آماده شدن برای آینده آبی نامطمنئ‬ ‫از یک سو‪ ،‬افزایش بیشرت و تداوم قیمت‌های باالی نفت می‌تواند‬ ‫منجر به درآمدهای صادراتی نفت بیشرت شود‪ .‬اگر بازارهای نفت به‬ ‫ایران کشوری با تنش آبی است که مرصف منابع آب آن از بازآفرینی‬ ‫دنبال متام عرضه موجود برای کاهش فشار قیمت باشند‪ ،‬تقاضای‬ ‫طبیعی آن پیشی گرفته است‪ .‬بیشرتین سهم مرصف آب در کشور‬ ‫قوی‌تر می‌تواند منجر به افزایش حجم صادرات نفت کشور شود و‬ ‫متعلق به کشاورزی است (‪ 92‬درصد)‪ ،‬اما این آب به خوبی استفاده‬ ‫در نتیجه منجر به بهبود بیشرت تراز بودجه و تراز خارجی شود‪ .‬اگر‬ ‫منی‌شود زیرا بهره‌وری آب کشاورزی یکی از پایین‪‌‎‬ترین‌ها در منطقه‬ ‫تحریم‌های اقتصادی به طور قابل توجهی کاهش یابند یا برداشته شوند‪،‬‬ ‫است‪ .‬تغییرات اقلیمی بر تولید ناخالص داخلی‪ ،‬تقاضای نیروی کار‪ ،‬و‬ ‫این می‌تواند منجر به بهبود بیشرت چشم انداز اقتصادی ایران و مهار‬ ‫قیمت مواد غذایی تأثیر منفی خواهد گذاشت‪ .‬بر اساس گزارش «آب‬ ‫انتظارات تورمی شود‪ .‬از سوی دیگر‪ ،‬ریسک‌ منفی شامل اثرات افزایش‬ ‫در تراز» بانک جهانی در سناریویی که دسرتسی به آب تا ‪ 20‬درصد‬ ‫قیمت‌های جهانی مواد غذایی‪ ،‬شیوع مجدد سویه‌های جدید کووید ‪،19‬‬ ‫کاهش یافته و دماهای باالتر بر عملکرد محصول تأثیر منفی می‌گذارد‪،‬‬ ‫و بدترشدن تاثیر تغییرات اقلیمی است‪ .‬افزایش شدید قیمت جهانی‬ ‫تولید ناخالص داخلی ‪ 7‬درصد نسبت به تولید ناخالص داخلی واقعی‬ ‫مواد غذایی به دلیل جنگ در اوکراین‪ ،‬اگر تداوم یابد‪ ،‬می‌تواند به شدت‬ ‫سال پایه ‪ 1395‬یا حدود ‪ 30‬میلیارد دالر کاهش می‌یابد‪ .‬تقاضا برای‬ ‫بر عرضه محصوالت کشاورزی و کود شیمیایی تأثیر بگذارد و خطرات‬ ‫نیروی کار در فعالیت‌های کشاورزی و غیرکشاورزی به ترتیب تا ‪4.8‬‬ ‫امنیت غذایی را افزایش دهد‪ .‬افزایش قیمت‌ها منجر به افزایش بیشرت‬ ‫درصد و ‪ 10‬درصد نسبت به سال پایه ‪ 1395‬کاهش می‌یابد‪ .‬قیمت‬ ‫هزینه‌های واردات می‌شود و فشار بر دولت و ذخایر ارزی محدود‬ ‫مواد غذایی مرصفی تا ‪ 8.2‬درصد افزایش می‌یابد‪ .‬این محاسبات بر‬ ‫کشور افزایش می‌یابد‪ .‬تداوم فشارهای تورمی‪ ،‬در صورت عدم جربان‪،‬‬ ‫افق‌های زمانی کوتاه تا میان‌مدت تغییرات در بازدهی محصول و‬ ‫فشار بر دهک‌های درآمدی پایین را افزایش می‌دهد و بر نارضایتی‌های‬ ‫در دسرتس بودن آب متکی است و بر تغییراتی مترکز می‌کند که به‬ ‫اجتامعی می‌افزاید‪.‬‬ ‫احتامل زیاد قبل از سال ‪ 1429‬اتفاق می‌افتد‪ .‬از آنجایی که کاهش‬ ‫دسرتسی به آب یکی از بزرگرتین تأثیرات اقتصادی تغییرات اقلیمی‬ ‫پرداخنت به چالش‌های توسعه بلندمدت‪ ،‬از جمله تکانه‌های قریب‌الوقوع‬ ‫است‪ ،‬ایران می‌تواند از درس‌هایی از کشورهایی که با این مسئله کنار‬ ‫تغییرات اقلیمی‪ ،‬نیازمند بسته‌ای جامع از اصالحات اقتصادی است که‬ ‫آمده‌اند‪ ،‬بهره‌مند شود‪ .‬این مسیرهای گزار شامل است از (‪ )1‬مدیریت‬ ‫با حامیت‌های اجتامعی کافی تکمیل می‌شود‪ .‬سیاست‌های اقتصادی را‬ ‫مؤثر منابع آب‪ )2( ،‬بهبود کارایی مرصف آب با سیاست‌های مدیریت‬ ‫می‌توان در جهت ایجاد مشاغل که شدیدا ً مورد نیاز است هدایت کرد‪.‬‬ ‫تقاضای آب‪ )3( ،‬مؤسسات تخصصی و سیاست‌های متناسب‪ ،‬و (‪)4‬‬ ‫این امر می‌تواند از طریق رسمایه‌گذاری در زیرساخت‌ها به‌ویژه در‬ ‫همکاری با کشورهای همجوار‪.‬‬ ‫مناطق کم‌تر توسعه‌ یافته‪ ،‬تحریک فعالیت‌ بخش خصوصی از طریق‬ ‫‪xiv‬‬ ‫‪IRAN ECONOMIC MONITOR: MANAGING ECONOMIC UNCERTAINTIES‬‬ 1 RECENT ECONOMIC AND POLICY DEVELOPMENTS Output and Demand grew by 22.8 percent in 2021/22, and the price of Iran’s crude surged by more than 82.5 percent Iran’s economy grew for the second consecutive (Figure 3). Oil production volume in April 2022 year in 2021/22,2 after a two-year recession. reached a three-year high of 2.56 million barrels per Real gross domestic product (GDP) grew by 4.7 day (mbpd) but remained 1.3 mbpd below its pre- percent in 2021/22. Growth was largely driven sanctions level in 2018/19. Despite the increase in by oil sector activity which grew by 10.1 percent, oil production and exemption from recent OPEC following stronger global oil demand and a pick-up production quotas, Iran’s share in OPEC production in Iran’s oil exports (Figure 1). Non-oil GDP also grew declined from 9.7 percent in April to about 8.9 by 3.9 percent following the easing of pandemic- percent between November 2021 and May 2022 related mobility restrictions and a gradual rebound as OPEC+ production cuts started to be tapered. in economic activity as services expanded by 6.5 The oil and gas sector suffers from years of under- percent in the same period (Figure 2). The modest investment largely related to ongoing US sanctions. growth in manufacturing activity (3.3 percent)3 Over the last decade, investments were even below was partly offset by the decline in construction depreciation costs. The growth rate of net capital (6.9 percent), resulting in industry sector activity to stock in the oil and gas sector was negative for marginally grow by 1.1 percent in 2021/22. Severe droughts and water management challenges 2 The Iranian calendar year starts on March 21 of every hindered agriculture production, which contracted year and ends on March 20 of the following year. by 2.6 percent. 3 Manufacturing growth in 2021/22 was about 40 percent of the last year due to large electricity shortages in The recovery in global oil demand along summer 2021. with a pick-up in Iran’s oil exports drove a 4 Iran has stopped publishing crude oil production and strong expansion in oil production. According to export volumes data since the reimposition of US OPEC’s secondary sources,4 Iran’s oil production sanctions in 2018 1 FIGURE 1 • GDP rebounded in 2021/22… …Driven by a Rebound in Oil and FIGURE 2 •  Services Sectors 20 80 8 15 60 Contrbution to y/y GDP growth, pp 10 40 4 Percent Percent 5 20 0 0 0 –4 –5 –20 –10 –40 –8 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22* –12 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2018/19 2019/20 2020/21 2021/22* Non-oil GDP growth rate (LHS) GDP growth rate (LHS) Oil Agriculture Industries Oil 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. Note: * Based on the 2016/17 base year series. Note: * Based on the 2016/17 base year series. FIGURE 3 • Global Oil Demand Recovery Drove FIGURE 4 • …but Oil Production Capacity Oil Production and Export Price… Remained Constrained by Declining Capital Stock 4 140 2,000 120 Trillion Rial, Constant price 2017/18 1,800 3 1,600 100 1,400 80 1,200 US$/bbl Mbpd 2 1,000 60 800 600 40 1 400 20 200 0 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 0 0 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr 2018 2019 2020 2021 2022 Net capital stock in oil and gas sector's equipment Iran's oil production, mbpd (LHS) Net capital stock in oil and gas sector's construction Iran's heavy oil price, US$/bbl (RHS) Source: CBI and World Bank staff calculations. Source: OPEC Monthly Oil Market Report. Note: Data based on the 2016/17 base year series. most of the last decade, and the total net capital Less strict containment measures and a stock of the oil and gas sector in 2020/21 was 16 rapid vaccination rollout in 2021/22 led to a strong percent below the level a decade earlier (Figure 4). expansion in services—the main driver of non-oil While authorities have announced a series of new growth. After more than two years of the COVID-19 investments, the underinvestment in the previous pandemic, the situation is returning to normal. Iran was years could pose as a bottleneck for ramping up one of the first countries with large outbreaks and was oil production in the future should export conditions severely affected by six waves of infections, registering improve further. over 7.24 million confirmed cases and about 141K 2 FIGURE 5 • Iran Underwent Six Waves of …and the End of Last Wave Improved FIGURE 6 •  COVID-19 Infections… Market Sentiments 600 10 70 8 60 Daily deaths per million Daily cases per million 400 6 50 PMI Index 4 200 40 2 30 0 0 2020/03/01 2020/05/01 2020/07/01 2020/09/01 2020/11/01 2021/01/01 2021/03/01 2021/05/01 2021/07/01 2021/09/01 2021711/01 2022/01/01 2022/03/01 2022/05/01 2022/07/01 20 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 PMI New cases per million (LHS) Manufacturing PMI New deaths per million (RHS) Source: Iran Chamber of Commerce, Industries, Mines & Agriculture (ICCIMA). Source: Our world in data. Note: A PMI index above 50 shows producers/managers having a positive outlook. deaths (Figure 5).5 The acceleration in vaccination has also declined due to the soaring prices for con- rollout during Q4-20216 resulted in a substantial struction materials (over 180 percent during the last decline in the ratio of daily deaths to new cases and two years) and land (over 100 percent in 2019/20- helped confront the spread of the less virulent Omicron 2020/21). Demand for housing has also been im- variant. Better preparedness led to further easing of pacted by increasing housing prices (more than containment measures, supporting the expansion in 300 percent in 2018/19-2020/21), which has made the service sector and in private consumption. house ownership unaffordable for many Iranians. The non-oil industry sector grew moder- Similar to other countries in the region, ately, limited by energy shortages and an uncer- Iran faces significant water shortages which tain investment environment. Energy shortages threaten the agriculture sector and elevate food weighed on manufacturing growth, which together security risks. Following the driest year in half-a- with a sharp decline in construction hampered the century (September 2020-August 2021), rainfall growth of the industry sector in 2021/22. After con- between September 2021 and June 2022 increased tracting in summer 2021, the purchasing managers’ by 26 percent y/y.7 Despite this improvement, rainfall index (PMI) and the manufacturing PMI recovered was 22 percent below the long-term average. Recent to positive territory in the second half of 2021/22 rainfall was not evenly distributed throughout the (Figure 6). However, this trend was marked by some country (from 59.8 mm in Yazd to 867 mm in Gilan) and volatility, reflecting shortages of natural gas and about half of the provinces still faced less precipitation economic uncertainties associated with ongoing nu- clear negotiations. In May 2022, the PMI and manu- 5 Accounting for over 29 percent of cases and 44 percent facturing PMI registered their highest levels, one of deaths in the MENA region, ranking 17th and 11th month after recording their lowest levels in the past globally in the number of confirmed cases and deaths as two years. The recent spike in the PMI reflects the of July 5, 2022, respectively (https://www.worldometers. info/coronavirus). rush to purchase goods ahead of expected higher 6 As of July 5, 2022, 68.3 percent of the 85-million inflation in the coming months as well as the nor- population are fully vaccinated and about 32.7 percent malization of business activities after the new-year received their boosters. holidays in April 2022. Construction sector activity 7 http://www.ion.ir/news/778613. Recent Economic and Policy Developments 3 FIGURE 7 • Consumption Was the Main Driver of FIGURE 8 • The Capital Stock Has Declined Over GDP Growth on the Demand Side the Last Decade 20 10 Contrbution to y/y GDP growth, pp 8 10 Growth Rate, percent 6 4 0 2 0 –10 –2 –20 –4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2018/19 2019/20 2020/21 2021/22* Private consumption Gov. consumption Investment Exports Total net capital stock, growth rate Imports Inventory & SD Net capital stock in machinery, growth rate GDP Net Capital stock in construction, growth rate Source: Central Bank of Iran (CBI) and World Bank staff calculations. Source: CBI and World Bank staff calculations. Note: * Based on the 2016/17 base year series. Note: * Based on the 2016/17 base year series. compared to last year.8 According to the Ministry sharp decline in construction investment (7.1 percent) of Energy, water storage behind dams declined by caused overall investments to stagnate in 2021/22. 5 percent y/y in September 2021 to June 2022 and The sharp decline in gross capital formation, as of July 2022, water reservoirs in dams are below which has weakened Iran’s potential GDP growth, half capacity.9 Overextraction from finite groundwater has been a legacy of the previous years’ sanctions resources in recent years has brought these resources and decline in oil revenue. In the three years following to low critical levels.10 Water-related aspects of climate the re-imposition of US sanctions in 2018, real public change have significant implications for future growth, investment contracted by an annualized rate of 20 per- food security, and jobs in Iran (see the special focus cent. During this period, the growth rate of net capital chapter on water). investment was less than one percent, and new invest- On the expenditure side, growth in 2021/22 ments barely compensated for the depreciation cost was largely driven by consumption. Private and of the capital stock (Figure 8). The growth rate of net government consumption grew by 3.9 percent and 8.3 percent in 2021/22, respectively, after contracting by 8 Iran is among the world’s semi-arid and arid countries and over 10 percent during the previous three years due to average rainfall is about 250 mm which is about one third of high inflation and the pandemic. Higher oil revenues the global average and two-third of it vanishes because of prompted the government to increase consumption under evaporation. Furthermore, about 20 percent of areas across Iran are highly prone to flooding. In 2021/22, large floods the second-tier, higher budget envelope (see the public hit Iran’s southern provinces (Fars, Kerman, Hormozgan, sector finance section on 2021/22 budget provision). Sistan and Baluchestan, and Khuzestan) which have Private consumption was supported by the easing of struggled with the worsening water crisis in recent years. pandemic-related restrictions as well as supplementary 9 During the same period, the decline in dams’ water increases to pensions payment and wages. Consumption storage in the province of Tehran was 18 percent (y/y), growth reflects the expansion in services, which leaving water levels at only 34 percent of their full storage capacity; while the decline in dams in Hamedan and accounts for a significant share in consumption. Higher Sistan was more than 50 percent (y/y) and their water consumption was partly met through higher imports, levels are less than 20 percent (Ministry of Energy). which rose by 24.1 percent in 2021/22 in real terms, 10 For further information see Noori et al. (2021) and Ashraf outpacing exports growth of 5.2 percent. Meanwhile, a et al. (2021). 4 capital stock had been worsening since 2014/15. This rate in rural areas (4.1 pp decline from 47.3 percent downward trend in capital accumulation was even stron- in 2019/20). As such, the recent low unemployment ger for investment in machinery and equipment, which, rate of 9.2 percent in 2021/22 masks important labor since 2018/19, consistently contracted due to the im- market challenges. Underemployment also remained pact of sanctions on Iran’s trade and foreign exchange high at 10.2 percent in 2021/22, which also highlights reserves. The lower accumulation of capital stock affects the lack of adequate jobs for those employed. productive capacity and prospects of future growth. Female employment remained significantly below the pre-pandemic level, maintaining pre- vious gender disparities in Iran’s labor market. Labor Market and Jobs Employment for males in 2021/22 recovered to level of 2019/20 due to greater job creation in the male-domi- The recovery in the labor market has lagged nated industrial sector (about half a million jobs). Over the rebound in GDP. While GDP expanded by the same period, female employment was 18 percent 3.4 percent in 2020/21 and 4.7 percent in 2021/22, lower due to the disproportionate effect of the pandem- employment in 2021/22 remained at 3.4 percent ic on women including working mothers who took on (0.83 million jobs) below its pre-crisis level in the majority of family caregiving responsibility during 2019/20.11 This outcome was in part due the fact that school and childcare closures. This led the employ- the less-labor intensive oil sector drove the recovery in ment to the working-age population ratio for females GDP. The agriculture sector contraction added to job to decline by more than 2.9 pp to 11.1 percent com- creation challenges. Since the start of the pandemic, pared to 2019/20. Female labor force participation also the working-age population increased by 1.4 million declined to 13.3 percent in 2021/22, from 17 percent while the active population declined by 1.3 million in 2019/20 before the pandemic started. This trend (with 78 percent being female). This brought the labor added to pre-existing gender disparities in labor market force participation rate to 40.9 percent in 2021/22, outcomes. While the female education level in Iran is down by 3.2 pp compared to 2019/20. The decline in the active population was partly due to a lack of job opportunities in the agriculture sector, reflected 11 Only one-third of the 1.4 million jobs lost during the in a stronger decline in the labor force participation pandemic (Q3-19/20 to Q3-21/22) were recovered. FIGURE 9 • The Pandemic Deteriorated 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 Employment Unemployment participation rate ratio rate Pre-pandemic 2019/20 Post-pandemic 2021/22 Source: SCI and World Bank staff calculations. Recent Economic and Policy Developments 5 comparable to OECD countries (both with 51 percent of Khorasan) to 15.8 percent (Hormozgan) (Figure 10). The tertiary education), the female labor force participation differences in labor market outcomes across Iran’s prov- rate remains one of the lowest in the world. Even wom- inces reflect differences in annual government budget en who participate in the labor force face an unemploy- allocations, differences in previous development plans’ ment rate that is on average 1.5–2 times higher than that objectives for regional concentration of industries, vary- for men. Women were disproportionally affected by the ing levels of infrastructure, as well as different geograph- pandemic due to childcare responsibilities and a high- ical characteristics, including proximity to a border.12 er female concentration in pandemic-affected sectors, such as services and the informal sector (see Box 1). Public Sector Finance13 Iran’s labor market indicators show signifi- cant regional disparities, highlighting the different Fiscal policy in 2021/22 was more accommoda- impact of the pandemic across the country. The em- tive, aided by improved oil income revenues that ployment ratio, the ratio of employed population to work- were used to counter the impact of high inflation. ing age population, declined during the pandemic by General budget resources (expenditures plus acquisi- about 2.2 pp and 75 percent of provinces experienced tion of financial assets) grew by 78 percent in nominal a decline in their employment ratio. Provinces with a terms,14 keeping within the two scenario targets outlined larger share of employment in the informal sector and in the agriculture sector experienced worse outcomes 12 Yazd, Semnan, Tehran, Isfahan, and Markazi are among the during the pandemic. In 2021/22, Zanjan and Yazd provinces with the highest development indices, and Sistan, had the highest employment to working-age population Kohkiloyeh, Kurdistan, Hormozgan, and Ilam have the ratio (around 42 percent) and the lowest belonged to lowest development indices (Etaat and Shojaenasab, 2014). Ilam, Sistan, and Kohgiloyeh (around 31 percent). The 13 Since the re-imposition of US sanctions in 2018, Iran labor force participation rate also varied significantly no longer publishes fiscal data on a regular basis. Data used in this section are based on those quoted by between provinces in 2021/22, the highest rate was officials in the media. in Yazd at 47.8 percent, and the lowest in Ilam, Sistan, 14 All growth rates of fiscal data variables are reported and Kohgiloyeh at around 34 percent. The unemploy- in nominal terms. Growth rates below the inflation rate ment rate ranged from 6.5 percent (Zanjan and North show a decline in real-terms. FIGURE 10 • Significant Regional Disparities Exist in Iran’s Labor Market a. Employment to working-age population ratio in 2021/22 b. Unemployment rate in 2021/22 31.1–34 34.1–37 37.1–40 40.1–43 6.1–8 8.1–10 10.1–12 12.1–16 Source: SCI and World Bank staff calculations. 6 BOX 1 INFORMAL EMPLOYMENT IN IRAN According to estimates by the Statistical Center of Iran (SCI),a informal employment accounts for about 60 percent of total employment in Iran. This rate of informality is comparable with the world average (ILO 2018),b but some nuances exist. About one-third of informal employees in Iran work for the formal sector and just over 2 percent work in households (Table B1.1). The share of informal employment is slightly higher for women (63 percent) than men (58 percent), while the world average of informal employment is higher among men (63 percent) compared to women (58.1 percent). Only in low and lower-middle-income countries, women are more exposed to the informal economy. In Iran, over 75 percent of those working in rural areas make their living in the informal economy while half of the urban employment is informal. Informal employment in rural areas in the world is twice as high in urban areas due to the high share of the agriculture sector as the main source of informal employment (ILO 2018). The level of informal employment varies across the different sectors of the economy and based on the level of education. Similar to other countries, the agriculture sector accounts for the highest level of informal employment in Iran (78 percent) but it is lower than the world average (93 percent). Informal employment in Iran accounts for two-thirds of employment in the industry sector and half of the employment in the service sector. Globally about 57.2 percent of industry workers and 47.2 percent of service workers are informal. In addition, the level of education of individuals is highly correlated with informality. According to international data, people with university degrees are less likely to be informally employed. In Iran, the share of informal employment among people with no eduction is 84.2 percent, for primary education 76.3, for secondary education 70.1 percent, and for territory education 32.7 percent. The global average for these numbers are 93.8 percent, 84.6 percent, 51.7 percent, and 23.8 respectively (ILO, 2018). This indicates the level of informality in Iranian educated people above their international counterparts while informal employment of people with no education is below the global average. The level of informality also varies substantially throughout Iran. The range of the ratio of formal employment varies from 38 percent (Semnan) to above 70 percent (Kohkiloyeh, Ardebil, and Hamedan). The ratio of formal employment is higher among the provinces close to the border, and provinces with a higher poverty rate have a higher share of informal employment (e.g., Sistan and Baluchistan, and Kohkiloyeh). In line with the global trend, informal employment was disproportionally affected by the pandemic. According to ILO (2022), based on a sample of 10 countries, job losses among informal employment were about two to three times larger than that of formal employees and TABLE B1.1 • Informal Employment Varies Significantly among Different Sectors 2019/20 2020/21 The world average in 2016 Formal sector 31.6 31.6 11.0 Informal sector 64.1 66.0 84.9 Household 4.3 2.4 4.1 Men 58.3 57.8 63.0 Women 63.4 59.0 58.1 Urban area 53.3 51.8 43.7 Rural area 75.7 75.8 80.0 Public sector 10.5 8.4 NA Private sector 67.9 66.7 NA No education 84.2 84.2 93.8 Primary education 76.3 75.1 84.6 Secondary education 70.1 69.7 51.7 University education 32.7 30.1 23.8 Agriculture 78.1 77.1 93.6 Industry 66.3 65.7 57.2 Services 48.1 46.1 47.2 Source: ILO (2018), SCI, and World Bank staff calculations. (continued on next page) Recent Economic and Policy Developments 7 BOX 1 INFORMAL EMPLOYMENT IN IRAN (continued) while formal employment almost recovered in mid-2021, this was not the case for informal employment. In Iran, the job losses in the informal sector in 2020/21 was over 6 percent compared to only 1.2 percent in the formal sector. In 2020/21, male job losses in the formal and informal sectors were 0.4 and 2.6 percent, respectively; those of females were 5 percent and 21.2 percent, respectively. Drivers of informality Informality is driven by regulatory inefficiencies, low institutional capacity, and weak macroeconomic conditions. The restrictiveness of economic regulations in the formal sector such as restrictive and overlapping laws, regulatory and administrative complexity, and strict labor protection laws limits firms’ ability to adjust to shocks and as a result contributes to higher informality. Corruption, weakness of the rule of law or weak enforcement evading or contravening regulations, and low quality of government institutions also promote informality. Weak macroeconomic outcomes (lack of economic growth, high inflation, and high level of uncertainty and volatility) together with other constraints such as demographic pressures or urban migration also contribute to the growth of the informal economy (Freije 2001, Alizadeh and Ghafari 2013). These conditions are often amplified by inadequate macroeconomic policy. Inefficient fiscal policy including those related to tax policy and government interventions such as price control policies and trade restrictions (exchange rate controls, import licenses, or high custom duties), impose additional costs on economic activities, making formal economic activities too expensive, especially for small businesses. In Iran, high inflation, negative real interest rates, and domestic currency overvaluation have also led to the development of capital-intensive industries, which meant that the country could not utilize its full potential workforce (Asadzadeh et al. 2019, Nili and Maleki 2006). Addressing informality Tackling informality relies on a comprehensive socio-economic series of measures that are implemented in a balanced and gradual fashion. Key policies to this end include labor market legislation reform complemented by social protection programs, increasing labor market flexibility (that allows for the adjustment of both real wages and employment as a response to macroeconomic shocks), reducing red tape, and promoting pro-growth macroeconomic policies. Training opportunities for informal workers improve their productivity and increase their reservation wage, making them less vulnerable, especially with the growing role of the digital economy. Reducing informality in Iran can help address other goals including reducing poverty and inequality, domestic revenue mobilization, and reducing budgetary pressures from social insurance and pension transfers. a Based on the informality report published by SCI in 2021/22. b The informal employment accounts for about 68 percent in Asia and the Pacific and Arab states, but it is about 25 percent in Europe and Central Asia. in the budget.15 The growth in expenditures was, in part, Efforts toward domestic revenue mobiliza- helped by a reported improvement in realization of oil tion and expanding the tax base helped improve and tax revenues (see below) which helped moderate the growing fiscal deficits of recent years (Figure 12). 15 The 2021/22 budget law envisaged a 58 percent In line with higher oil prices and oil export expansion compared to the previous year’s budget. volumes, oil revenues grew rapidly in 2021/22, However, the budget could be expanded by 124 percent if revenues meet their target in the first six months (April- albeit from a low base. According to the authorities, September 2021). oil revenues grew by over 400 percent y/y in the 16 Government oil revenues fell from 6 percent of GDP in first nine months of 2021/22 (9M-21/22) (April to 2017/18 to 1.1 percent of GDP in 2020/21 as a result of November 2021), though from a low base.16 While oil re-imposed sanctions. 17 Although official oil export data are not published, export volumes are estimated to have been below the estimates of oil exports from remote sensing and tanker budget’s second, more ambitious target in 2021/22,17 tracking sources put the number at below the budget’s a surge in oil prices (83 percent) drove a surge in oil second target of 2.3 mbpd for 2021/22. revenues. In 2022/23 and since the start of the war 18 According to Reuters, Iran’s oil exports to China was between in Ukraine and subsequent sanctions on Russia, oil 0.7 to 0.9 mbpd in March 2022, but they sharply declined to 0.2 to 0.25 mbpd in April (Reuters). This reported decline prices rose to over US$100/bbl during March and in Iran’s exports is partly related to the heavily discounted May 2022, but Iran’s oil export volumes are also price of Russian oil, in response to which Iran also started estimated to have declined.18 offering discounts on its crude exports (Bloomberg). 8 FIGURE 11 • Tax and Oil Revenues Improved in FIGURE 12 • …which Helped Moderate the 2021/22… Previous Year’s Growing Fiscal Deficit 500 20 400 15 Growth rate, percent 300 10 Percent of GDP 200 5 0 100 –5 0 –10 –100 –15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 9M-2021/22 –20 2016/17 2017/18 2018/19 2019/20 2020/21 Oil revenues Tax revenues Other revenues Current expenditures Oil revenue growth Tax revenue growth Capital expenditures Fiscal balance Source: CBI, Plan and Budget Organization (PBO), media, and World Bank staff calculations. Source: CBI, PBO and World Bank staff calculations. non-oil revenues. In 11M-21/22 (April 2021 to started phasing out exchange rate subsidies with February 2022), tax revenues met 94 percent of the transfers. An important provision in the 2022/23 budget target, in part aided by the inflation effect on budget was the approval of a clause that provided the the nominal growth of the tax base. While corporate government the discretion to replace the subsidized and income tax revenues met their budget targets, exchange rate21 with transfers to lower income deciles. only 36 percent of planned wealth tax revenues were In May 2022, the government announced policies to collected in the same period. The latter low rate partly use the provision to end the exchange rate subsidies reflects the downturn in the stock market as well as for imports of major food staples and replace them challenges in the implementation of taxes on vacant with a combination of direct transfers and electronic houses and luxury automobiles. The realization of in- coupons. These measures also aim to manage direct taxes in 11M-21/22 was about 80 percent due domestic consumption and curb the smuggling of to the weaker performance of import taxes (40 per- subsidized food to neighboring countries (see Box 2 cent realization). on food security for more details). To control fiscal pressures, the approved 2022/23 budget is less expansionary compared to the previous year. Based on the 2022/23 19 This year’s budget puts the government share of oil Budget Law, total expenditures are to expand by 15 revenues at 40 percent with the remainder going to the sovereign wealth fund (SWF), National Oil Company, and percent, with a higher rate for capital expenditures underdeveloped regions. In recent years, the fiscal rule while revenues are envisioned to grow by 43 percent was partially waived to reallocate part of SWF transfers aided by higher oil and tax revenues (Table 2). The to the budget to cover revenue shortfalls. budget forecasts oil revenues to grow by 31 percent, 20 Corporation tax will increase by 126 percent, while wealth tax based on oil export volume of 1.4 mbpd and an oil revenues are to decline by 20 percent. Import tax revenues price assumption of US$70/bbl.19 The government are set to increase by 40 percent as the government intends to replace the subsidized exchange rate with the higher also plans to increase tax revenues by about 60 NIMA exchange rate as a basis for import tax calculation. percent.20 21 In 2021/22, the government allocated US$ 12.5 billion Faced with a growing subsidy bill and to imports of essential food items at the subsidized soaring price of food imports, the government exchange rate. Recent Economic and Policy Developments 9 TABLE 1 • The 2022/23 Budget Law is Less Accommodative 2021/22 2022/23 2022/23 (IRR billion) (IRR billion) (US$ billion)a Growth (%) Total revenues 8,504,460 12,173,419 52.9 43.1 Current revenues 4,548,990 6,977,103 30.3 53.4 Tax revenues 3,298,390 5,324,498 23.1 61.4 Direct taxes 1,490,451 2,476,481 10.8 66.2 Indirect taxes 1,807,939 2,848,017 12.4 57.5 Other revenues 1,250,600 1,652,606 7.2 32.1 Disposal of non-financial assets 3,955,470 5,196,315 22.6 31.4 Total expenditures 10,951,809 12,591,254 54.7 15.0 Current expenditures 9,189,164 9,990,086 43.4 8.7 Capital expenditures 1,762,646 2,601,167 11.3 47.6 Operational balance –4,640,174 –3,012,983 –13.1 –35.1 Budget balance –2,447,350 –417,835 –1.8 –82.9 Disposal of financial assets 4,274,480 1,767,900 7.7 –58.6 Acquisition of financial assets 1,827,400 1,350,065 5.9 –26.1 Net disposal of financial assets 2,447,080 417,835 1.8 –82.9 Government general resources 12,779,209 13,941,319 54.7 9.1 Source: PBO and World Bank staff calculations. a Converted using the implicit exchange rate of IRR230,000 /USD. BOX 2  FOOD SECURITY IN IRAN Iran has long pursued food security and food self-sufficiencya in various national and subnational development plans. To bolster agriculture production and to secure affordable consumption, Iran has implemented a combination of policies including tariffs, import subsidies, crop purchase price guarantees, food price subsidies, and significant subsidies on agricultural inputs such as fertilizers, water, and energy (Michel 2019). Although these policies have helped improve food production, it has not been enough to provide food for the growing population and the country has depended on food imports. Moreover, the resulting price distortions have led to wasteful consumption and inefficient resource allocation,b leaving a large fiscal burden (the food subsidy bill is estimated as high as 5 percent of GDP in 2020/21). In addition, these policies have also endangered the country’s environmental resources and took a toll on land and water resources, leading to urban migration, social grievances, and under-development (Michel 2019). Recent droughts and climate change challenges along with economic sanctions have further aggravated these challenges. Meeting the country’s food demand has become a growing challenge due to rising global commodity prices and limited fiscal space following the pandemic and sanctions. In 2020, food and cereal imports accounted for 37.5 and 12.5 percent of Iran’s total imports, respectively. The recent dry weather and drought in Iran have resulted in a substantial reduction in wheat production (about 30 percent), resulting in higher import dependency. This has led to wheat imports surging by more than 200 percent in 2021/22.c This trend continued in 2022/23, and in April 2022, the volume of Iran’s wheat imports increased by 120 percent y/y. Iran is expected to import 25 million tons of grains in 2022/23, about 28 percent of which will be wheat imports. At the same time, the recent surge in grain prices following the war in Ukraine increased fiscal and external financing pressures. In 2021/22, the government spent US$12.5 billion on imports of essential food items at a subsidized exchange rate which stood at only 15 percent of the parallel market rate.d Despite this subsidized exchange rate, food price inflation has been high (over 400 percent Jan 2018-May 2022) and a major driver of overall inflation with a negative impact on vulnerable people who have been disproportionately impacted by successive years of high inflation. In 2022, the authorities took measures to control the rising food import bill and introduced additional cash transfers to mitigate the impact on households. In May 2022, the government stopped subsidizing imports of certain essential foods and increased the administered (continued on next page) 10 BOX 2  FOOD SECURITY IN IRAN (continued) FIGURE B2.1 • Food Price Inflation Has Been High and More Recently Was Driven by Global Inflation 140 120 100 Growth rate (y/y), percent 80 60 40 20 0 –20 –40 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Dec-17 Apr-18 Aug-18 Dec-18 Apr-19 Aug-19 Dec-19 Apr-20 Aug-20 Dec-20 Apr-21 Aug-21 Dec-21 Apr-22 Food Bread and cereals Meat Global agriculture price Global food price Source: SCI, World Bank Commodity Prices, and World Bank staff calculations. Note: World Bank commodity price indices for low and middle-income countries (2010=100). Share of Top Partners in Iran’s FIGURE B2.2 •  FIGURE B2.3 • The Administered Price of Cereal Imports in 2020 Some Essential Goods Increased Sharply in May 2022 (m/m) 400 350 India 300 Others 14% Price changes, percent 26% 250 UAE 13% 200 Germany 6% Russia 150 12% Netherlands 100 7% Turkey UK 12% 10% 50 0 Chicken Egg Milk Cooking (per kg) (per kg) oil Source: Trade Map Statistics. Source: Media and World Bank staff calculations. price of chicken, eggs, diary, and cooking oil (Figure B2.3). The authorities also raised the guaranteed purchase price of wheat (it almost doubled) to incentivize domestic production and to curb smuggling due to a rising gap in food prices with neighboring countries. A two- month direct cash transfer of US$12–14 per individual per month (inclusive of existing cash transfers) was also provided to over 23 million heads of households (the first 9 income deciles).e These measures were part of the 2022/23 budget plan to phase out the subsidized exchange rate.f The removal of the subsidy on flour for industrial users resulted in a surge in flour-based food prices (including for pasta, (continued on next page) Recent Economic and Policy Developments 11 BOX 2  FOOD SECURITY IN IRAN confectionery items, and unsubsidized types of bread such as baguettes) by over 300 percent. Traditional flatbreads (accounting for 70– 80 percent of wheat consumption) were temporarily exempt from price increases, until the government can introduce electronic coupons for rations at subsidized prices. Price reform measures and transfers could help address some of the impending food security challenges, but they also add to inflationary pressures. Cash and non-cash transfers are an important tool in mitigating the impact of rising prices in the short term. The cash transfer program introduced in 2010g and the recently launched national welfare database offer the government unique tools to target vulnerable consumers efficiently and accurately. If these tools are fully utilized, the policy can help manage food security challenges and reduce both fiscal and external account pressures. In the medium-term, the recent measure would also need to be followed with a plan for a gradual phase-out of administered pricing and automatic adjustments to social assistance to protect their real value of these transfers for the most vulnerable. These measures led to a surge in monthly inflation to a record high of 12.2 percent in June 2022 (m/m) as food prices shot up by 25 percent m/m. Inflation was even higher for the lowest income decile (19.5 percent) and those living in rural areas (15.8 percent). a Food security focuses on the equitable and stable availability of food to people regardless of the origin of food production (Azadi et al. 2022). Factors that lead to food insecurity include inadequate food availability, inappropriate use of food or food distribution, disproportional global food distribution, natural disasters, political tensions, low purchasing power and poverty (Akbari et al. 2022). b Agriculture accounts for over 90 percent of water withdrawal while the world average is about 70 percent. In addition, while the country faces unprecedented water shortages, the country exports water-intensive products. c In 2021/22, Iran’s main partners in wheat imports include Russia (30 percent), Iraq (15.6 percent), UAE (14 percent), UK (8.6 percent), and the Netherlands (7.5 percent). d In 2018/19, the subsidized exchange rate was initially introduced as a unified exchange rate used for all transactions for a few months and US$31 billion of imports, or 51 percent of goods imports for the year were made at this rate. The subsidized imports were then slashed to US$14 billion in 2019/20 with the accelerated import compression drive. Allocated funds for subsidized imports grew by 40 percent in 2021/22 to US$15.1 billion (accounting for 24 percent of all imports). e Based on the new cash transfer plan, each individual from the bottom three deciles will receive IRR 4 million/per month, and each individual from the next five deciles (decile 4–9), will receive IRR 3 million per month for two months. After that, they will receive digital coupons for essential goods. f According to the authorities, the replacement of exchange rate subsidies with direct consumer subsidies would avoid previous misallocation of exchange rate subsidies and smuggling of cheaper food products to other countries. For example, the flour price differential with neighboring countries had been 10-15 times that of the subsidized domestic prices. g Iran’s most notable experience in implementing large-scale price reforms was the ambitious 2010 price subsidy reform. The reforms attempted to replace direct price subsidies with universal cash transfers to households. The 2010 price reform had good preparations but lacked key elements in implementation including having an automatic price adjustment mechanism and a lack of targeted or time bound cash transfers which left a large burden on the budget (see IMF report for more details). Monetary Policy and Prices However, monthly inflation in June 2022 reached a record high (12 percent, m/m) due to the phasing Consumer price inflation (CPI) accelerated due out of the main essential goods’ import subsidies to a combination of supply-push and demand-pull and the global surge in commodity prices following factors. In 2021/22, CPI marked its third consecutive the war in Ukraine (see Box 2). year of inflation of over 35 percent, driven by a The stop and go in nuclear negotiations rapid growth in monetary aggregates, inflationary drove fluctuations in the foreign exchange market expectations, and rising global commodity prices and inflationary expectations. Progress in nuclear (Figure 13). Headline and core inflation rose to 40.2 talks led the rial to appreciate by 7 percent in Jan-Mar percent and 36.7 percent in 2021/22, respectively, 2022, and the gap between the parallel market and with the former registering the highest annual rate Central Bank’s auction exchange rate (NIMA rate) in a decade. Food prices and rental costs were narrowed, indicating subdued inflationary expectations the main contributors to high inflation (Figure 14), (Figure 15). However, between April to June 2022, especially adding pressure to the livelihoods of the pause in nuclear negotiation led to a drop rial to lower-income households as these items constitute a depreciate by about 12 percent. The depreciation in large share of their consumption basket. In H2-21/22 the rial against the dollar and the increase in global (Oct 2021–Mar 2022), the appreciation of the rial prices led to a rapid growth of import prices (Figure 16). and lower inflationary expectations due to progress Monetary aggregates expanded at the same in nuclear talks led to a deceleration in inflation. pace as in the previous year, keeping inflationary 12 Inflation Rose Further in 2021/22… FIGURE 13 •  FIGURE 14 • …Driven by Higher Food Prices and Rental Costs 25 60 60 40 20 15 40 Contribution to CPI, pp 30 Inflation y/y, percent Percent, m/m Percent, y/y 10 40 20 5 20 16.7 0 0 20 10 –5 7.3 4.5 2.4 2.7 2.2 –10 –20 0 0 Jan-20 Apr-20 Jul-20 Oct- 20 Jan-21 Apr-21 Jul-21 Oct- 21 Jan-22 Apr-22 CPI Food & beverages Housing, water, electricity, & gas Transport Furniture & household equipment Clothing & footwear Health Inflation, m/m (LHS) ER depreciation, m/m (LHS) Inflation, y/y (RHS) Inflation, y/y (LHS) Core inflation, y/y (RHS) Contribution to headline CPI, pp (RHS) Source: SCI, CBI, and World Bank staff calculations. Source: SCI and World Bank staff calculations. FIGURE 15 • Economic Uncertainties Drove FIGURE 16 • Currency Depreciation and Global Fluctuations in Rial’s Value against Inflation Drove Up the Price of the Dollar Imports 350 14 700 80 300 12 600 Thousand IRR per 1 US$ 250 10 60 Percent (m/m) 200 8 500 Percnet (q/q) Percent (y/y) 150 6 400 100 4 40 300 50 2 0 0 200 20 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 100 Inflation, m/m (RHS) 0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Parallel market ER (LHS) NIMA ER (LHS) 2017/18 2018/19 2019/20 2020/21 2021/22 Subsidized/official ER (LHS) Import price inflation, q/q (LHS) Source: SCI and World Bank staff calculations Note: NIMA, the Persian acronym for “integrated system of foreign exchange Import price inflation, y/y (RHS) transactions”, is a foreign exchange auction system administered by the CBI for facilitating foreign currency exchange between exporters and importers. Source: SCI and World Bank staff calculations. pressures high. In 2021/22, aggregate money central bank claims on banks (Figure 17). The Central (M2) and the monetary base (MB) grew by 39 percent Bank’s claims on banks grew due to a 45.4 percent and 31.6 percent, respectively. This expansion was expansion in banks claims on public organizations in comparable to last year and remained again above 2021/22 as well as a 56.3 percent growth in banks long-term average (1974/75-2020/21) of 27 percent credit to the private sector during the same period, and 24.6 percent, respectively. The main drivers in MB following a 95 percent increase in 2020/21 (Figure 18). growth in 2021/22 were increases in net foreign assets, The stock market was less volatile in a re-evaluation of foreign assets and an increase in 2021/22 than the previous year. The unprece- Recent Economic and Policy Developments 13 FIGURE 17 • MB Growth Was Led by Foreign FIGURE 18 • Banking Sector Credit as a Share of Asset Revaluation, NFA, and CBI GDP Grew Further in 2021/22 Claims on Banks 70 60 60 Contribution to MB growth, pp 40 50 Percent of GDP 40 20 30 0 20 –20 10 0 –40 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 NFA Net claims on government Agriculture Manufacturing & Mining Claims on banks Other items net Construction & Housing Trade MB growth Services Source: CBI and World Bank staff calculations. Source: CBI and World Bank staff calculations. FIGURE 19 • After Experiencing Some Volatility, FIGURE 20 • The Real Return of All Assets Was the Stock Market Edged Up Negative in 2021/22 2,500 40 2,000 TSEM Index (Thousands) 30 1,500 Percent 20 1,000 10 500 0 0 9/24/19 11/24/19 1/24/20 3/24/20 5/24/20 7/24/20 9/24/20 11/24/20 1/24/21 3/24/21 5/24/21 7/24/21 9/24/21 11/24/21 1/24/22 3/24/22 5/24/22 TS E Gold Coin FX Real Estate Bank Deposits Government Tehran Stock Exchange Market Index (LHS) Inflation Bond Source: Tehran Stock Exchange (TSE) and World Bank staff calculations. Source: CBI, SCI, and World Bank staff calculations. dented bull market in mid-2020/21 (over 300 percent est return among all assets (Figure 20).23 Between growth) was followed by a 40 percent contraction in April to June 2022, the stock market gained about 10 the main index by March 2021 (Figure 19). The gov- percent as higher global energy prices made the larg- ernment subsequently implemented various policies est listed industries including petrochemical compa- including the “3+7 capital market package”22 to boost nies more profitable due to the subsidized domestic the market, albeit with limited success. The down- electricity prices. ward trend continued during the first half of 2021/22 (H1-21/22) (April to June 2021) and led to an exodus 22 See Iran Economic Monitor Spring 2021. of small investor capital from the market. In 2021/22, 23 In 2020/21, the stock market yielded a 150 percent average the stock market edged up by only 4 percent, the low- nominal return, the highest return among all assets. 14 FIGURE 21 • The Capital Account Registered a …while the CAB Registered Surplus FIGURE 22 •  Deficit in 2021/22 Due to Increasing Oil Exports Proceed 30 80 20 60 10 40 US$ billion US$ billion 0 20 0 –10 –20 –20 –40 –30 –60 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 Current account Net capital account Goods account-oil Goods account-non-oil Net errors and BOP (change in reserve Services account Income and current transfer omissions assets) Current account balance account Source: CBI and World Bank staff calculations. Source: CBI and World Bank staff calculations. External Sector volumes but remained below its pre-sanction level (Figure 22). Trade in goods fully recovered from the The rebound in global demand following the pandemic. Despite the strong expansion in service pandemic helped push Iran’s current account exports and imports in 2021/22 (55 percent and 45 back to surplus, which partly offset the capital percent, respectively), they remained below their pre- account deficit. The strong growth in exports in pandemic levels by 43 percent and 26 percent, re- 2021/22 (59.2 percent, y/y) outweighed the growth spectively. in imports (36.5 percent), leading the current account Stronger global demand and higher inter- balance to return to surplus (US$11.2 billion) after national prices drove a strong expansion in non- two consecutive years of deficit in 2019/20 and oil trade in 2021/22. Following a strong contrac- 2020/21 (Figure 21). The current account surplus tion at the onset of the pandemic in early 2020/21, partly compensated for the net capital account deficit non-oil exports and imports continued their upward (US$ 10.1 billion) and international reserves slightly trend, surpassing pre-pandemic levels by 16 percent improved by US$0.9 billion. The capital account and 19 percent, respectively (Figure 24). With over balance experienced six consecutive years of deficits, half of non-oil exports in petroleum products, rising partly reflecting a significant amount of capital flight commodity prices also drove up non-oil exports by due to economic uncertainty.24 Although tighter 37 percent in nominal terms to a new record of US$48 capital controls over the last two years moderated the billion in 2021/22. Non-oil imports grew by 34 percent capital account deficit in 2019/20 and 2020/21, the to US$52 billion in 2021/22, outperforming the pre- temporary appreciation of the currency in H1-21/22 pandemic level in 2019/20, but they remained 4.5 per- provided an opportunity for those seeking to transfer cent below the pre-sanctions level in 2017/18. funds abroad, leading to higher capital outflows. The main driver of non-oil exports was While trade in goods surpassed its pre-pan- an expansion in exports of petrochemical and demic level, services trade has yet to fully recov- er. The current account in 2021/22 improved signifi- 24 For example, according to the Turkish Statistical Institute cantly compared to its pre-pandemic level in 2019/20, in April 2022, Iranians were the biggest investors in the partly due to increasing oil export revenues which real state sector in Turkey since 2020, and previously benefited both from higher oil prices and oil export were the second largest investors in 2018 and 2019. Recent Economic and Policy Developments 15 FIGURE 23 • Higher Oil Price and Increase in FIGURE 24 • ...and Non-Oil Exports also Rose to Exports Increased Share of Oil in a Record-High Total Exports… 16 80 150 100 12 60 US$ billion 50 8 Percent Percent 40 0 4 20 –50 0 0 –100 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 Q1 Q2 Q3 Q4 2018/19 2019/20 2020/21 2021/22 2017/18 2018/19 2019/20 2020/21 2021/22 Oil exports, % of goods exports (RHS) Non-oil exports Non-oil imports Oil exports growth, nominal y/y (LHS) Source: Islamic Republic of Iran’s Customs Administration (IRICA) and World Bank Source: CBI and World Bank staff calculations. staff calculations. mining products,25 which accounted for 52 FIGURE 25 • A Surge in Exports of Petrochemical percent of non-oil exports. In 2021/22, the and Mining Products Compensated for the Contraction in Agricultural surge in petrochemical and mining product Exports in 2021/22 exports by over 70 percent compensated for a 16 percent contraction in agriculture exports due to 50 severe droughts (Figure 25). The top destinations 13.3,28% US$ billion, Share of exports (%) 40 of Iran’s non-oil ex-ports remained unchanged in 2021/22 (China 31.2 percent, Iraq 18.6 percent, 14.8,37% 30 10.4, 30% Turkey 12.6 percent, UAE 10.2 percent, 12.9,27% Afghanistan 3.8 percent), and non-oil exports 7.5, 22% 20 8.4, 28% 9%, 4.2 increased to all except for Afghanistan, where non-oil 3.2, 8% 10%, 3.5 5.2, 11% exports declined by 21 percent (y/y). Notably, non- 10 5.7, 14% 6.2, 18% oil exports to China increased by over 65 percent in 11.9, 25% 7.2, 18% 7.1, 21% 2021/22 and are now 57 percent above their pre- 0 2019/20 2020/21 2021/22 pandemic level in 2019/20 (Figure 26). Iran’s top import partners changed in Petrochemicals Agriculture Manufacturing Mining Other 2021/22. The top importers to Iran in 2021/22 include UAE (31.2 percent), China Source: Trade Promotion Organization (TPO) and World Bank staff calculations. (24 percent), Turkey (10 percent), and Germany and Russia (less than 4 percent each). UAE replaced China 25 Include other items which consist a large portion of non- as Iran’s top import partner as imports from UAE oil exports. 26 It is important to note that most of the imports from UAE grew by 69 percent.26 India was also no longer are only traded through the country and originate from among the Iran’s major import partners and was other countries such as China. This would imply a larger replaced by Russia whose exports to Iran share of imports based on the exact product origin for increased by 64 percent. Cell phones, essential countries such as China. food items such as corn, wheat, soybean, and edible oil were the main imported items. 16 IRAN ECONOMIC MONITOR: MANAGING ECONOMIC UNCERTAINTIES FIGURE 26 • Iran’s Top Exporting Destinations FIGURE 27 • UAE Became Iran’s Main Importing Remained the Same Partner in 2021/22 60 60 50 50 13.9, 28% 10.5, 24% US$ billion, share (%) US$ billion, share (%) 40 40 0.9, 4% 11, 26% 1, 5%, 12.8, 29% 9, 26% 2, 4% 30 9, 26% 6.2, 13% 30 2.1,5% 5.3, 10% 2.4, 6% 1.6, 4% 5, 12% 2.4, 6% 6.2, 13% 3.7, 8% 2.1, 6% 2.5, 7% 5, 11% 4.4, 11% 16.5, 32% 20 4.5, 11% 4.7, 13% 8.9, 19% 20 9, 22% 8.9, 20% 9.8, 25% 7.4, 21% 10 10 15, 31% 11.2, 26% 12.7, 22% 9.5, 23% 9.1, 26 % 9.8, 25 % 0 0 2019/20 2020/21 2021/22 2019/20 2020/21 2021/22 China Iraq UAE China UAE Turkey India Turkey Afghanistan Others Germany Russia Others Source: IRICA and World Bank staff calculations. Source: IRICA and World Bank staff calculations. Recent Economic and Policy Developments 17 2 OUTLOOK AND RISKS Outlook However, high growth in government expenditures due to increasing wage bill and pension spending as GDP growth is projected to remain modest in the well as higher food import costs are projected to keep medium term as the economy continues to be the fiscal balance in a deficit of 4.4 percent of GDP in constrained by global and domestic bottlenecks. 2022–24. The current account balance is forecast to Higher inflation is forecast to weigh on consumption remain in surplus in the medium term due to improved and lead to more sluggish demand, after the initial oil market conditions, despite a projected increase in post-pandemic rebound. The scarring effects of the imports. pandemic, including disruptions to global value chains Inflationary pressures are forecast to and rising commodity prices, will negatively impact remain high, at over 35 percent per year in 2022– production and demand for intermediate goods. 24, as fiscal and exchange rate pressures persist. Trade, especially oil exports, will be constrained by Inflationary pressures are reinforced by the recent ongoing sanctions. Non-oil GDP growth is projected global surge in inflation and higher commodity prices. to remain below potential following previous years’ Sustained levels of high inflation will continue to put declines in investment. Nonetheless, the growth pressure on the livelihood of poor and vulnerable forecast for 2022–24 has improved due to higher households, which have already been severely hit by projected oil prices and oil market supply gaps that the pandemic crisis and a lack of job opportunities. will allow Iran to produce more oil and petroleum The recent surge in global food and energy products to meet export demand. The non-oil sector prices will raise the import bill and the implicit is also expected to benefit from spillovers from higher subsidy of energy and food products. Given the oil export proceeds. wide range of subsidies and administered prices in A more favorable global oil market outlook Iran, higher global food and energy prices will increase is projected to improve fiscal and external the cost of maintaining these subsidies. Gradual balances. Higher projected oil prices and growth in oil domestic price adjustments in line with higher global export volumes are forecast to improve oil revenues. prices would help reduce the fiscal burden of higher 19 import prices on government finances. The effect of further improve Iran’s economic prospects and curb these price increases on lower-income households inflationary expectations. Downside risks relate to the can be mitigated by well-targeted transfers using impact of surging global food prices, the resurgence existing means testing tools and resources including of new COVID-19 variants, and a worsening of the the national welfare database. However, considering climate change impact. Global food prices are soaring the recent years of high inflation and continued real at the fastest pace ever due to the war in Ukraine, income losses, any successful reform needs to be which, if prolonged, could heavily impact crop and comprehensive, gradual, and complemented by fertilizer supplies. Higher imported commodity prices a transparent public communication strategy. The would lead to a further increase in Iran’s import bill government can also enhance the targeting and and put more pressure on the government and its effective coverage of social safety nets to protect limited accessible foreign exchange reserves. The the most vulnerable throughout the price adjustment resulting inflationary pressures, if unmitigated, would process. increase pressures on lower-income deciles and add Climate change and environmental chal- to social grievances. lenges, if not adequately mitigated, would have Adaptation and mitigation policies are a deteriorating impact on Iran’s economy. Con- an increasingly urgent priority to address Iran’s tinued low precipitation and increasing temperatures climate change challenges. Addressing depleting will intensify current water shortages, which adverse- water resources and overextraction from scarce ly impact agricultural products and employment and groundwater sources is more crucial than ever. This threaten food security. The Special Focus chapter requires improved demand management via price highlights the significant negative impact of a scenar- signals and increased efficiency. The special focus io of water shortage and high temperature on Iran’s chapter of this report outlines four main pathways to GDP and labor demand. Extreme weather trends al- water security for Iran, including on better resource so increase electricity demand and reduce electrici- management and other policies that can help ty supply through hydropower generation which add address the climate change impact of Iran’s water to electricity shortages and disrupt industrial produc- shortage challenges. In addition, highly subsidized tion. Increased air pollution and dust storms impact energy prices have promoted intensive energy use economic growth and threaten people’s health and and have turned Iran to one of the highest per capita productivity. energy consumers in the world, including through high gas flaring (the third highest in the world). Given Risks and Opportunities the adverse effects of intensified air pollution and dust storms on the health and daily life of Iranians, Iran’s economic outlook is subject to significant the government could introduce regulations and risks. On the upside, further increases in oil prices environmental levies, and realign energy prices to would lead to higher oil export revenues. If global incentivize new investments in cleaner production oil markets seek all available supply to ease price processes especially in steel, cement, and pressures, stronger demand could also lead to higher petrochemical sectors. Finally, the preparation of a oil export volumes, thereby further improving Iran’s blueprint for Iran’s economic transition out of fossil fiscal and external balances. With both Iran and fuel dependence would allow the country to be ready Russia under sanctions, higher trade and investment for the global shift towards net-zero goals. between Iran and Russia could reduce the impact of Addressing the above-mentioned challeng- sanctions on Iran. Iran’s oil exports to China could, es requires a comprehensive package of eco- however, face competition from heavily discounted nomic reforms that needs to be complemented by Russian crude if sanctions on the two countries an adequate social protection system. Economic continue. If progress in nuclear negotiations leads to policies could be better geared towards creating a significant easing or removal of sanctions, this could much-needed jobs. This could be achieved through 20 investment in infrastructure, especially in under-de- and improving value-added tax collection can create veloped regions, stimulating private sector activity much-needed fiscal space. Relatively low public debt via an improved business environment, and reducing allows the government to finance its deficit by issuing distortive pricing interventions. De-carbonizing infra- government bonds within a well-defined medium-term structure, a transition towards sustainable sources fiscal framework; this reduces reliance on the banks’ of energy, and accelerated adoption of climate-smart resources or the central bank’s balance sheet. To rein water and agriculture interventions will also be key in in inflationary pressures, monetary policy needs to be managing climate change risks. Rightsizing current less accommodative. To address the income and dis- expenditures, including reforming domestic energy tributional impact of these policies, the most vulner- price subsidies, and increasing tax revenues through able households would need to be protected through the removal of exemptions, addressing tax evasion, well-targeted social safety transfers. TABLE 2 • Selected Economic and Financial Indicators, 2019/20–2024/25 2019/20 2020/21 2021/22 2022/23 2023/24 2024/25 Act. Act. Est. Proj. Proj. Proj. Real sector (Annual percentage change, unless otherwise stated) Real GDP at market prices –6.8 3.4 4.7 3.3 2.5 2.1 Real GDP per capita –6.5 3.6 4.4 3.3 2.5 2.1 Real non-oil GDP –8.0 2.1 3.4 2.1 1.4 1.0 Real oil GDP 1.1 2.5 3.5 2.9 2.3 1.9 Crude oil production (mbpd) –38.7 11.2 10.1 5.5 3.5 3.0 (GDP supply side components) 2.4 2.0 2.2 2.3 2.4 2.5 Agriculture Industry (including oil) 8.8 4.5 –2.6 1.6 1.4 1.3 Services –15.9 8.4 3.2 3.1 2.3 2.0 (GDP demand side components) –0.5 –0.1 6.5 3.7 2.8 2.3 Private consumption –7.7 –0.4 3.9 2.4 1.8 1.6 Government consumption –6.0 –2.3 8.3 3.6 3.4 2.9 Gross fixed capital formation –5.9 2.5 0.0 3.7 1.7 0.9 Exports, goods and services –29.9 –5.4 5.2 4.9 4.4 3.9 Imports, goods and services –38.1 –29.2 24.1 4.4 3.8 3.2 Money and prices Oil price (US$/bbl) 68.0 61.0 41.0 96.7 84.0 77.4 CPI Inflation (p.a.) 41.3 36.4 41.1 51.2 42.6 36.5 Monetary base (MB) 32.8 30.1 31.6 n/a n/a n/a Broad money (M2) 31.3 40.6 39.0 n/a n/a n/a Banking system credit 26.0 94.8 56.3 n/a n/a n/a Nominal interest rate (percent) 18.9 17.5 19.6 n/a n/a n/a Nominal exchange rate, parallel market (IRR/USD) 129,183 228,872 259,476 n/a n/a n/a (continued on next page) Outlook and Risks 21 TABLE 2 • Selected Economic and Financial Indicators, 2019/20–2024/25 (continued) 2019/20 2020/21 2021/22 2022/23 2023/24 2024/25 Act. Act. Est. Proj. Proj. Proj. (Percent of GDP, unless otherwise stated) Investment & saving Gross capital formation 31.0 32.8 33.3 33.3 33.2 33.1 Gross national savings 32.5 32.5 36.4 37.5 36.2 36.0 Government finance Total revenues 10.8 9.1 11.0 11.6 12.1 12.3 Tax revenues 6.6 5.9 6.1 6.4 6.6 6.7 Total expenditures 15.9 15.4 16.3 16.3 16.4 16.4 Current expenditures 13.8 13.2 13.8 13.8 13.9 13.9 Net lending/borrowing (overall balance) –5.0 –6.3 –5.3 –4.7 –4.4 –4.1 External sector Current account balance 1.5 –0.3 3.1 4.1 3.0 2.9 Population and labor market Population (million) 82.9 84.0 85.0 86.0 87.0 87.9 Participation rate (percent) 44.1 41.3 40.9 n/a n/a n/a Unemployment rate (percent) 10.7 9.6 9.2 n/a n/a n/a Memorandum Items: Nominal GDP (IRR billion) 24,412,570 35,084,726 52,896,540 77,591,818 110,548,943 153,503,840 Source: Iranian authorities and World Bank staff calculations. 22 SPECIAL FOCUS CHAPTER: PREPARING FOR AN UNCERTAIN WATER FUTURE I ran is a water-stressed country whose consumption Water Stress and Climate Change of water resources outstrips natural regeneration. Climate change will widen the water supply and Water resources in Iran are under stress because demand gap, worsening the water challenges for Iran the annual water consumption, estimated at 96 and its neighbors. Irrigated agriculture consumes the billion cubic meters, is about 8 percent more greatest share of water in the country (92 percent), than estimated total annual renewable water but that water is not used well: agricultural water resources. The nation’s rainfall has spatial variability: productivity is one of the lowest in the region. Climate from less than 50 millimeters in the deserts and change will negatively affect the gross domestic central plateau to more than 1,600 millimeters near product (GDP), demand for labor, and food prices. the Caspian Sea. The average annual rainfall is an Since reduced water availability is one of the biggest estimated 400 billion cubic meters, and total annual economic impacts of climate change, Iran can benefit renewable water resources is around 89 billion cubic from lessons from countries that have coped with meters.27 The multiyear water availability depends on this issue. These pathways include (i) effective water resources management, (ii) improved water use 27 It is worth noting that while Mesgaran and Azadi 2018 efficiency with water demand management policies, provide an estimate of 89 billion cubic meters, Food (iii) adept institutions and tailored policies, and and Agriculture (FAO) AQUASTAT database provides (iv) collaboration with riparian countries. another estimate of 137 billion cubic meters; see 23 the dams’ operating rules and storage capacity (52 Agricultural Water Productivity and FIGURE 28 •  billion cubic meters). Water availability has decreased Per Capita Water Withdrawals in MENA (2018) in the last few decades due to population growth, economic development, and climate change impacts. 3 The water depletion index, defined as the ratio of water consumption to replenishable water resources, Jordan recommends a threshold of 0.75 to identify regions 2 US$/cubic meters with water depletion problems. Iran’s water depletion Israel index is 1.08, indicating severe water depletion. Lebanon Agriculture consumes the highest share of Kuwait Oman withdrawal, estimated at 92 percent. Iran has one 1 Qatar UAE Saudi Arabia Yemen of the lowest water productivities in the region and Egypt Iran the second highest agricultural water withdrawal per Bahrain Algeria Morocco capita (Figure 28). About 7.2 percent of the territory is Tunisia Syria Iraq 0 cultivated, and water consumption is about 92 percent 0 200 400 600 800 1,000 1,200 1,400 1,600 (compared to a 70 percent global average). Irrigated Agricultural water withdrawal per capita (m3) agriculture represents 68 percent of the agriculture Source: World Bank, forthcoming. sector, yet only about 5 percent of the irrigated area uses modern irrigation technology. Municipal water uses about 6.6 percent, and 1 percent is used by industries. Iran is overusing its surface water and the periods of 2041–70 and 2071–2100, respectively. groundwater, and water quality is degrading. In Annual mean precipitation is expected to decrease the west, Lake Urmia—the largest lake in the Middle by –5.4 percent and –9.5 percent for the periods of East and one of the world’s largest hypersaline lakes— 2041–70 and 2071–2100, respectively. Monthly pre- has shrunk by about 88 percent since the 1970s. This cipitation regimes are expected to change across the trend is seen in several water bodies throughout the country, especially in the Caspian Sea coastal regions country. Iran had one of the highest groundwater and the Alborz Mountain range. The next section mod- depletion rates in the world at the beginning of the els the economic impacts of climate change through 21st century.28 Groundwater overuse occurs in around reduction of water availability on all the sectors and 77 percent of the territory and lowers groundwater temperature impacts on agriculture through 2050. levels, increasing soil and groundwater salinity problems and land subsidence. In addition, about 75 Economic Impacts of Climate Change percent of the wastewater is returned untreated into through Reduced Water Availability the environment, creating a further contamination risk and Temperature Impacts on Crop of surface water and groundwater resources—and Yields health hazards for people and ecosystems. Climate change impacts on rainfall and Water scarcity is affecting the Middle East and temperature will further reduce water availabil- North Africa (MENA) region, and improving water ity and affect economic sectors dependent on management practices can lead to significant water. Climate change projections using the outputs benefits. Inadequate water supply and sanitation of 17 Global Climate Models, based on temperature and historical data (1971–2015), show that under two https://www.fao.org/aquastat/statistics/query/results. emission scenarios, RCP4.5 and RCP8.5, tempera- html, consulted on April 7, 2022. For this note we use tures will increase, and rainfall levels will decrease. estimate of 89 billion cubic meters. Under the RCP8.5 scenario, the annual mean temper- 28 Other countries in the list: India, the United States, Saudi ature is expected to increase by 1.9°C and 3.3°C for Arabia, and China. 24 BOX 3  DESCRIPTION OF THE GTAP-BIO-W MODEL AND SCENARIOS The GTAP-BIO-W model developed by GTAP is the computable general equilibrium model that uses water as an input to capture economywide impacts—including changes in prices, quantities, and incomes—that are affected by fluctuations in goods and services. The model can assess the economywide impacts of changes in water scarcity. This model traces demands for and supplies of all goods and services produced, consumed, and traded at a global scale by country. It considers resource constraints and models the allocation of limited resources—including labor, capital, natural resources, water, and land—among their uses. This model divides crop production into rainfed and irrigated, and it traces supplies of water and land resources and their demands at the spatial resolution of River Basin-Agro- Ecological Zone (RB-AEZ) in each country or region. The benchmark database used in this modeling includes (i) input-output (I-O) table; (ii) global data on trade by commodity (aggregated to several categories); (iii) land use data at the RB-AEZ level; (iv) crop production and harvested area at RB-AEZ level; and (v) water consumption by users at the RB-AEZ level. The model simulates six scenarios—over the baseline of 2016 economic parameters—that portray the Iran’s economy under different reductions of water availability and impacts of temperature on crop yields. Three scenarios consider the impact of reduced water availability. Scenario 1 (S1) is a reduction in water supply by 5 percent; scenario 2 (S2), by 10 percent; and scenario 3 (S3), by 20 percent. The fourth scenario (SC) considers the joint impacts of reduced water supply by 20 percent (S3) with changes in crops due to temperature. SC10% and SC20% capture the mitigation effects of water usage efficiency (WUE) improvement by 10 percent and 20 percent, respectively, to the SC scenario. (World Bank 2020). cost is about 1 percent of regional GDP in MENA it focuses on changes that are highly likely to happen annually. Improving how water for irrigation is before 2050. The main components of the model and stored and delivered could lead to an estimated the analyzed scenarios are described in Box 3. US$10 billion welfare gain annually. If all the available One of the biggest economic impacts of surface water allocated to agriculture were stored and climate change is driven by reduced water avail- delivered efficiently to irrigated agriculture, agricultural ability. Under S3, which simulates a reduction of water production would increase 1 percent to 8 percent, availability by 20 percent, the GDP drops by about 5.3 depending on the country. Countries that could reap percent. Under SC, which simulates the reduction of the greatest relative benefits from improved water water availability by 20 percent and the temperature im- management are Egypt, Iran, and Syria—which is not pact on crop yields, the GPD drops by about 7.2 percent. surprising, given that they have the largest proportion Therefore, the temperature impact is less significant of irrigated areas in the region (World Bank 2018). than the impact of reduced water availability (Figure 29). Climate change is increasing water scarci- Climate change will severely curtail eco- ty—affecting rainfall patterns and temperatures— nomic production and reduce the state’s fiscal and its impact will only worsen. Water is vital for capacity, yet WUE31 can partially mitigate the im- production and underpins all economic activity, from pacts. The economywide impacts of climate change agriculture to manufacturing to human and natural include consequences for agricultural and nonag- capital. A lack of water can spark social unrest29 and ricultural activities (the primary effects) and their in- slow economic progress. The projected temperature teractions with capital (secondary effects) and labor increase will change crop yields, especially affecting markets (tertiary effects). The simulation shows that agriculture-dependent economies. This section pres- ents a deep dive into the main findings relevant to Iran in Water in the Balance (World Bank 2020), which ap- 29 Water shortages in the southwest Khuzestan Province plies an extended version of the Global Trade Analysis sparked large protests in July 2021, which have spread across the country, occasionally turning violent. Project (GTAP) computable general equilibrium model 30 The economic modeling does not consider the impacts to assess the economic impacts of climate change.30 of CO2 levels on crop yields nor the temperature impacts This analysis relies on short to medium time horizons of on other sectors of the economy. the changes in crop yields and water availability. Thus, 31 In this note WUE comes from modernized irrigation. Special Focus Chapter: Preparing for an Uncertain Water Future 25 Changes in Real GDP under Reduced FIGURE 29 •  WUE, new investment is required and was not estimat- Water Availability Scenarios S3 and ed as part of this modeling. SC in Iran by 2050 The impact of climate change will affect the water-dependent industrial and services sectors (Figure 31). Electricity producers, petrochemical S3 (20%) facilities, and services, among many others, will not be able to operate at full capacity with lower access SC (20% and to water. Interlinkages between sectors mean that changes in yields) disruptions in agricultural production caused by climate change ripple through supply chains, affecting –8 –7 –6 –5 –4 –3 –2 –1 0 manufacturing and services sectors. This spillover Change (%) generates negative feedbacks activities that provide Source: World Bank 2020. Note: Scenario S3 is the reduced water availability scenario by 20 percent. Scenario inputs for agricultural activities or process agricultural SC considers the joint impacts of reduced water supply by 20 percent (S3) with products. changes in crops due to temperature. Climate change is expected to decrease the demand for labor, increasing challenges in when decomposition the impacts on the GDP of an already stagnant labor market and affecting these three effects, the second effect is the highest poor households disproportionately.32 The impact contributor to the drop in GDP. Effective WUE mea- of reduced labor is more significant in nonagricultural sures would partially mitigate the climate change activities (Figure 32). Climate change reduces impact. For example, a 20 percent reduction of the irrigation and related demand for work; however, water supply and temperature impact on crop yields the simulation shows an increase in rainfed crops, (SC scenario) could trigger a drop in the GDP of more increasing demand for labor and compensating a than 7 percent compared with the 2016 levels, equiva- portion of the reduced demand in agriculture. Although lent to US$30 billion, and a 20 percent increase in the percentage change is smaller for agricultural WUE (SC20% scenario) would shorten the GDP drop by 2.32 percent, or US$10 billion (Figure 30). To gain FIGURE 31 • Impacts of Reduced Water Availability (S3) on Sectoral Outputs in Iran by 2050 Changes in the Real GDP with and FIGURE 30 •  without Water Use Efficiency in Iran 0 Change in sector output (percent) 2050 –1 –2 No efficiency +10% +20% –3 Baseline improvement efficiency efficiency –4 scenario (SC) (SC10%) (SC20%) –5 2.0 −20.3 (US$, –6 0.0 billions) –7 Change (percent) –8 –2.0 –9 –4.0 Crop Forestry Food Energy Manufacturing Services −25.1 (US$, billions) –6.0 −30 (US$, Source: World Bank 2020. –8.0 billions) Note: Scenario S3 simulates a reduction of water availability by 20 percent. –10.0 Source: World Bank 2020. 32 The increases in crop and food prices only reflect the Note: Scenario SC considers the joint impacts of reduced water supply by 20 percent price impacts of water scarcity and reductions in crop (S3) with changes in crops due to temperature. SC10% and SC20% capture the mitigation effects of water usage efficiency improvement by 10 percent and 20 yields and are abstract from the increases form general percent, respectively to the SC scenario. inflation. 26 Changes in Demand for Unskilled FIGURE 32 •  FIGURE 33 • Impacts of Climate Change on Labor in Agricultural and Crop Price Index for Producers and Nonagricultural Activities in Iran Consumers in Iran by 2050 0 10.0 9.0 –2 8.0 Change (percent) Change (percent) –4 7.0 6.0 –6 5.0 4.0 –8 3.0 –10 2.0 1.0 –12 0.0 S1 (5%) S2 (10%) S3 (20%) SC (20% and changes in yields) SC10% (S3 plus 10% WUE) SC20% (SC plus 20% WUE) S1 (5%) S2 (10%) S3 (20%) SC (20% and changes in yields) SC10% (S3 plus 10% WUE) SC20% (SC plus 20% WUE) Agricultural activities Nonagricultural activities Producers Consumers Source: World Bank 2020. Source: World Bank 2020. Note: Scenario S1 is a reduction in water supply by 5 percent; S2, by 10 percent; Note: Scenario S1 is a reduction in water supply by 5 percent; S2, by 10 percent; and S3, by 20 percent. SC considers the joint impacts of reduced water supply by 20 and S3, by 20 percent. SC considers the joint impacts of reduced water supply by 20 percent (S3) with changes in crops due to temperature. SC10% and SC20% capture percent (S3) with changes in crops due to temperature. SC10% and SC20% capture the mitigation effects of water usage efficiency (WUE) improvement by 10 percent and the mitigation effects of water usage efficiency (WUE) improvement by 10 percent and 20 percent, respectively, to the SC scenario. 20 percent, respectively, to the SC scenario. labor, unskilled labor makes up a significant share of of food items has so far partly offset the passthrough the agricultural labor market. Thus, a lower reduction from the exchange rate depreciation. It has, howev- rate is connected to a large body of unskilled labor er, restricted the fiscal space and gradually become in agricultural activities. In nonagricultural activities, less effective due to the growing gap with the paral- several important and large-scale industries are in lel market rate which incentivizes smuggling and mis- areas with significant water scarcity. Climate change allocations. will have further effects, resulting in a substantial WUE and climate-smart agriculture34 mea- reduction in outputs (Figure 31) and, hence, demand sures can partially alleviate the burden of climate- for labor (Figure 32). driven water scarcity but must be accompanied Food prices are expected to increase be- with demand management policies to ensure wa- cause of climate change, affecting poor house- ter saving. Increasing the efficient use of water can mit- holds disproportionately. Producer and consumer igate part of the severe economic consequences of cli- price indexes will increase by 9.4 percent and 8.2 per- mate change. WUE measures need to be implemented cent, respectively, in the SC scenario (Figure 33). Be- yond food prices, climate change disruptions have 33 This last impact was felt in 2021: the country faced its negative impacts on income, which could face a 9.8 worst drought in 50 years leading to a 60 percent increase percent and 8 percent decline under the same sce- in wheat imports by weight and a 92 percent increase nario, and a higher dependency on food imports due by monetary value, compared to 2020. These increases to lower crop yields.33 Increased food prices and a added pressure to the country’s finances, especially decline in wages would occur in a reduced fiscal because of high global grain prices (Iran Chamber of Commerce, Industries, Mines and Agriculture 2021). space—in a context in which many low-income house- 34 Climate-smart agriculture (CSA) is an integrated holds spend a high share of their incomes on food approach to managing landscapes—cropland, livestock, products—which may have a significant impact on forests, and fisheries—to address the challenges of food poverty. The subsidized exchange rate for the imports security and climate change. Special Focus Chapter: Preparing for an Uncertain Water Future 27 with water demand management policies to avoid an time and often requires infrastructure and major increase in water consumption known as the “rebound institutional and entitlement changes. The reforms in effect.” Indeed, the simulations show that without con- China were implemented over 20 years. Even when straints in the withdrawals, a 10 percent increase in WUE effective management is achieved, shocks in the would cause total water consumption to increase, thus system, such as multiyear drought, require updates. canceling any water savings. Improvements in WUE re- Water use accounting and monitoring quire new investments in water infrastructure, water dis- are critical for effective water management. tribution systems, and at the consumption level. Governments use water accounting and monitoring to plan and assess water management alignment with national policies and the impacts of shocks on Looking Forward the water system. Agriculture is the main sectoral user of fresh water worldwide; however, most agricultural Since one of the biggest economic impacts water use is not monitored. There is limited metering of climate change is driven by reduced water of irrigated agriculture despite increasing pressure availability, Iran can learn from countries that on groundwater and surface water resources. As have coped with reduced water availability. The competition over limited water resources increases, pathways that contribute to water security are many policy makers seek to limit irrigated agricultural (i) effective water resources management, (ii) improved water withdrawals and incentivize improvements in water use efficiency and water demand management water productivity. Disruptive technologies, such as policies,35 (iii) adept institutions and tailored policies; remote sensing, can help improve water accounting and (iv) enhanced regional collaboration among and monitoring. In France, satellite monitoring of riparian countries. irrigated areas spot-checks individual groundwater users’ compliance with authorized quotas against Pathway 1: Effective Water Resources self-reported data that farmers provide. Management for Enhanced Flexibility to Adapt to Changes in the Water System Pathway 2: Improved Water Use With effective water resources management36 Efficiency with Water Demand the institution in charge of water can better Management Policies to Cap Water Use cope with changing conditions such as droughts Decoupling a country’s economic growth from its or changes in the hydrology, and governments water use, through increasing water use efficiency, can deliver results that align with their policies. In can partially shield the economy from the climate Australia, effective water resources management of change impact of reduced water availability. the Murray-Darling Basin was tested through climate Monitoring the economic output per water unit is change, when flows started averaging less than crucial when developing agriculture where water 40 percent of the long-term average. In response, the basin authority reevaluated water rights and redefined entitlements. In China, the “three red lines” caps total 35 In this note, water demand management policies refer national water use, water use efficiency, and pollution to policies that affect consumers’ use of water: water levels. The central government sets national caps as pricing, quotas, shifting from high water intensive crops future targets. Then jurisdictional authorities propose to low water intensive crops, water accounting and caps for the central government’s approval at the monitoring, use of transformative technology to support water governance monitoring and enforcement, and basin, province, prefecture, and county levels (World strategic communication. Bank, forthcoming). Because of reforms in the water 36 In this note, effective water resources management is sector between 1990 and 2010, China has stabilized when the observed outcome for each user is consistent its water use. Achieving effective management takes with declared policy at national, regional, or local levels. 28 and market are the limiting factors. Spain, one of the management policies. As competition over limited most water stressed industrialized countries in the water resources increases, policy makers seek to world, the second water scarce country in the world, limit agricultural water withdrawals and incentivize is striving to improve the water efficiency and has improving irrigation water efficiency. The promise increased the water productivity over time. There was of efficiency improvement investments is to “save” significant improvement of economic outputs per unit water and allow for its reallocation to cities or to for industrial and agricultural water from 1987 to 2017. the environment. However, global evidence shows Spain optimized surface water use for municipal and that farmers often use the “saved” water to irrigate agricultural water customers, and increased reuse of more area, increase cropping intensity, or switch treated wastewater instead of freshwater in agriculture toward thirstier crops. The result is often an increase (45 percent), irrigation of parks and recreational of water withdrawal called the “rebound effect.”38 areas (36 percent) and industry (10 percent) among Water demand policies require a better valuation of other uses. These actions can help maintain a level water, including water accounting and monitoring, of agriculture that plays an essential sociocultural and strategic communication to support users’ role and provides a lifeline to some marginalized behavior change to reduce consumption. Policies economic groups. and interventions range from volumetric pumping Complement supply-side water policies37 quotas, power rationing, taxes on extraction, reforms (such as dams, reduction of leakages, and re- in water pricing, and water markets. Transformative use of treated wastewater) with increased water technology (such as remote sensing and smart valuation (through economic instruments such as meters) allows cheaper and faster information tariffs and quotas). Extensive literature shows that collection and processing to support monitoring increasing the water supply can generate a higher users’ compliance with water demand management demand, which can aggravate water scarcity. Better policies. Sanctions and penalties must accompany water valuation, including strategic communication accounting and monitoring to deter noncompliance to support users’ behavior change, helps manage and rule breaking. In Nebraska, a local governing body the water demand. Tariff structures for domestic wa- has revoked groundwater rights to irrigators caught ter need to cover operations and maintenance costs attempting to bypass flow meters. Enforcement is while ensuring vulnerable households can afford the difficult—and there are limited examples of success— services. The Gironde area of France implemented a but it is critical. If users perceive that the cost of water conservation policy that included an awareness noncompliance to water restriction is lower than campaign and a program to reduce leaks in domes- the cost of compliance, users will deplete the water tic water distribution networks to reduce water use in resources. the deep Gironde Aquifer. The policy was effective, as Using the latest decision-making method- shown through a reduction of almost 10 million cubic ologies can improve infrastructure benefits and meters in abstracted drinking water between 2005 and 2013, even though the population increased by about 120,000. Capping the demand with tariffs for 37 In this note, supply-side water policies refer to water domestic water and industrial uses and having quo- resource augmentation interventions such as increasing tas for agriculture provided incentives for users to storage capacity, desalination, agriculture drainage lower their water use. Across MENA there is a cor- water reuse, and wastewater reuse; increasing efficiency relation between higher domestic water tariffs and and water productivity; reduction of nonrevenue water; lower per capita water use, except in countries such reduction in water leakages (distribution network and transfers); and modernizing irrigation. as the Republic of Yemen, which has absolute supply 38 Rebound effects encompasses economic and behavior constraints. adaptation mechanisms that occur when an increase in Increasing water use efficiency will cap resource use efficiency affects the total consumption of water use only if implemented with water demand that resource. Special Focus Chapter: Preparing for an Uncertain Water Future 29 increase resilience to droughts and floods. As the Increased local stakeholder engagement system gets more complex, decision-making in infra- can better inform policy decisions in identifying structure operation needs to shift from a reliance on sectoral requirements and priority areas for water historical data to estimates based on forecasting and reallocations, while ensuring just and equitable real-time data. Many countries update their dams’ op- distribution. Including important local actors from eration to accommodate flood volumes and determine multiple sectors supports coordination between com- the water allocations during drought events. Agile wa- peting water uses. With water supply and sanitation ter allocation and flood and drought response mecha- service delivery, stakeholder engagement can im- nisms preserve economic development and prevent prove customer satisfaction with services, which could seasonal or annual losses in sectors dependent on wa- trigger a virtuous cycle of increasing locally generated ter. The shift in managing Italy’s Lake Como from his- revenue from customers. Stakeholder engagement torical data to a forecast approach reduced floods and can help to build trust in water sector institutions and water scarcity and increased hydropower production.39 generate user support for and compliance to deci- The United States Corps of Engineers developed the sions regarding shared water resources—perhaps set- Forecast Informed Reservoir Operations (FIRO)40 to in- ting the stage for broader-scale cooperation. crease water supply reliability without reducing flood One of the global consequences of institu- protection capacity and environmental flows. The final tions failing to perform adequately in the water viability assessment for California’s Lake Mendocino sector is groundwater overuse; therefore, many shows that the use of FIRO in 2020, the third driest year countries have regulated groundwater use re- over a 127-year record, enabled a 19 percent increase gimes to stabilize or reverse the overuse. The most in water storage by the end of winter. common regulated groundwater use regimes include (i) command-and-control,41 (ii) market approaches with the definition of property rights,42 and (iii) decen- Pathway 3: Adept Institutions and tralization of water allocation policies,43 whereby user Tailored Policies to Incentivize Water use Efficiency and Capping Water Use 39 A comparison of the deterministic and probabilistic approach results for the historical data (1981–95) show Policy makers need to take complementary ac- (i) a reduction of 30 percent in the flood frequency tions, such as robust trade agreements, to im- of downstream of Lake Como, Italy; (ii) a reduction prove resilience to water scarcity. However, in- of the water deficit of 110 million cubic meters per year (12 percent); and (iii) an increase of 3 percent in adequately designed energy, agriculture, and trade electricity production. policies can affect the water sector. Availability and 40 FIRO is a reservoir-operations strategy that better transparency of water accounting, monitoring, and informs decisions to retain or release water by integrating use of information can help to pinpoint unintended flexibility in operation policies and rules with enhanced consequences on water resources from policies in monitoring and improved weather and water forecasts. 41 Command-and-control instruments aim to affect and outside the water sector. Energy subsidies are target group behavior through state intervention. They types of policies that have led to the unintended con- establish or reinforce direct administrative regulation, sequence of groundwater overuse. For example, elec- with systematic registration of abstraction points, issuing tricity subsidies in India between 1995 to 2004 led to pumping permits and awarding and enforcing individual groundwater overuse and the production of more wa- volumetric quotas. ter intense crops. On trade and food security, water- 42 Market approaches with the definition of property rights are based on private appropriation of the resource and scarce countries like Jordan have focused on policy involve allocating water use rights traded among users. options to build strategic reserves and improve the 43 The decentralization of water allocation policies entails efficiency of supply chains and reduced their produc- devising several state responsibilities to water users, tion of thirsty crops. communities, or associations. 30 associations apply local rules for groundwater man- a multisectoral economic evaluation and modeling of agement. The command-and-control regulated ground- water resources development showed that cooperative water use regime has not reversed the problem. The development could increase hydropower outputs. main constraints are that (i) the institutions often lack Within this cooperative scenario of coordinated human resources to inspect a significant proportion of operation of hydropower facilities, an increase of users, and (ii) fines imposed are usually kept low for po- firm energy generation by 7 percent can be achieved litical reasons. Thus, many countries have transitioned with no major infrastructure investment, leading to a out of the command-and-control system. France transi- net positive value of US$585 million over a 30-year tioned to a decentralization of water allocation policies. period. Information sharing and the development of The total volume to extract from an aquifer is capped, monitoring and early warning systems promote the and this volume is shared among users. Local ground- cooperative operation of water infrastructure, allowing water user associations share available water among riparian states to make better decisions on storage or farmers. China transitioned to market approaches us- release of water in the dams and improve drought and ing tradable quotas. These transitions often start with flood resilience. experiments and pilots, allow a tailored approach to the Cooperation on shared water resources be- local context, and gradually scale up. tween countries globally ranges from joint opera- tion of infrastructure to exchange of information. The Senegal River Basin Organization owns infra- Pathway 4: Collaboration with Riparian structure and operates it on behalf of other countries Countries to Improve Water Use at based on benefit sharing agreements. Other basins, Basin Level such as the Mekong, have developed information and best practices exchanges among the riparian states. Collaboration includes increased information Some regions have developed subbasin institutions sharing among the riparian countries on water or projects according to the subsidiarity principle quantity and quality. More coordinated management that activities should occur at the lowest appropriate and operation of water infrastructure on shared river governance level. One example of a subbasin proj- systems could increase benefits such as energy ect is the Rusumo Falls hydropower dam, benefitting generation. For example, in the Zambezi River Basin, Burundi, Rwanda, and Tanzania. Special Focus Chapter: Preparing for an Uncertain Water Future 31 REFERENCES Akbari, M., Foroudi, P., Shahmoradi, M., Padash, and agricultural production. Department of H., Parizi, Z.S., Khosravani, A., Ataei, P. and Agriculture and Resource Economics Working Cuomo, M.T., 2022. 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