IRAN ECONOMIC MONITOR The Economy at a Crossroads Spring 2021 Middle East and North Africa Region Iran Economic Monitor The Economy at a Crossroads Special Focus Topic: Poverty and Inequality in Iran at the Outset of the COVID-19 Pandemic IRAN ECONOM Spring 2021 (Eighth edition) MONITO Middle East and North Africa Region Weatherin triple- © 2021 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .vii Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi ‫چکیده‌ی مدیریتی‬ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv 1. Recent Economic and Policy Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Output and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 External Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Monetary Policy and Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Public Sector Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Labor Market and Jobs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2. Outlook and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Risks and Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Special Focus on Poverty and Inequality in Iran at the Outset of the COVID-19 Pandemic . . . . . . . .21 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Poverty and Inequality Trends in Iran 2018/19–2019/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 iii List of Figures Figure 1 Iran is Grappling with a Fourth COVID-19 Wave… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Figure 2 GDP Strongly Rebounded in Q2 and Q3-20/21... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Figure 3 … but Was Not Enough to Counter the Recent Diverging Welfare between Iran and Peer Groups… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Figure 4 …and Potential GDP Growth Rate Has Declined Sharply Over the Last Two Decades . . . . . . . .3 Figure 5 Industries Including Oil Strongly Rebounded... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Figure 6 …while Investment and Consumption Are Still Lagging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Figure 7 PMI and the Industrial Production Index Picked Up After Reaching a Record Low in April 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Figure 8 The CAB Registered a Deficit in H1-20/21… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Figure 9 …as Oil Export Revenues Hit a Two-Decade Low. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Figure 10 Non-Oil Exports Fell Sharply and Concentrated on Closer Neighbors… . . . . . . . . . . . . . . . . . . . .6 Figure 11 …while the Origin of Imports Remained Unchanged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Figure 12 The Rial Has Depreciated Sharply… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 13 … Leading to a Renewed Surge in Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 14 Food and Beverages Were the Main Contributors to Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 15 An Increase in the CBI’s Net Foreign Asset Was the Main Driver of the Monetary Base Growth… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 16 TSE Underwent a Large Fluctuation in 2020/21… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 17 …yet Provided the Highest Return among other Assets in 2020/21 . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 18 Oil Revenues Have Fallen to Historic Lows While Taxes Grew Modestly… . . . . . . . . . . . . . . . . . . 9 Figure 19 …leading to a Widening Fiscal Deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 20 Labor Market Gender Gaps Remain High (Q4-20/21) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Figure 21 GDP (total and Non-Oil) Growth Rates and Poverty Headcount Rates (consumption per capita) at USD 5.5 2011 PPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Figure 22 Anonymous Growth Incidence Curves 2018/19–2019/20 Growth Rates of Annualized Real Expenditure (a) and Real Income (b) Per Capita by Percentiles (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Figure 23 Headcount Poverty Rates (consumption per capita) at USD 5.5 2011 PPP National and by Rural/Urban Areas, 2016/17–2019/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Figure 24 Gini Index (consumption per capita) National and by Rural/Urban Areas, 2016/17–2019/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Figure 25 Headcount Poverty Rates (consumption per capita) at USD 5 and USD 10 2011 PPP by Province, 2019/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Figure 26 Sources of Income Poverty Changes (USD 5.5 2011 PPP Poverty Line), 2018/19–2019/20 (percentage points) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Figure 27 Sources of Income Inequality Changes (Gini Coefficient), 2018/19–2019/20 (percentage points) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Figure 28 Headcount Poverty Rates (consumption Per Capita) at USD 5.5 2011 PPP by Region, 2019/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Figure 29 Distribution of Consumption Per Capita (USD 2011 PPP) by Rural and Urban Areas, 2019/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 Figure 30 Head of Household’s Level of Education by Quintile, 2019/20 . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Figure 31 Female Headed Households and Household Size by Quintile, 2019/20 . . . . . . . . . . . . . . . . . . 26 iv List of Tables Table 1 The 2021/22 Budget Is Expansionary on All Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Table 2 Iran: Selected Economic and Financial Indicators, 2018/19–2023/24 . . . . . . . . . . . . . . . . . . . . 18 List of Boxes Box 1 COVID-19 Vaccine Rollout in Iran . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Box 2 Policy Responses to the Pandemic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Box 3 The New Government Security Issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Box 4 COVID-19 and Inequality in the Middle East and North Africa (MENA) and Iran . . . . . . . . . . . . 27 Table of Contents v ABBREVIATIONS AND ACRONYMS Bbl Barrel of oil MEAF (Iran’s) Ministry of Economic Affairs and CAB Current account balance Finance CMSF Capital market stabilization fund MoCLSW (Iran’s) Ministry of Cooperatives, Labor CBI Central Bank of Iran and Social Welfare COVID-19 Corona Virus Disease 2019 (Novel MoH (Iran’s) Ministry of Health Coronavirus) m/m month-on-month CPI Consumer price inflation; Consumer NDFI National Development Fund of Iran price index (Special Focus chapter) NIMA Unified system of foreign exchange ER Exchange rate transactions (Persian acronym) GDP Gross domestic product OPEC Organization of Petroleum Exporting HIES Household Income and Expenditure Countries Survey PBO Plan and Budget Organization ICCIMA Iran Chamber of Commerce, Industries, PMI Purchasing Manager’s Index Mines & Agriculture pp Percentage point(s) IEM Iran Economic Monitor PPP Purchasing Power Parity IPI Industrial Production Index RHS Right-hand-side IPO Initial public offering SCI Statistical Centre of Iran IMF International Monetary Fund SME Small and medium-sized enterprise IMF DOTS International Monetary Fund’s Direction SOE State-owned enterprise of Trade Statistics database TEDPIX Tehran Stock Exchange main index IRR Iranian Rial TSE Tehran Stock Exchange kWh Kilowatt-hour US(A) United States of America LHS Left-hand-side US$ United States Dollar Mbpd Million barrels per day WB WDI World Bank World Development MBRI Monetary and Banking Research Institute Indicators database MENA Middle East and North Africa y/y year-on-year vii PREFACE T he Iran Economic Monitor (IEM) provides Saroj Kumar Jha (Regional Director). The Special an update on key economic developments Focus chapter was written by Laura Rodriguez and policies. It examines these economic Takeuchi (Young Professional, POV), Mohammad developments and policies in a longer-term and Mostafavi-Dehzooie (Consultant, POV) under the global context, and assesses their implications for the guidance of Johannes Hoogeveen (Global Practice outlook for the country. Its coverage has ranged from Manager, POV). the macro-economy to financial markets to indicators Muna Abed Salim (Senior Program Assistant) of human welfare and development. It is intended for print-produced the report. a wide audience, including policy makers, business The findings, interpretations, and conclusions leaders, financial market participants, and the expressed in this Monitor are those of World Bank community of analysts and professionals engaged staff and do not necessarily reflect the views of the on Iran. Executive Board of the World Bank or the governments The Iran Economic Monitor is a product of the they represent. World Bank’s Global Practice for Macroeconomics, For questions and comments on the content Trade and Investment (MTI) team. The eighth issue of of this publication, please contact Majid Kazemi the IEM was prepared by Majid Kazemi (Economist, (mkazemi@worldbank.org) or Eric Le Borgne Task Team Leader, MTI) and Razieh Zahedi (eleborgne@worldbank.org). (Consultant, MTI) under the general guidance of The data cut-off date for this report was May Eric Le Borgne (Global Practice Manager, MTI) and 15, 2021. ix EXECUTIVE SUMMARY I ran’s economy witnessed a modest recovery in deficit in 2020/21. These constraints together with the second half of 2020 following more than inflationary expectations led to higher production two years of economic recession. A stronger costs and ultimately higher prices for consumers. performance in the industrial sector (including oil) in Headline inflation hit a high of 36.4 percent in the first nine months of 2020/211 (9M-20/21) drove the 2020/21. Like previous years, the higher inflation gross domestic product (GDP) growth of 2.2 percent was felt hardest by lower income deciles as it eroded year-on-year (y/y) despite a contraction of services the real value of their savings and government cash value added due to COVID-19 impact. Oil production transfers. according to secondary sources has reportedly The legacy of the previous years of recovered to 2.4 million barrels per day (mbpd) in economic shocks along with COVID-19 dominated April 2021 from a low of 2 mbpd in Q4-2019. The government finances and led to a widening fiscal overall economic rebound, which started in Q2-20/21 deficit in 2020/21. Oil revenues fell to their lowest and continued in the subsequent quarter, marks an level in decades, through both export price and end to two years of economic recession after the volume channels. According to the most recent cited reintroduction of US sanctions in 2018 and the onset data in 9M-20/21 (Apr–Sep 2020), only 16 percent of of COVID-19 in late 2019/20. However, the economy planned oil revenues for the year were realized during remains far from recovering from the accumulated this period. Tax receipts, however, were buoyed in contraction of recent years which left the economy at nominal terms by higher inflation and met the budget 90 percent of its previous peak in 2017/18. As a result, target except for indirect taxes which were impacted by the per capita GDP gap between Iran and its income the COVID-19 measures. Expenditures also increased and regional comparator group of countries remains in nominal terms due to higher wage bill, pensions, significantly larger than a decade ago. and COVID-19 expenditures (though the growth in real Restricted access to foreign exchange terms was offset by high inflation). This brought the reserves and limited other external financing fiscal deficit-to-GDP ratio to an estimated 6.3 percent sources translated to pressures on the exchange in 2020/21 (a 2.6 pp increase). Faced with growing rate and higher inflation in 2020/21. Financial gross financing needs, the government continued to sanctions on the CBI and other financial institutions led to a sizable share of Iran’s official reserves becoming 1 The Iranian calendar year starts on March 21 of the either inaccessible or frozen in banks abroad which Gregorian calendar year and ends on March 20 the in turn complicated financing of the current account following year. xi expand domestic bond issuance (70 percent share of back with higher demand. If US sanctions on Iran’s financing) in addition to sales of assets in the stock economy are eased significantly, it could lead to market (15 percent) and withdrawal from reserves (8 substantially higher growths in both oil and non-oil percent). sectors. However, insufficient investment in the oil The spread of new variants of COVID-19 led sector constrains Iran’s oil production capacity in the to yet another record surge in daily confirmed cases medium term, even in the absence of US sanctions. in 2020/21. With over 2.7 million cases of infections Furthermore, given the recent large global investment and 76 thousand death as of May 15, 2021, Iran has drive in renewable energy and other climate change experienced the deadliest outbreak in the Middle East mitigation measures, the long-term prospects for oil and North Africa (MENA) region. A fourth wave started demand are uncertain. after the two weeks of the Iranian new year holidays In the absence of a pickup in oil revenues, (starting on March 21) which brought daily infections the fiscal deficit is projected to remain elevated and deaths to their highest level on record. This placed over the medium term. A slow economic recovery an unprecedented burden on the health system and would translate into a similarly slow growth in non- hospitals in some cities such as Tehran reached close oil revenues. Higher reliance on bond issuance, to full capacity of intensive care units. The recent surge especially with shorter maturities, would increase was also associated with a higher reported prevalence interest payments and amortization costs. Further of the newer more dangerous variants of the virus while government debt issuance and sales of public assets vaccination rollout remained sluggish. could have negative spillovers to the stock market The COVID-19 pandemic further intensified and place additional stress on the undercapitalized economic pressures on the most vulnerable. banking sector. Using the latest household survey data, the Special Despite a moderate economic rebound, Focus chapter of this issue of the Iran Economic economic pressures on poor households will Monitor (IEM) highlights the existing vulnerabilities continue. Inflation is forecast to decelerate but remain of households in falling into poverty even before above 20 percent on average over the medium term the pandemic hit. Multiple years of recession and due to cost push factors. With limited fiscal space high inflation have pushed a sizable proportion of to support the poor and high inflation, economic the Iranian population closer to the poverty line. Per pressures on the poor are unlikely to subside, but capita consumption fell by 5.6 percent in 2019/20. a better targeting of cash transfers could free up As a result, poverty continued to increase by 2 pp resources for additional social protection measures. to 14.3 percent in 2019/20. Inequality measured by Risks to Iran’s economic outlook relate to the Gini coefficient m odestly i mproved i n 2019/20 the recovery path from the pandemic and the but this was hardly good news as both income and prospects of geopolitical developments. The pace consumption fell and is likely to be temporary due to of vaccination rollout, a resurgence in new cases such the subsequent disproportionate impact of COVID-19 as those from new COVID-19 strains and subsequent on lower income households. lockdown measures could all weigh heavily on Iran’s economic outlook hinges on the economic activity and prolong the acute phase of the evolution of the COVID-19 pandemic, the pace of crisis. The burden of further economic deterioration global economic recovery, and the possibility of would be felt the most by the poor and vulnerable and easing of US sanctions. The recovery is projected increase poverty. Upside risks relate to a more rapid to be slow, gradual, and likely non-linear due to vaccination drive and sustained higher oil prices. the resurgence of new variants and containment If there is a breakthrough in nuclear negotiations, it measures, slow vaccination rollouts, and weak could boost economic activity and improve Iran’s demand from regional trading partners. Non-oil GDP fiscal and external balances. The outcome of the is projected to return to its pre-COVID-19 average upcoming presidential elections (to be held in June while oil production is forecast to modestly bounce 2021) will also be a crucial factor in the direction of xii IRAN ECONOMIC MONITOR: THE ECONOMY AT A CROSSROADS Iran’s economy and the path of economic reforms reforms such as investment in green infrastructure, over the next years. digital economy, and renewable energy can help The economy is at a crossroads and lead the economy out of the pandemic and create urgently needs a recovery plan of comprehen- much needed jobs. After the sharp contractions in sive and coordinated macro-fiscal reforms. Over- recent years along with high unemployment, invest- coming many of Iran’s chronic economic challenges ment in infrastructure can boost the economy, create including high inflation calls for an overhaul of Iran’s jobs, reduce emissions, and enhance trade. Greater fiscal framework. A sustainable and inclusive growth focus on the digital economy can help catalyze eco- model would require urgent reforms including in the nomic diversification, by utilizing the full potential of areas of energy subsidies, pension system reforms, Iran’s highly educated and tech-savvy young popula- water scarcity management, and a comprehensive tion and transform the economy into a regional tech- banking system restructuring. Growth-enhancing nology hub. Executive summary xiii ‫چکیده‌ی مدیریتی‬ ‫‪ ۱۳۹۹‬انجامیدند‪ .‬درآمدهای نفتی به پایین‌ترین سطح خود در چند‬ ‫اقتصاد ‌ایران به دنبال بیش از دو سال رکود اقتصادی‪ ،‬بهبودی نسبی‬ ‫دهه اخیر رسید‪ ،‬هم به واسطه قیمت صادرات و هم به دلیل حجم‬ ‫را در نیمه دوم سال ‪ ۲۰۲۰‬تجربه منود‪ .‬عملکرد قویرت بخش صنعت‬ ‫تولید‪ .‬بر اساس آخرین اطالعات‪ ،‬در نه ماه نخست سال ‪ ،۱۳۹۹‬تنها ‪۱۶‬‬ ‫(که شامل بخش نفت نیز می‌گردد) در نه ماه نخست سال ‪ ،۱۳۹۹‬رشد‬ ‫درصد درآمدهای نفتی پیش‌بینی شده محقق گردیده است‪ .‬درآمد‌های‬ ‫‪ 2/2‬درصدی تولید ناخالص داخلی (‪ )GDP‬نسبت به سال قبل را‪ ،‬با‬ ‫مالیاتی اما به واسطه تورم باال از لحاظ اسمی افزایش یافته و به اهداف‬ ‫وجود کاهش در ارزش افزوده بخش خدمات به واسطه تأثیرات کووید‬ ‫بودجه دست یافتند‪ ،‬به استثنا مالیات‌های غیرمستقیم که تحت تأثیر‬ ‫‪ ،۱۹‬به همراه داشت‪ .‬تولید نفت بنا بر گزارش منابع ثانوی اوپک از‬ ‫اقدامات احتیاطی ناشی از کووید ‪ ۱۹‬قرار گرفتند‪ .‬هزینه‌های دولت‬ ‫‪ ۲‬میلیون بشکه در روز در سه ماهه آخر سال ‪ ۲۰۱۹‬به ‪ 2/4‬میلیون‬ ‫نیز از لحاظ اسمی به خاطر افزایش دستمزد‌ها‪ ،‬مستمری بازنشستگی و‬ ‫بشکه در آوریل ‪ ۲۰۲۱‬افزایش پیدا کرده است‪ .‬بهبود کلی اقتصادی‪ ،‬که‬ ‫هزینه‪‎‬های مرتبط با کووید ‪ ۱۹‬افزایش داشتند (اگر چه افزایش واقعی‬ ‫از سه ماهه دوم ‪ ۱۳۹۹‬آغاز و تا سه ماهه بعد ادامه یافت‪ ،‬را می‌توان‬ ‫آن به واسطه تورم خنثی گردید)‪ .‬این مساله باعث شد که نسبت کرسی‬ ‫نقطه پایان رکود اقتصادی دانست که پس از اعامل مجدد تحریم‌های‬ ‫بودجه به تولید ناخالص داخلی به سطحی حدود ‪ 6/3‬درصد در سال‬ ‫امریکا در سال ‪ 1397‬و شیوع کووید ‪ ۱۹‬در اواخر سال ‪ ،1398‬آغاز‬ ‫‪( ۱۳۹۹‬افزایش ‪ 2/6‬واحد درصد) برسد‪ .‬برای مقابله با نیازهای تأمین‬ ‫گردیده بود‪ .‬با‌ این وجود‪ ،‬اقتصاد به واسطه رکود انباشته سال‌های اخیر‬ ‫مالی داخلی‪ ،‬دولت میزان انتشار اوراق بدهی را افزایش داد (‪ ۷۰‬درصد‬ ‫و عملکردی برابر با ‪ 90‬درصد اوج آن در سال ‪ ،‌1396‬هنوز فاصله زیادی‬ ‫سهم تأمین مالی)‪ ،‬در کنار فروش دارایی‌ها در بازار بورس (‪ ۱۵‬درصد )‬ ‫با بهبودی دارد‪ .‬در نتیجه‪ ،‬شکاف رسانه‌ی تولید ناخالص داخلی بین‬ ‫و برداشت از ذخایر (‪ ۸‬درصد )‪.‬‬ ‫ایران و همتایان درآمدی و منطقه‌‌ای به طرز چشم‌گیری بیشرت از یک‬ ‫دهه گذشته می‌باشد‪.‬‬ ‫شیوع گونه‌های جدید کووید ‪ ۱۹‬منجر به افزایش بی‌سابقه در آمار‬ ‫روزانه ابتال در سال ‪ ۱۳۹۹‬گردید‪ .‬با تعداد بیش از ‪ ۲/۷‬میلیون مورد‬ ‫دسرتسی محدود به ذخایر ارزی و دیگر منابع خارجی تأمین مالی منجر‬ ‫ابتال و ‪ ۷۶‬هزار فوتی تا تاریخ ‪ ۲۵‬اردیبهشت ‪ ،۱۴۰۰‬ایران مرگبارترین‬ ‫به فشار بر نرخ ارز و تورم باال در سال ‪ ۱۳۹۹‬گردید‪ .‬تحریم‌های مالی‬ ‫میزان شیوع در منطقه خاورمیانه و شامل آفریقا را تجربه کرده است‪.‬‬ ‫بر بانک مرکزی ایران و دیگر نهادهای مالی باعث شد که بخش بزرگی از‬ ‫موج چهارم دو هفته پس از تعطیالت سال جدید در ایران آغاز گردید‬ ‫ذخایر ارزی ایران غیر قابل دسرتس شوند و یا در بانک‌ها بلوکه گردند‪ ،‬و‬ ‫و میزان ابتال و مرگ و میر را به باالترین سطح رساند‪ .‬این اتفاق فشار‬ ‫تأمین مالی کرسی حساب جاری را در سال ‪ ۱۳۹۹‬مشکل‌تر ساخت‪ .‬این‬ ‫بی‌سابقه ای را بر روی بیامرستان‌ها و بخش درمان در برخی شهرها‪،‬‬ ‫محدودیت ها به همراه انتظارات تورمی منجر به باال رفنت هزینه‌های‬ ‫از جمله تهران‪ ،‬وارد منوده و ظرفیت بخش‌های مراقبت‌های ویژه را‬ ‫تولید و در نهایت قیمت‌های باالتر برای مرصف‌کنندگان گردید‪ .‬در سال‬ ‫نزدیک به حد اشباع رساند‪ .‬این افزایش تا حدی نیز به واسطه شیوع‬ ‫‪ ،1399‬تورم تا ‪ 36/4‬درصد اوج گرفت‪ .‬مانند دیگر سال‌ها‪ ،‬تورم باال‬ ‫بیشرت گونه‌های خطرناک تری از ویروس کرونا و روند کند واکسیناسیون‬ ‫بیشرتین فشار را بر دهک‌های کم درآمد وارد منود و باعث کاهش ارزش‬ ‫می‌باشد‪.‬‬ ‫واقعی پس‌انداز و یارانه نقدی آن‌ها شد‪.‬‬ ‫پاندمی کووید ‪ ۱۹‬باعث افزایش فشار اقتصادی بر اقشار آسیب پذیر‬ ‫آثار شوک‌های اقتصادی سال‌های پیش‪ ،‬به همراه کووید ‪ ۱۹‬تأثیر‬ ‫شده است‪ .‬بخش مترکز ویژه این شامره از ناظر اقتصادی ایران با استفاده‬ ‫مهمی بر تأمین مالی دولت گذاشتند و به افزایش کرسی بودجه در‬ ‫‪xv‬‬ ‫علی رغم بهبود نسبی اقتصاد‪ ،‬فشار اقتصادی بر خانوار‌های فقیر‬ ‫از جدیدترین اطالعات بودجه خانوار نشان دهنده وجود آسیب پذیری‬ ‫ادامه خواهد یافت‪ .‬پیش‌بینی‌می‌شود که میزان تورم کاهش یابد‪ ،‬ولی‬ ‫در خانوار‌ها و حرکت آن‌ها به سمت فقر حتی قبل از رشوع پاندمی‬ ‫هم‌چنان به واسطه فشار هزینه‌ها به طور متوسط باالی ‪ ۲۰‬درصد در‬ ‫است‪ .‬رکود مستمر در طول چند سال و تورم باال‪ ،‬تعداد قابل توجهی‬ ‫میان مدت باشد‪ .‬محدودیت مالی دولت برای حامیت از افراد فقیر و‬ ‫از جمعیت ‌ایران را به سمت خط فقر سوق داده است‪ .‬میزان مرصف‬ ‫وجود تورم باال به معنای ادامه فشار اقتصادی بر فقرا می‌باشد‪ ،‬ولی‬ ‫رسانه در سال ‪ ۱۳۹۸‬به میزان ‪ 5/6‬درصد کاهش داشت و در نتیجه فقر‬ ‫هدفمندی بهرت یارانه نقدی‌می‌تواند به آزاد شدن منابع بیشرت به منظور‬ ‫به میزان ‪ ۲‬واحد درصد افزایش یافته و به ‪ 14/3‬در سال ‪ ۱۳۹۸‬رسیده‬ ‫اقدامات حامیت اجتامعی گردد‪.‬‬ ‫است‪ .‬نابرابری که توسط رضیب جینی اندازه گرفته می‌شود کمی بهبود‬ ‫را برای سال ‪ ۱۳۹۸‬نشان می‌دهد‪ ،‬اما منی‌توان به آن خوش‌بین بود چرا‬ ‫ریسک چشم‌انداز اقتصادی‌ ایران به روند بهبود رشایط پاندمی و آینده‬ ‫که درآمد و مرصف هر دو کاهش یافتند و احتامال به واسطه تأثیر نابرابر‬ ‫تحوالت ژئوپولیتیک بستگی دارد‪ .‬رسعت واکسیناسیون‪ ،‬افزایش در‬ ‫کووید ‪ ۱۹‬بر خانوار‌های کم درآمد‪ ،‬موقتی خواهد بود‪.‬‬ ‫تعداد مبتالیان به گونه‌های جدید و اقداماتی از قبیل تعطیلی مشاغل‬ ‫می‌توانند بر فعالیت‌های اقتصادی تأثیر منفی زیادی گذاشته و منجر به‬ ‫چشم‌انداز اقتصادی ایران به تحوالت پاندمی کووید ‪ ،۱۹‬آهنگ بهبود‬ ‫استمرار فاز حاد بحران گردند‪ .‬فشار هر گونه تضعیف اقتصادی بیشرت‬ ‫اقتصاد جهانی و احتامل کاهش تحریم‌های امریکا بستگی دارد‪ .‬به‬ ‫توسط قرش فقیر و آسیب پذیر حس‌می‌گردد و افزایش فقر را به دنبال‬ ‫واسطه پیدایش گونه‌های جدید و نیاز به اقدامات کنرتلی پاندمی‪ ،‬روند‬ ‫خواهد داشت‪ .‬ریسک‌های دیگر به رسعت واکسیناسیون و استمرار در‬ ‫کند واکسیناسیون‪ ،‬و تقاضای ضعیف در میان رشکای تجاری منطقه‌‌ای‪،‬‬ ‫قیمت‌های باالی نفت بستگی دارند‪ .‬پیرشفت در مذاکرات هسته‌‌ای‬ ‫انتظار می‌رود که بهبود اقتصادی به کندی صورت پذیرد‪ .‬پیش‌بینی‬ ‫می‌تواند باعث افزایش فعالیت‌های اقتصادی و بهبود تراز بودجه و‬ ‫می‌شود که تولید ناخالص داخلی غیر نفتی به میانگین زمان قبل از‬ ‫خارجی ایران گردد ‪ .‬نتایج انتخابات آتی ریاست جمهوری نیز (که قرار‬ ‫کووید ‪ ۱۹‬باز گردد‪ ،‬هم‌چنین انتظار ‌می‌رود که تولید نفت افزایش‬ ‫است در خرداد ‪ ۱۴۰۰‬برگزار گردد) عامل مهمی خواهد بود در تعیین‬ ‫نسبی به دنبال باال رفنت تقاضا را نشان دهد‪ .‬اگر عمده تحریم‌های‬ ‫جهت اقتصاد ایران و مسیر تحوالت اقتصادی برای چند سال آینده‪.‬‬ ‫اقتصادی امریکا برداشته شوند‪‌ ،‬می‌توان رشد بسیار باالتری را در‬ ‫هر دو بخش نفتی و غیر نفتی انتظار داشت‪ .‬اما عدم رسمایه‌گذاری‬ ‫اقتصاد در مقطع حساسی است و نیازمند فوری برنامه‌ای جامع و‬ ‫کافی در بخش نفتی در میان‌مدت ظرفیت تولید نفت ایران را محدود‬ ‫اصالحاتی هامهنگ در سطح کالن اقتصاد‌می‌باشد‪ .‬غلبه بر چالش‌های‬ ‫‌می‌سازد‪ ،‬حتی اگر تحریم‌های امریکا برداشته شوند‪ .‬بعالوه‪ ،‬با توجه به‬ ‫مزمن اقتصادی ‌ایران‪ ،‬از جمله تورم باال‪ ،‬تحولی اساسی در چارچوب‬ ‫رسمایه‌گذاری‌های بزرگ اخیر جهانی در بخش انرژی‌های تجدید پذیر و‬ ‫بودجه را طلب ‌می‌کند‪ .‬مدلی برای رشد پایدار و فراگیر باید در‬ ‫دیگر اقدامات مرتبط با مقابله با تغییرات اقلیمی‪ ،‬چشم‌انداز دراز مدت‬ ‫برگیرنده اصالحات در بخش‌هایی از قبیل یارانه انرژی‪ ،‬سیستم مستمری‬ ‫تقاضا برای نفت نامشخص‌می‌باشد‪.‬‬ ‫بازنشستگی‪ ،‬مدیریت کمبود آب‪ ،‬و تحوالت ساختاری گسرتده در بخش‬ ‫بانکی باشد‪ .‬اصالحات در بخش‌های محرک رشد از جمله رسمایه گذاری‬ ‫پیش‌بینی می‌شود در صورت عدم افزایش درآمد‌های نفتی‪ ،‬کرسی‬ ‫در زیرساخت‌های سبز‪ ،‬اقتصاد دیجیتال‪ ،‬و انرژی‌های تجدید پذیر‬ ‫بودجه در میان مدت در سطح باالیی باقی مباند‪ .‬آهنگ کند روند‬ ‫‌می‌توانند اقتصاد را از دوران پاندمی عبور داده و به امر مهم اشتغال‬ ‫بهبودی نیز به معنای روند آهسته افزایش درآمد‌های غیر نفتی خواهد‬ ‫زایی کمک کنند‪ .‬پس از رکودهای شدید سال‌های اخیر و نرخ باالی‬ ‫بود‪ .‬اتکای باالی دولت بر انتشار اوراق بدهی‪ ،‬بخصوص با رسرسید‌های‬ ‫بیکاری‪ ،‬رسمایه‌گذاری در زیرساخت‌ها منجر به رونق اقتصادی گردیده و‬ ‫کوتاه مدت‌تر‪ ،‬منجر به باالتر رفنت بهره پرداختی و بازپرداخت بدهی‬ ‫اشتغال‌زایی‪ ،‬کاهش گازهای آالینده و افزایش تجارت را به همراه خواهد‬ ‫خواهد شد‪ .‬بعالوه‪ ،‬انتشار بدهی توسط دولت و فروش دارایی‌های‬ ‫داشت‪ .‬مترکز بیشرت بر اقتصاد دیجیتال‌می‌تواند با استفاده از توان بالقوه‬ ‫عمومی‌می‌تواند باعث انتقال شوک بر بازار سهام شود و فشار بیشرتی‬ ‫جمعیت جوان بسیار تحصیل کرده و تکنولوژی آشنای کشور باعث تنوع‬ ‫را بر بخش بانکی که از وضعیت نامناسب کفایت رسمایه رنج می‌برد‪،‬‬ ‫اقتصادی گردد و اقتصاد را به یک قطب منطقه‌ای فناوری تبدیل مناید‪.‬‬ ‫وارد سازد‪.‬‬ ‫‪xvi‬‬ 1 RECENT ECONOMIC AND POLICY DEVELOPMENTS Introduction FIGURE 1 • Iran is Grappling with a Fourth COVID-19 Wave… Over the last decade, Iran’s growth performance 350 6 Daily confirmed deaths per million Daily confirmed cases per million has been volatile and jobless due to the role of 300 5 the oil sector. Real GDP has declined to the same 250 4 level of a decade ago and the country failed to benefit 200 3 from growth opportunities such as periods of high 150 2 oil prices (2010–2014) and a highly educated young 100 population that could boost productivity. Job creation 50 1 has fallen short of meeting labor supply, and despite 0 0 02/19/20 03/19/20 04/19/20 05/19/20 06/19/20 07/19/20 08/19/20 09/19/20 10/19/20 11/19/20 12/19/20 01/19/21 02/19/21 03/19/21 04/19/21 a persistent low labor market participation rate (42 percent average), the rate of unemployment has been in the double digits. Unemployment has been New deaths per million Iran (RHS) New deaths per million World (RHS) especially high among the youth, female, and the New cases per million Iran (LHS)) highly educated (23.7, 15.6, and 14.2, respectively in New cases per million World (LHS) 2020/212). Despite some progress towards economic Source: Our World in Data. diversification, high public sector presence continues to inhibit job creation and capital formation by the private sector. Iran is grappling with the impact of the the peak in daily cases of the third wave in November COVID-19 health crisis. With over 2.7 million cases 2020, daily cases remained stable at the average level of infections and 76 thousand death as of May 15, of 7–8 thousand new cases per day with a double- 2021, Iran has experienced the deadliest outbreak digit death rate after new containment measures, in the Middle East and North Africa (MENA) region. Since the first confirmed cases in February 2020, the 2 The Iranian calendar year starts on March 21 each year pandemic underwent four waves (Figure 1). Following and ends on March 20 of the following year. 1 such as late-night curfews, were announced in pandemic resulted in a large burden on government November 2020. Since then, a fourth wave started finances and amplified existing structural challenges. after the two weeks of the Iranian new year holidays Inflation has remained high since 2018/19 (36 percent (starting on March 21) which brought daily infections y/y on average). The pandemic severely affected and deaths to their highest levels on record. Intensive jobs and incomes in many labor-intensive activities, care units in major cities such as Tehran subsequently including high-contact services and the informal reached close to full capacity. In mid-April 2021, sector. over 85 percent of cities were declared high-risk, and 65 percent were put on the highest virus risk level, and the country implemented more stringent Output and Demand containment measures and lockdown for two weeks which were further extended. The recent surge was Iran’s economy underwent a modest recovery in also associated with a higher reported prevalence of 2020/21 despite experiencing two-quarters of the newer more dangerous variants of the virus while COVID-19 induced shock. GDP recovery in Q2 and vaccination rollout remained sluggish (see Box 1). Q3-2020/21 was stronger than expected both in the COVID-19 and years of economic sanctions oil and non-oil sectors, which grew by 15.3 percent amplify previous economic challenges. The sharp and 3.1 percent y/y, respectively (Figure 2). The decline in hydrocarbon revenues since 2019/20 COVID-19 output loss was less pronounced than in combined with the economic and health costs of the other countries, partly due to a lower economic base BOX 1  COVID-19 VACCINE ROLLOUT IN IRAN As the epicenter of the Middle East’s worst COVID-19 outbreak, more than 76 thousand Iranian lives have been lost and more than 2.7 million infections have been reported (as of May 15, 2021). The country started vaccination in mid-February 2021, however, only a small fraction of the population (less than 3 percent) has been vaccinated. Early in 2021, Iran secured 21 million doses of vaccine, and mass vaccination was due to start later using domestic and joint vaccine production. However, Iran finalized a purchase of 60 million doses of Sputnik V vaccine as well as 10 million doses of China’s Sinopharm vaccine in mid-April. Despite the ambitious initial vaccination targets, progress was slow and lagged other neighboring countries. The government announced an expedited timeline for the national vaccination programa which aimed to vaccinate 60 million of Iran’s 84 million population by the end of 2021, but this was pushed back by 1 quarter. To date, only 2.1 million people (2.5 percent of the population) have received at least one dose. Other countries in the region have been able to fully vaccinate a larger share of their population (UAE 39.2 percent, Turkey 13.0 percent, Qatar 29.1 percent and Azerbaijan 7.5 percent versus Pakistan 0.45 percent—as of May 15, 2021b). The prospects of widescale vaccination remain uncertain.  According to the authorities, Iran has put orders for over 86 million doses of various vaccines—16.8 million doses from the COVAX facility, 60 million doses from Russia, 10 million doses from China, and 500 thousand doses from India—but payments have faced hurdles due to constrained access to funds abroad due to sanctions. As of the publication of this report, Iran has received 4.6 million doses, including 2.1 million doses of AstraZeneca from the COVAX vaccination program, 1.65 million doses of China’s Sinopharm, 720 thousand doses of Russia’s Sputnik V, and 125 thousand doses of India’s Bharat Biotech’s Covaxin.c Vaccinations are free of charge for all Iranians. Iran is working on multiple locally developed vaccines as well as two joint vaccine production projects. At least 8 different domestic vaccine development projects by state-owned pharmaceutical, defense ministry, and universities are underway with half of them already in clinical trials stage. A joint vaccine development program in cooperation with Cuba, Cuban Soberana02, is in the third trial phase and is expected to be ready by June 2021. Iran is also planning to locally manufacture the Russian Sputnik V. a According to the MoH vaccination program, in the first phase (Feb–March 2021), about 1.3 million front-line health workers and high-risk individuals were expected to receive vaccines. About 6 million people are planned to be vaccinated during the second phase (Apr–Jun 2021) including those over 65 years of age, and people with “special diseases”. In the third phase (Jul-Dec 2021), about 12 million people including people 55 to 64 years and people working in high exposure occupations and essential services are planned to be vaccinated. The fourth phase will be carried out in Jan–Mar, 2022 for the rest of the population. b Johns Hopkins University c Around 375,000 doses were initially ordered and expected to arrive in late March, but this did not materialize after India banned COVID-19 vaccine exports. 2 GDP Strongly Rebounded in Q2 and FIGURE 2 •  … but Was Not Enough to Counter FIGURE 3 •  Q3-20/21 the Recent Diverging Welfare between Iran and Peer Groups… 15 80 19 (International Thousand US$) Growth (y/y), percent 60 18 10 GDP per capita, PPP 40 17 5 20 16 15 0 0 14 –20 13 –5 12 –40 11 –10 –60 10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 9M-20/21 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Iran Middle East & North Africa Non-oil GDP (LHS) GDP (LHS) Oil-GDP (RHS) Upper middle income World Source: CBI and World Bank staff calculations. Source: World Bank WDI. after the previous economic contraction. Real GDP While the economy has started to rebound contracted by 12 percent over the 2018/19–2019/20 in mid-2020, the recovery was uneven across period after US sanctions were reintroduced on the oil sectors. Economic activity in all sectors expanded in sector which shrank by half. The COVID-19 pandemic Q2 and Q3-20/21 (y/y) but at different rates (Figure 5). also had an impact towards the end of 2019/20 The recovery was led by a stronger than expected and contributed to the annual contraction. The expansion in the oil industry (22.2 percent and 9.7 economic contraction widened the gap between Iran percent in Q2 and Q3-20/21, y/y), albeit from a low and its income and regional peers (Figure 3). Over base, as well as growth in manufacturing value-added the last two decades, Iran’s potential GDP growth (7.9 percent and 7 percent in Q2 and Q3-20/21, rate is estimated to have declined sharply from over y/y). The services sector growth remained subdued 4 percent in the early 2000s to below 1 percent in due to the ongoing impact of COVID-19 and the recent years (Figure 4). containment measures, while the agriculture sector …and Potential GDP Growth Rate Has FIGURE 4 •  Industries Including Oil Strongly FIGURE 5 •  Declined Sharply Over the Last Two Rebounded... Decades 20 8,000 5 IRR Trillion (constant prices) 15 Contribution to y/y growth, pp 7,000 4 Growth rate, percent 6,000 10 5,000 3 4,000 5 3,000 2 0 2,000 1 1,000 –5 0 0 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 –10 –15 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Potential GDP (LHS) 2016/17 2017/18 2018/19 2019/20 2020/21 Real GDP (LHS) Potential GDP growth rate (RHS) Oil Agriculture Industries Services GDP Source: CBI and World Bank staff calculations. Note: Potential GDP estimated using the HP filter. Source: CBI and World Bank staff calculations. Recent Economic and Policy Developments 3 …while Investment and Consumption FIGURE 6 •  PMI and the Industrial Production FIGURE 7 •  Are Still Lagging Index Picked Up after Reaching a Record Low in April 2020 20 70 10 Contribution to y/y growth, pp 10 60 5 50 0 40 0 30 –5 –10 20 –10 10 –20 0 –15 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 2016/17 2017/18 2018/19 2019/20 2020/21 Private consumption Gov. consumption Investment PMI (LHS) Exports Imports Inventory & SD Manufacturing PMI (LHS) GDP Index of Industrial Production Growth Rate, y/y (RHS) Source: CBI and World Bank staff calculations. Source: ICCIMA and MBRI. recorded 4.6 percent growth in 9M-20/21. GDP is now most pronounced in trade as exports and imports estimated to expand by 1.7 percent in 2020/21, driven plunged by more than 39 percent and 56 percent, by the industrial sectors (including oil). respectively. Private consumption also contracted by The recent recovery was primarily driven more than 10 percent in real terms leading to a per by the pickup in industries. The oil sector shows capita consumption falling by 12 percent. Over the signs of recovery after eight consecutive months same period, investment shrank by 17 percent with of contraction. The pick-up could be attributed to investment in machinery fell by 28 percent. higher anticipated orders3 ahead of an expected recovery in global and domestic demand. The non- oil sector rebound was driven by the manufacturing External Sector sector as the local currency depreciation made The current account balance (CAB) turned domestic production more price competitive. The negative in first half of 2020/21 as a drop in rial depreciated by a further 65 percent in 2020/21. exports outweighed the decline in imports. In the The Industrial Production Index (IPI) of the selected first half of 2020/21, oil and non-oil exports contracted industries in the stock market and Purchasing by 47 percent and 22 percent, respectively, and imports Manager’s Index (PMI) improvement also confirm dropped by 17 percent (y/y). The CAB registered a more favorable sentiment after a sharp decline in US$ 1.8 billion deficit and for the first time in the past early 2020 (Figure 7). fifteen years, turned negative in H1-20/21 (Figure 8). The main components of demand-side Import prohibition policy and the authorities’ expansion GDP including consumption and investment of the list of goods banned from imports and the rial’s have yet to fully recover. Imports and buildups in depreciation were not enough to offset the full impact inventories led the growth in Q2 and Q3-20/21. After of a contraction in oil and non-oil exports. nine consecutive quarters of y/y contraction, private consumption and investment moderately grew in Q2 and Q3-20/21 but had a small contribution to 3 During the same period, total exports declined hence growth (Figure 6). Exports and imports continued additional oil production was likely aimed at building to decline, though at a slower pace than previous inventories in anticipation of a stronger foreign quarters. Since the return of US sanctions (2017/18– demand, especially from China, and the possibility of a 2019/20), the deterioration on the demand side was breakthrough in relaxation of oil sanctions. 4 The CAB Registered a Deficit in FIGURE 8 •  As Oil Export Revenues Hit a FIGURE 9 •  H1-20/21… Two-Decade Low 40 70 50 20 30 0 10 –20 –10 –30 –40 –50 –60 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 –70 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2016/17 2017/18 2018/19 2019/20 2020/21 2016/17 2017/18 2018/19 2019/20 2020/21 CAB, US$ billion Exports growth, percent (y/ y) Oil exports, % of goods exports Imports growth, percent (y/y) Oil exports growth, nominal (y/y) Source: CBI and World Bank staff calculations. Source: CBI and World Bank staff calculations. Oil production and exports in H1-20/21 of intermediate goods (raw materials machinery registered a record low in the last two decades, and equipment). Import substitution and restric- but some signs of recovery appeared in H2- tions measures continued in 2020/21. Non-tariff 20/21. Based on OPEC data4, Iran’s oil production import control policies, including the allocation of in 2020 recorded a substantially low level of 1.98 preferential exchange rates for essential goods, mbpd even compared to that of 2019 (2.36 mbpd). have proved challenging. While the government still Assuming similar levels of domestic consumption, this provides preferential exchange rates for imports of indicates that Iran’s oil export volumes were likely well essential goods, the allocated amount has reduced below their 2019 levels (0.651 mbpd)5. More recently, significantly from US$30.5 million in 2018/19 to there are indications that oil production and exports US$10.5 million in 2020/21. This also reflects limited started to pick up. The latest OPEC report puts Iran oil access to foreign exchange reserves due to financial production at 2.32 mbpd in March 2021. According sanctions. to media reports, in March 2021, China purchased Iran’s main import partners remained the about 1 mbpd at a discounted price from Iran6. same in 2020/21, albeit trading at lower levels. Iran The large trade shock due to the COVID-19 continued to import goods from the same countries as pandemic also impacted non-oil exports. Total before in 2020/21 (Figure 11). Trade restrictions and non-oil exports shrank by 17 percent (US$ nominal difficulties in accessing foreign reserves have led to a terms) in 2020/21, however, the shock was distributed decline in imports. The total value of imports from the differently with different trade partners. Non-oil exports top import partners declined dramatically except for to Turkey fell by 50 percent, Iraq by 26 percent, and the UAE, which expanded by 8 percent. Imports from China and Afghanistan each by 7 percent in 2020/21 India plunged by 43 percent and those from Germany, (Figure 10), while exports to the UAE edged up by Turkey, and China declined by about 13–14 percent 2 percent during the same period. Iran’s main non- in 2020/21. The US sanctions and the pandemic oil exporting items included gasoline, natural gas, polyethylene, and methanol. The continuation of import prohibitions 4 As reported by secondary sources. led to a decline of total imports in 2020/21 5 CBI and other official sources stopped publishing oil production and exports data after the return of US by 12 percent. Imports of goods in 2020/21 was sanctions. about US$38 billion, of which about 30 percent were 6 https://www.bloomberg.com/news/articles/2021–03–22/ essential goods (primarily corn, soybeans, rice, oil, china-may-be-taking-rebranded-iran-oil-amid-increased- and oilseeds) and the remainder consisted mainly scrutiny. Recent Economic and Policy Developments 5 Non-Oil Exports Fell Sharply and FIGURE 10 •  …while the Origin of Imports FIGURE 11 •  Concentrated on Closer Neighbors… Remained Unchanged 45 50 40 45 35 26%, 11.0 40 35 29.3%, 12.8 30 5.7%, 2.4 26%, 5.7 USD, billion USD, billion 12.2%, 5.0 30 4.8%, 2.1 28.4%, 6.8 4.7%, 1.8 25 6.4%, 2.2 8.4%, 3.7 25 5.5%, 2.1 20 10.9%, 4.5 7.2%, 2.5 11.4%, 5.0 11.2%, 4.3 13.3%, 4.6 20 15 23.0%, 9.5 15 20.4%, 8.9 25.8%, 8.9 25.0%, 9.6 10 10 5 21.7%, 9.0 5 25.6%, 11.2 25.3%, 9.7 21.1%, 7.3 0 0 2019/20 2020/21 2019/20 2020/21 Iraq China UAE China UAE Turkey Turkey Afghanistan Other India Germany Other Source: IRICA and World Bank staff calculations. Source: IRICA and World Bank staff calculations. Note: The first number represents the country’s share (%) in total exports. Note: The first number represents the country’s share (%) in total imports. increased the concentration in import partners as the increased to 36.4 percent in 2020/21 (y/y) due to top five import partners account for 72 percent of total a combination of money supply growth, inflationary import in the last two years, compared to a 58 percent expectations, and higher cost-push factors. The latter share in 2017/18 to 2018/19. was primarily driven by higher trade costs and a sharp The CAB deterioration and increased depreciation of the rial (Figure 12). Over 2020/21, the economic uncertainty have added to existing rial depreciated more than 65 percent as the impact challenges of accessing foreign exchange of COVID-19 added to geopolitical uncertainties and (FX) reserves abroad. Despite deadlines set by restricted access to export proceeds. In tandem with CBI, repatriation of export proceeds by exporters the ER trend, inflation steadily rose to 49.5 percent in was muted due to logistical challenges posed April 2021 (y/y) and core inflation rose to 57.7 percent. by sanctions and disincentives such as the price The CBI missed its inflation target of 22 percent for gap between parallel and NIMA market7 rates and the year after it started its inflation targeting policy increasing uncertainty. These developments added to and open market operations for the first time in May pressures on the rial in the parallel market (Figure 12). 2020. The main driver of the monetary base growth In response to these depreciation pressures, since in M9-2020/21 was an increase in net foreign assets mid-October 2020, the CBI intervened to stabilize the as the CBI could not fully sterilize external funds due FX market. These interventions along with the recent to limited access to its foreign reserve. Based on this, negotiations to access foreign reserves with countries the CBI was faced with the only option of printing where funds have been blocked as well as positive against export proceeds and withdrawal from the market sentiment following the US elections and National Development Fund of Iran (NDFI), including nuclear talks contributed to an appreciation of the rial for the pandemic-related expenditures. in the parallel market by 23 percent (Oct 2020 to mid- Similar to past cycles of high inflation, May 2021). headline CPI was led by higher food and rental costs. As in 2019/20, the CPI was led by price increases in essential goods and services (Figure 14). Monetary Policy and Prices The sharp depreciation of the rial and rapid 7 Launched in April 2018, NIMA is an FX auction system growth in liquidity drove up inflation in 2020/21 administered by the CBI for facilitating FX transactions (Figure 13). Consumer price inflation (CPI) between exporters and importers. 6 FIGURE 12 • The Rial has Depreciated Sharply… …leading to a Renewed Surge in FIGURE 13 •  Inflation 350 60 Thousand IRR per 1 US$ Thousand IRR per 1 US$ 300 50 30 100 250 40 200 20 30 50 150 Percent (m/m) 20 10 Percent (y/y) 100 50 10 0 0 0 0 –50 –10 –10 –50 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 –20 –30 –100 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 Parallel-NIMA gap (RHS) Official (LHS) Parallel market (LHS) NIMA (LHS) Source: CBI and World Bank staff calculations. Inflation, m/m (LHS) IRR depreciation, m/m (LHS) Note: NIMA, the Persian acronym for “integrated system of foreign exchange Inflation, y/y (RHS) Core inflation, y/y (RHS) transactions”, is an FX auction system administered by the CBI for facilitating transactions between exporters and importers. Source: CBI, SCI, and World Bank staff calculations. The rapid increase in the price of essential foods such percent driven by an expansion of the banking sector as meat and poultry led to long lines in supermarkets claims on the government and non-public sectors. for subsidized goods as the Iranian new year This is in part due to the emergency COVID-19 loans approached. High inflation for food and housing (for which the reserve requirements were temporarily disproportionately affects the poor, as these items reduced) which contributed to a rapid rise in credit account for more than 75 percent of the consumption issued by the banking sector (8 pp increase as a basket of the bottom 40 percent of the population, share of GDP). However, high liquidity growth has versus 51 percent for the highest decile as defined been a chronic challenge in the banking sector over by the CBI. many years. The average growth rates of M2 and Monetary aggregates continued to the monetary base (MB) in the last four decades increase in a background of higher inflation and were 28 percent and 22 percent, respectively. The other constraints facing the banking sector. Broad banking sector faces deeper structural issues such money (M2) growth accelerated in 2020/21 to 40.6 as undercapitalization and other imbalances of their Food and Beverages Were the Main FIGURE 14 •  An Increase in the CBI’s Net Foreign FIGURE 15 •  Contributors to Inflation Asset Was the Main Driver of the Monetary Base Growth… 70 65.6 80 Contribution to total CPI, pp 60 70 Inflation YoY, percent 20 Contribution to MB growth, 50 46.5 60 39.1 38.7 50 15 40 36.4 40 10 30 33.9 25.3 percent 30 5 20 20.6 20 17.9 0 10 6.1 5.4 10 –5 0 0 CPI Food and Beverages Housing and utilities Transport Furnishings, Household Equipment/ Clothing and Footwear –10 –15 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2018/19 2019/20 2020/21 NFA Net Claims on Public Sector Inflation, YoY (LHS) Claims on Banks Other Items (Net) Contribution to headline CPI, pp (RHS) MB Growth (q/q) Source: SCI and World Bank staff calculations. Source: CBI and World Bank staff calculations. Recent Economic and Policy Developments 7 balance sheets (e.g., accumulation of illiquid assets real estate, which are traditional investments to hedge including non-performing loans and claims on against high inflation (Figure 17). In addition, both government). equity financing and debt financing through the stock The Tehran Stock Exchange Market (TSE) market doubled in 2020/21. has experienced unprecedented fluctuations in 2020/21. From early 2020/21, the TSE index jumped by more than 300 percent to its record high in early Public Sector Finance August but since then, it lost over 40 of its previous The sharp decline in oil exports and COVID-19 value (Figure 16). While the TSE was underperforming placed unprecedented pressures on government in previous years, its unprecedented rise had finances. The fiscal balance-to-GDP ratio reached little fundamental support, and mainly driven the 6.8 percent in 9M-20/21, as revenues fell to 8 percent depreciation of the currency, inflationary expectations, of GDP. The government’s share from oil revenues and some TSE initiatives by the Government. The fell by more than 80 percent to reach less than 1 latter included a series of initial public offerings (IPOs) percent of GDP and tax revenues shrank in real terms of state-owned enterprises (SOEs) and exchange- 2020/21. Oil revenue’s share in the budget fell to 3.4 traded funds (ETFs). These measures along with percent, the lowest in recorded history (the previous lower banking deposit rates and curbs on FX sales low was 25 percent during the Iran-Iraq war in led to a large influx of liquidity to the market and drove 1986/87), as only 16 percent of planned oil revenues the index upwards in the initial stages. The market’s were realized during 9M-20/21. However, overall tax bullish trend reversed in July 2020 after an increase in revenues met the target based on the budget law banking deposit rates and delays in other government in 2020/21 despite the economic contraction and IPOs and since November 2020, an easing of ER narrowing of the tax base. This was mainly due to depreciation has also contributed to keeping the higher inflation and better collection, particularly from index stable. the wealth tax including stock exchange transaction Following the sharp decline in the TSE tax. The indirect tax fell short of the budget target index, authorities introduced several policies to by about 20 percent in 2020/21 due to the impact support the capital market. To shore up the stock market, the authorities announced the “3+7 capital market package”8 in April 2021. Key elements of the package include allocation of additional funds 8 The package consists of (i) allocating one percent of the NDFI resources to the CMSF; (ii) lifting restrictions to capital market stabilization fund (CMSF) from the on capital market financial institutions to use banking NDFI and stock transfer taxes, lifting restrictions facilities; (iii) granting five-year residency for foreign on banks and NDFI direct investment in TSE, tax investors in the stock market; (iv) allocating 80 percent exemptions or deferrals for listed companies’ of the stock transfer tax in 2021/22 to the CMSF’s investment activities and share buybacks, and easing account; (v) tax exemption for companies that spend bank investment ring-fencing regulations. While some their accumulated profits on raising capital; (vi) allowing tax deferral for one year of 50 percent of purchasing of these interventions can help TSE’s stabilization their own or subsidiaries shares to support the in the short term, their potential inflationary impact market; (vii) extending the “law of removing barriers to and other ramification such as creating moral hazard production exemptions” to banks and credit institutions problems and risky investment behaviors need to be for three years, and allowing them to invest in the considered. capital market; (viii) providing the possibility of NDFI Despite the recent volatility of the TSE, the investing in the capital market; (ix) allowing the CMSF and capital market development fund to issue up to IRR stock market provided the highest nominal return 200 Trillion of debt with government guarantees and among other assets. The TSE in 2020/21 with more allocate these sources to market protection policies; than 150 percent return was higher than the yearly and (x) compensate the loss incurred by buyers of return in bank deposits, and investing in gold, FX, and government’s ETFs shares. 8 TSE Underwent a Large Fluctuation FIGURE 16 •  … yet Provided the Highest Return FIGURE 17 •  in 2020/21… among Other Assets in 2020/21 2,500 160 2,000 120 Thousands 1,500 Percent (y/y) 1,000 80 500 40 0 01/1/19 03/1/19 05/1/19 07/1/19 09/1/19 11/1/19 01/1/20 03/1/20 05/1/20 07/1/20 09/1/20 11/1/20 01/1/21 03/1/21 0 TSE Gold FX Real Bank Estate Deposits Tehran Stock Exchange Market Index (TEDPIX) Inflation Source: TSE. Source: TSE, CBI, and World Bank staff calculations. Oil Revenues Have Fallen to Historic FIGURE 18 •  …Leading to a Widening Fiscal FIGURE 19 •  Lows while Taxes Grew Modestly… Deficit 40 40 20 3 Share of total revenues, 20 35 15 10 Percent of GDP Percent of GDP 30 1 Growth, percent 0 25 5 percent –20 0 –1 20 –40 15 –5 –3 –60 10 –10 –15 –5 –80 5 –20 –7 –100 0 2015/16 2016/17 2017/18 2018/19 2019/20 9M-20/21 2015/16 2016/17 2017/18 2018/19 2019/20 9M-20/21 Oil share (RHS) Oil revenues Tax revenues Oil revenue growth (LHS) Other revenues Current expenditures Tax revenue growth (LHS) Capital expenditures Fiscal balance (RHS) Source: CBI, PBO, and World Bank staff calculations. Source: CBI, PBO, and World Bank staff calculations. of the pandemic on both import tax and sales and However, the increase in expenditures was mainly consumption tax. offset by inflation, and as such, meant that the gov- Higher current spending and COVID-19 ernment expenditures only marginally increased in related costs have led to an increase in govern- real terms. ment expenditures. Expenditures in nominal terms The government resorted to wide-scale grew faster in 2020/21 due to wage bill growth, pen- bond issuance, sales of assets, and drawdowns sion payment adjustments, new unemployment pay- on NDFI reserves for financing the deficit. The ments, and additional transfers. In response to the government started selling SOE shares via the stock pandemic, the government rolled out a number of market and issued bonds through CBI auctions. The new cash transfer programs and low interest loan fiscal deficit in 9M-20/21 was primarily financed packages to protect households and businesses through bond issuance (70 percent), followed by (see Box 2). As a result of these higher costs and sales of assets (15 percent) and withdrawals from lower revenues, the fiscal deficit is estimated to strategic reserves (8 percent). Disposal of financial have widened to over 6 percent of GDP in 2020/21. assets (mainly bond issuance) increased by over Recent Economic and Policy Developments 9 BOX 2  POLICY RESPONSES TO THE PANDEMIC Iran initiated several measures to counter the immediate economic impact of the COVID-19 crisis. The government’s initial rescue package was IRR 1000 Trillion (about 20 percent of budget, and 4 percent of GDP in 2020/21). A quarter of the package was allocated to cash transfers to households, the health sector, and the unemployment insurance fund, and the rest to provide low interest rate loans, through the banking system, to households and affected businesses. The NDFI was the financing source for the health sector and the unemployment insurance fund allocations. In addition to the initial package, in December 2020, the government announced another support package including four monthly cash transfers to vulnerable households (four bottom deciles) as well as additional low interest loans to households (about 0.5 percent of GDP). Other supporting measures included a moratorium on tax payments for a period of three months and relaxing the previous restrictions on trading the Justice Shares in the TSE, which potentially acted as a new income source for those in need. In addition, to protect the tenants, the government provided some subsidized loans to low-income tenants and imposed some caps on increasing rents as well as an extension of tenant agreements to three months after the pandemic.a Monetary policy was also leveraged as part of the pandemic response package. To support bank facilities to vulnerable households and affected businesses, the CBI temporarily reduced the required reserves and provided foreign currency at the official preferential rate for imports of medicine, medical equipment, and essential goods. It also temporarily waived penalties on non-performing loans. Bank loan repayments were extended by three months at the end of the loan duration period. The CBI also intervened in the foreign exchange market to stabilize the rial. The allocated resources were financed through government securities, the NDFI, and privatization proceeds. Due to the fall in oil revenues, the fiscal supports were mainly through the-below-the-‌line measures (i.e., those that do not affect primarily balances but debt) according to the latest fiscal data indicates. About Euro 1 billion from the resources of the NDFI were allocated to deal with the effects of the coronavirus outbreak. Out of this amount, according to the PBO’s report, as of Feb 2021, Euro 770 million was allocated to the ministry of health (89 percent), the unemployment insurance fund (9.8 percent), and the armed force (1 percent). Iran’s policy response was comparable to that of MENA and the upper middle income counterparts. The response included loans and guarantees (1.8 percent of GDP) and to the health sector and unemployment insurance fund (1 percent of GDP) as well as about 1 percent of GDP in cash transfer (above-the-line-measures). The World Bank assessment of fiscal policy measures for more than 200 countries shows that Iran’s response in terms of speed, predictability, cost control, and resilience to health measures ranks favorably among other countries but has a low rank in terms of scalability, abuse resistance, and reversibility.b FIGURE B2.1 • Governments All Over the World FIGURE B2.2 • Iran Average Performance of Deployed Unprecedented Fiscal Fiscal Policy Dimensions (policy Support to Face the Pandemic… assessment scores) 10 Targetability 1 Resilience to Health 0.8 Speed Percent of GDP Measures 0.6 5 0.4 Administrative 0.2 Abuse Resistance Complexity 0 0 Scalability Recoverability MENA Upper Iran Turkey Region Middle Income Predictability and Reversibility Cost Control Additional spending and forgone revenue Equity, loans, and guarantees Source: A Review of Fiscal Policy Responses to COVID-19, WBG. Note: Scores show the share of policies meeting each criterion. 0 indicates not Source: Fiscal Monitor Database of Country Fiscal Measures in Response to the meeting the criteria. The policies were scored objectively, without consideration of COVID-19 Pandemic, IMF and World Bank staff calculations. the country context. a The government COVID-19 response packages complement existing social protection programs including the Targeted Subsidy Reform Plan cash transfers (cover about 78 million people since 2010), Livelihood Support cash transfers (cover about 60 million since the November 2019 gasoline price increase), occasional transfers (e.g., for Ramadhan) as well as other public social assistance plans of Behzisti Organization and Imam Khomeini Relief Foundation (Komite Emdad) which focus on the most vulnerable households and people with disabilities. b The assessment is based on whether the governments met the criteria across nine dimensions, including targetability, speed, abuse resistance, affordability, predictability and cost control, scalability, reversibility, administrative complexity, and feasibility considering social distancing and contagion risks. The assessment does not consider fiscal space, implementation capacity, pre-existing spending and coverage gaps, and the cost of the policy in the determination of the appropriateness of a fiscal policy. 10 TABLE 1 • The 2021/22 Budget is Expansionary on All Components 2020/21 Law 2021/22 Law 2021/22 Law Growth (%) (IRR billion) (IRR billion) (US$ billion)a (relative to 2020/21 Law) Total Revenues 3,962,886 8,504,460 73.95 114.60 Current Revenues 2,887,991 4,548,990 39.6 57.5 Tax Revenues 2,038,535 3,327,789 28.9 63.2 Direct Taxes 871,006 1,805,888 15.7 107.3 Indirect Taxes 1,167,530 1,521,901 13.2 30.4 Other Revenues 849,456 1,221,201 10.6 43.8 Disposal of Non-Financial Assets 1,074,895 3,955,470 34.4 268.0 Oil 569,436 1,992,720 17.3 249.9 Others 505,459 1,962,750 17.1 288.3 Total Expenditures 5,240,136 10,951,809 95.2 109.0 Current Expenditures 4,360,316 9,189,164 79.9 110.7 Development Expenditures 879,821 1,762,645 15.3 100.3 Operational Balance –1,472,324 –4,640,174 –40.3 215.2 Budget Balance –1,277,250 –2,447,349 –21.3 91.6 Disposal of Financial Assets 1,747,250 4,274,480 37.2 144.6 Acquisition of Financial Assets 470,000 1,827,400 15.9 288.8 Net Disposal of Financial Assets 1,277,250 2,447,080 21.3 91.6 Government General Resources 5,710,136 12,779,209 111.1 123.8 Source: PBO and World Bank staff calculations. Note: a Converted using the budget proposal’s ER of 115,000 IRR/US$. 100 percent in 2020/21. Financing through the higher than the current official ER of 42,000 IRR/ TSE—a combination of bond issuance and sales of US$. The public sector wages and pensions are to SOE shares—in 9M-20/21 was four times the size of increase by 25 percent—both imply real wage cuts these financing operations of 2019/20. given last year’s inflation and current inflation projec- Following a prolonged review in the Parlia- tions for this year. The government proposes a small- ment, the 2021/22 budget law was approved in er allocation of US$ 8 billion (down from US$ 10.5 the last days of 2020/21. The 2021/22 budget law billion in 2020/21) at the subsidized rate of 42,000 proposes an expansionary budget of about 58 per- IRR/USD for the importation of essential goods and cent compared to that of the previous year budget medicine.9 which could expand by 124 percent if revenues meet To improve electricity consumption, the the first six-month target. The bill assumes an ambi- government introduced a series of price adjust- tious oil export volume of 2.3 mbpd, far exceed the ments. Following widescale outages during the realized oil exports in 2020/21, and an oil price of peak consumption in the summer, electricity tariffs US$40/bbl. The oil revenue fiscal rule is adjusted to keep the share of NDFI from the first 1 mbpd of oil ex- 9 As part of the draft budget, the government requested port proceeds at 20 percent but increase to 38 per- discretion for scrapping the allocated ER subsidy in cent for exports beyond this amount. The implicit ER 2021/22 and allocate the resources to further social assumed in the Bill is 115,000 IRR/US$, substantially protection measures and capital expenditures. Recent Economic and Policy Developments 11 BOX 3  THE NEW GOVERNMENT SECURITY ISSUANCE Faced with an unprecedented budget deficit, the government turned to domestic financing sources and embarked on large-scale bond issuance. The Central bank of Iran (CBI) started holding auctions on behalf of the Ministry of Finance in the primary market for the first time in June 2020. The process has helped the government to partly finance the deficit. During June 2020 to April 2021, about IRR 1,300 trillion (about 4 percent of GDP), of government debt securities, were purchased by market participants (Figure B3.1). The bonds were mostly with maturities of 1–4 years with bi-annual payments. Figure B3.2 shows the maturity dates of issued securities. The bonds’ maturity profile indicates the servicing and rollover costs in the coming years and highlights the need for a consolidated medium-term debt strategy. The more favorable demand in the initial phase of issuance changed in recent months. While early issuances hovered around cut-off market interest rates of 15 percent, the government was slow in accepting asked prices at the time. After overall economic conditions worsened and prospects for alternative financing sources dimmed, the government increased the rates to 22 percent in the last two auctions in March 2021, closer to the CBI’s interest ceiling corridor. To ease the pressure, the CBI has intervened and bought bonds through open market operation to provide liquidity to market participants and maintain its interest rate corridor (the upper limit is CBI’s lending rate to banks and the lower limit is the deposit rate on banks’ deposits with the CBI). Debt issuance should be part of a comprehensive medium-term debt strategy (MTDS). Such a strategy should consider macroeconomic constraints and the level of development of the different components of the domestic financial market. The MTDS would support the development of the domestic debt market and facilitate a transparent approach to domestic borrowing and avoid volatility in the market, particularly where the market depth is low and is in the early stages of development. FIGURE B3.1 • Government Securities Weekly FIGURE B3.2 • Maturities of Government Auctions Securities 100 25 70 80 20 60 Trillion IRR 60 15 50 Percent Trillion IRR 40 10 40 20 5 30 0 0 20 06/2/20 06/30/20 28/07/20 08/25/20 09/22/20 10/27/20 11/24/20 12/22/20 01/19/21 02/16/21 03/16/21 10 0 08/01/21 12/01/21 04/01/22 08/01/22 12/01/22 04/01/23 08/01/23 12/01/23 04/01/24 08/01/24 12/01/24 04/01/25 08/01/25 12/01/25 Banks (LHS) Others (LHS) Effective Interest Rate (RHS) Source: CBI and World Bank staff calculations. Source: CBI, and MEAF. Note: The calculated figures do not include interest payments. for commercial and residential users were increased. price of electricity for some industries (including Residential electricity tariffs have increased by steel, aluminum, copper, basic metals, metal miner- 7 percent on average (considerably below inflation). als, and refineries and petrochemical units). While Residential high-consumption users (consuming the electricity tariff increase can help cover part of more than 300 kWh per month) faced a 23 percent the supply costs, they remain well below inflation and increase and low consumption households (consum- thus have a small effect on electricity companies’ ing less than 80 kWh per month) were incentivized by (mainly SOEs) balance sheets. free electricity. Cryptocurrency miners faced double In an attempt to remedy the housing electricity tariffs, as the electricity outages were part- shortage and soaring rent prices, the government ly attributed to their mining activities. Furthermore, in levied taxes on vacant homes. House prices rose March 2020, the Parliament quadrupled the average rapidly in Iran (e.g., about 80 percent in Tehran in 12 2020/21) and rents faced a sharp increase (e.g., FIGURE 20 • Labor Market Gender Gaps Remain 40 percent increase in 9M-20/21 (y/y)). To control High (Q4-20/21) prices, the government imposed taxes on vacant 80 properties. The tax rate will be higher (double) for empty 70 60 real estate properties under corporations’ ownership 50 Percent 40 and the rate will increase if the house remains empty 30 for more years. In addition, the government provided 20 10 some subsidized rental assistance loans to low- 0 Total Men Women Total Men Women Total Men Women Total Men Women income tenants and imposed caps on rent increases. Labor force Unemployment Youth Graduates participation rate rate unemployment unemployment Labor Market and Jobs rate rate Source: SCI. The worsening of the economic situation contributed to a deterioration of employment and labor force participation in 2020/21. Despite an years of recession. Over the last decades, even additional 0.7 million people entering the working-age with an exceptionally low participation rate (averaged population over the past year, the active population 42 percent), the unemployment rate has consistently declined by about 1.4 million as hope for finding jobs been in the double digits while underemployment was faded. In 2020/21, over a million jobs were lost mainly also high at 10 percent on average. The unemployment due to the pandemic, especially in the service sector rates are disproportionally worse for females, youth, (accounting for 75 percent of job losses). Women and the educated population with an average of bore the brunt of job losses accounting for 60 percent 23.6, 26.4, and 14.1 percent, respectively over the of net job losses. However, because of this decline past decade. GDP growth has been relatively jobless in participation, the unemployment rate dropped to meaning that the country failed to provide enough job 9.6 percent in 2020/21 (1 pp decline), the lowest rate opportunities to its highly educated young population. during the last two decades. Faced with limited job opportunities, the large cohort of The economic recession and the pan- Iranians born in the 1980s had previously postponed demic have had a disproportionate gender la- entry through continued education and training. Due bor market impact. The labor force participation to long-term structural issues in the labor market, rate declined by 2.8 pp to 41.3 in 2020/21, mainly many job seekers are either reluctant to enter the job driven by a reduction in the female participation rate. market or exited as they lost hopes for finding jobs. The female participation rate has fallen to a low rate Even during the last period of a moderate increase of 13.9 percent, far below the world and MENA av- in labor market indicators (2014/15 to 2019/20), the erages (47 and 20 percent, respectively). Even with majority of the created jobs were self-employed and a much lower participation rate, the female unem- in small enterprises of less than 4 employees in the ployment rate is twice as large as males (15.6 per- service sector which was quickly reversed due to the cent compared to that of men by 8.4 percent). The pandemic (see Behnia et al. 2021). gender gap is even wider among the youth and ed- ucated. The female youth unemployment rate is 36 percent, much lower than the rate of their male 10 This significant gender gap in labor market outcomes counterparts (21.2 percent). Furthermore, 22.8 per- has also been impacted by policies limiting female cent of women with university degrees are unem- employment such as gender quotas in the public sector employment and university students in specific majors. ployed while this number is 10.4 percent for male Women entering the labor force after the imposition of graduates (Figure 20).10 these quotas face fewer labor market and educational Iran’s labor market challenges are structural opportunities and are less likely to be employed. See issues that have been amplified by the recent Moeeni and Tanaka (2020). Recent Economic and Policy Developments 13 2 OUTLOOK AND RISKS Outlook shorter maturities, would increase interest payments and amortization costs. Further government debt Iran’s economic outlook hinges on the evolution issuance and sales of public assets could have negative of the COVID-19 pandemic, the pace of global spillovers to the stock market and place additional economic recovery, and the possibility of stress on the undercapitalized banking sector. sanctions relief. The recovery is projected to be slow Despite a moderate economic rebound, and gradual due to the resurgence of new variants economic pressures on poor households will and containment measures, slow vaccination rollouts, continue. Inflation is forecast to decelerate but and weak demand from regional trading partners. remain above 20 percent on average over the medium Non-oil GDP is projected to return to its pre-pandemic term. With limited fiscal space to support the poor average while oil production is forecast to modestly and high inflation, economic pressures on the poor bounce back with higher demand. If US sanctions are unlikely to subside, but a better targeting of cash on Iran’s economy are removed, this could lead transfers could free up resources for additional social to substantially higher growths in both oil and non- protection measures.12 oil sectors. However, insufficient investment11 in the oil sector constrains Iran’s oil production capacity 11 Iran and China signed a strategic 25-year agreement in in the medium term, even in the absence of US March 2021. The “Comprehensive Strategic Partnership” sanctions. Furthermore, given the recent large global aims to expand political, economic, and cultural investments in renewable energy and other climate cooperation between the two countries. The agreement change mitigation measures the long-term prospects could help Iran’s external account financing and reverse for oil demand are uncertain. the recent years’ decline in investment rates. In the absence of a pickup in oil revenues, 12 Mahmoodzadeh et al. (2019) show that in 2019/20, the total amount of explicit subsidies (including budget and the fiscal deficit is projected to remain high over off-budget items) and hidden subsidies are equal to IRR the medium term. A slow economic recovery would 8900 Trillion which is almost 2.2 times of the budget. translate into similarly slow growth in non-oil revenues. In addition, the government-guaranteed facilities are Higher reliance on bond issuance, especially with estimated to be IRR 720 Trillion. Thus, the subsidy paid 15 Risks and Opportunities authorities can build on these positive experiences and shift towards indirect interventions and improve Risks to Iran’s economic outlook relate to the re- the health and the depth of the financial sector. covery path from the pandemic and the prospects Achieving the inflation target requires independence of geopolitical developments. The pace of vaccina- of the central bank, reducing fiscal dominance, tion (purchase and distribution), a resurgence in the unifying the multiple exchange rates, and shifting to number of cases such as those from new COVID-19 a more flexible exchange rate regime (see Mazarei, strains, and subsequent lockdown measures could 2019; Zahedi and Azadi, 2018). weigh down on economic activity and prolong the The economy urgently needs a recovery acute phase of the crisis. The burden of further eco- plan through comprehensive and coordinated nomic deterioration would be felt the most by the poor macro-fiscal reforms. Overcoming many of Iran’s and vulnerable and increase poverty. Upside risks re- chronic economic challenges including high inflation late to a faster than expected vaccination drive and calls for an overhaul of Iran’s fiscal framework. A sustained higher oil prices. If there is a breakthrough sustainable and inclusive growth model would require in the ongoing nuclear negotiations, US sanctions re- urgent reforms including in the areas of energy lief, could significantly boost economic activity and subsidies, pension system reforms, water scarcity improve Iran’s fiscal balance. The outcome of the up- management, and comprehensive banking system coming presidential elections (due to be held in June restructuring. Growth-enhancing reforms such as 2021) will also be a crucial factor in the direction of investment in green infrastructure, digital economy, Iran’s economy and the path of economic reforms. and renewable energy can help lead the economy out The continuation of current monetary of the pandemic and create much-needed jobs. After reforms can help control inflationary pressures the sharp contractions in recent years along with high and improve banking sector health. Recently, unemployment, investment in infrastructure such as the central bank embarked on several fundamental railroads can boost the economy, create jobs, reduce reforms to improve monetary policy, including the emissions, and enhance trade. Greater focus on the introduction of inflation targeting. The CBI also held digital economy could help catalyze diversification weekly auctions for government securities, enabling by, utilizing the full potential of Iran’s highly educated the government to finance about 70 percent of the and tech-savvy young population and transform the 2019/20 budget deficit. Partly due to limited access economy into a regional tech hub. to its reserves, the CBI’s intervention in the foreign exchange market was also subdued. Despite an ambitious inflation target (22 percent) and a lack of fully developed monetary institutions and regulations, for each individual is estimated to be 20 times the current the new monetary policy approach helped the CBI to monthly cash transfer. These numbers indicate that resist pressures to accommodate fiscal needs and better and more effective allocation of these resources transfer pressures to the banking sector. The monetary can improve the well-being of the vulnerable population. 16 References Moeeni S., and A. Tanaka, (2020), The Effects of Labor Market Opportunities on Education: The Behnia, M., and F. Azizkhani, (2021), A review of Iranian Case of a Female Hiring Ceiling in Iran. labor market developments from 2014/15 Ritchie H., E. Ortiz-Ospina, D. Beltekian, E. Mathieu, to 2019/20, Deputy Economic Research, J. Hasell, B. Macdonald, C. Giattino, C. Appel, Parliament Research Center (in Persian) L. Rodés-Guirao, and M. Roser (2020), International Monetary Fund (2021), Policy Coronavirus Pandemic (COVID-19). Published Responses to Covid-19, available at https:// online at OurWorldInData.org. Retrieved from: www.imf.org/en/Topics/imf-and-covid19/ ‘https://ourworldindata.org/coronavirus’ Policy-Responses-to-COVID-19 [Online Resource] Mahmoodzadeh, M. , A. Abdollahzadeh, N. Demneh, Utz, R., J. Massad, and E. Lacey (2021), A Review of and F. Hajiha (2019), Hidden Subsidies in Iran, Fiscal Policy Responses to COVID-19. Fiscal Deputy for Economic Affair, Plan and Budget Policy and Sustainable Growth Unit, MTI, World Organization (in Persian) Bank Group. March 2021. Mazarei, A., (2019). Iran Has a Slow-Motion Banking Zahedi R., and P. Azadi, (2018), Central Banking in Crisis, Policy Briefs PB19-8, Peterson Institute Iran, Working Paper 5, Stanford Iran 2040 for International Economics. Project, Stanford University. Outlook and Risks 17 TABLE 2 • Iran: Selected Economic and Financial Indicators, 2018/19–2023/24 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 Act. Act. Est. Proj. Proj. Proj. Real sector (annual percentage change, unless otherwise stated) Real GDP at factor cost –5.4 –6.5 1.6 2.1 2.2 2.3 Real GDP per capita –7.2 –7.9 0.5 1.0 1.1 1.2 Real non-oil GDP –1.8 1.1 1.4 1.7 1.8 1.8 Total crude oil production (million barrels/day) 3.6 2.4 2.4 2.5 2.7 2.8 Crude oil, average price (US$/bbl) 68.3 61.4 41.3 56.0 60.0 61.0 Agriculture –0.9 8.8 4.0 4.0 4.2 4.2 Industry –11.0 –15.9 4.3 2.9 3.3 3.7 Services –0.7 –0.5 –0.7 1.2 1.0 0.8 Money and prices CPI Inflation (p.a.) 31.1 41.3 36.9 29.3 21.7 18.9 Monetary base (MB) 24.2 32.8 28.9 n/a n/a n/a Broad money (M2) 23.1 31.3 40.6 n/a n/a n/a Banking system credit 40.4 39.9 47.9 n/a n/a n/a Nominal interest rate (percent) 19.7 18.9 17.5 n/a n/a n/a Nominal exchange rate, parallel market (IRR/USD) 103,378 129,185 227,792 n/a n/a n/a (percent of GDP, unless otherwise stated) Investment & saving Gross capital formation 34.7 35.1 40.7 41.0 40.8 41.1 Gross national savings 40.6 35.7 39.9 41.8 41.9 42.4 Government finance Total revenues 15.4 11.2 8.6 8.7 8.8 9.0 Tax revenues 6.7 5.8 5.9 6.0 5.9 6.1 Direct taxes 3.4 3.4 3.4 3.4 3.3 3.3 Indirect taxes 3.3 2.4 2.5 2.6 2.6 2.8 Total expenditures 17.0 14.9 14.9 15.4 15.8 16.0 Current expenditures 14.5 12.5 12.6 12.6 12.4 12.4 Primary Balance –1.3 –3.0 –5.3 –5.2 –5.0 –4.9 Net lending/borrowing (overall balance) –1.6 –3.7 –6.3 –6.7 –7.0 –7.0 Government Debt 38.5 47.9 50.3 52.1 54.7 57.4 External sector Current account 5.9 0.6 –0.8 0.8 1.1 1.3 Net exports 5.5 0.5 –0.7 –0.6 –0.5 –0.4 Export of goods and services 22.7 12.1 7.2 6.9 7.1 7.5 (continued on next page) 18 TABLE 2 • Iran: Selected Economic and Financial Indicators, 2018/19–2023/24 (continued) 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 Act. Act. Est. Proj. Proj. Proj. Import of goods and services 17.1 11.6 7.9 7.5 7.6 7.9 Population and labor market Population (million) 82.08 83.08 84.04 84.97 85.87 86.74 Participation rate (percent) 44.5 44.1 41.3 n/a n/a n/a Unemployment rate (percent) 12.2 10.7 9.6 n/a n/a n/a Memorandum Items: Nominal GDP (IRR Billion) 19,128,840 24,412,570 33,058,141 43,935,200 54,872,887 66,859,113 Source: Iranian authorities and World Bank staff estimates and projections. Outlook and Risks 19 SPECIAL FOCUS ON POVERTY AND INEQUALITY IN IRAN AT THE OUTSET OF THE COVID-19 PANDEMIC 13 T his chapter updates monetary poverty esti- continued to fall, despite large drops in GDP growth in mates presented in previous Iran Economic 2009/1014 and 2012/13, and to increase after 2013/14 Monitor reports using the latest official data when the overall GDP growth trend was small but pos- covering the period of March 2019 to March 2020. itive (Figure 21). Two factors have been important to Poverty is measured using the international poverty explain this apparent disconnect.15 First, government line of USD 5.5 (2011 purchasing power parity (PPP)). It shows that the pandemic struck when many house- holds, especially those at the bottom of the welfare 13 This section is a product of the Poverty and Equity Global distribution, were already struggling with the econom- Practice. It has been written by Laura Rodriguez (Young ic downturn and high inflation of recent years. Professional) and Mohammad Mostafavi-Dehzooei (Consultant). Federica Alfani (Consultant) provided inputs for the box on COVID-19 and Inequality. Introduction 14 As in the rest of this report, numbers on Iran in this note are based on the Persian calendar which bridges two years in the Gregorian calendar, starting and ending in March. From a historic perspective, there was an apparent 15 Other potential explanations include a lagged impact disconnect between poverty trends and macro- of growth and the lack of a ‘trickle-down’ of aggregate economic performance in Iran. For instance, poverty growth to the poorer households of a country. 21 GDP (total and non-oil) Growth FIGURE 21 •  The latest release of official data from the Rates and Poverty Headcount Rates Household Expenditure and Income Survey (HEIS) (consumption per capita) at USD 2019/20, collected just before the pandemic 5.5 2011 PPP began, presents an opportunity to analyze the 15 15 situation and vulnerabilities of Iranian households Poverty headcount (%) 12 10 at the outset of this crisis. GDP growth (%) 9 5 6 0 Poverty and Inequality Trends in Iran 3 –5 2018/19–2019/20 0 –10 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Before the COVID-19 pandemic, households were already feeling the economic downturn; on aver- GDP growth (% change) (RHS) Non-oil GDP growth (% change) (RHS) age, consumption per capita fell by –5.6 percent Poverty rate at $5.5 2011 PPP USD (LHS) between 2018/19 and 2019/20. Growth incidence Source: World Bank calculations based on HEIS and Central Bank of Iran. curves (GIC) in Figure 22 show how much real house- hold consumption or income per capita changed from one year to the next across the population distribution, policies have helped to counterbalance some of the from the poorest to the richest percentile. In the two downturns, for example, in 2010 when a near universal previous years, the bottom 40 percent of the popula- cash transfer was introduced to alleviate the impacts tion experienced the slowest growth (2017/18) or lost of the removal of residential energy subsidies (Salehi- the most when consumption fell for all households Isfahani et al., 2015; Hayati et al., 2018). Second, other (2018/19) (World Bank, 2020a). In 2019/20, the over- macroeconomic indicators, particularly high inflation, all negative consumption growth trend persisted (on have had a disproportionate impact on the fates of the average, per capita consumption fell by 5.6 percent), poor. A high inflation period in 2013, and most recently but this time the fall was felt more evenly across all since 2018, have disproportionally affected poorer households, with a larger drop for the top 60 percent households, halving the real value of social assistance of the population (–5.7 percent compared to –5.0 per- transfers between 2012/13 and 2016/17 (Hayati et al., cent for the bottom 40 percent of the population). The 2018) and raising the cost of their consumption basket pattern is similar when looking at incomes instead of (Rodriguez and Atamanov, 2021). consumption; there was a negative income growth In recent years, before the COVID-19 rate across the distribution (on average –7.7 percent), pandemic, Iran was amidst economic uncertainty but the bottom 40 percent were affected slightly less and shocks. These macroeconomic trends raise than the richer income groups (–7.0 and –7.9 percent, concerns about the welfare of Iranians and their respectively). ability to withstand the shock of the pandemic. As a consequence of high inflation and Iran has been in an economic downturn since the economic contraction, poverty continued to rise. reintroduction of US sanctions in 2018: the growth rate As incomes and consumption fell, the poverty rate (at in GDP per capita was –7.0 percent in 2018/19 and the international poverty line of USD 5.5 in 2011 PPP)16 –7.7 percent in 2019/20, while inflation spiraled with the sharp currency depreciation. Meanwhile, poverty has been rising (Figure 21). During the last year, 16 The poverty measurement in this chapter follows the although some economic recovery is expected (GDP methodology of previous Iran Economic Monitor reports and well-established international standards. In the growth is expected to be 1.7), the global pandemic absence of an official poverty line, the poverty threshold continued to fuel inflation; the consumer price index is the international upper middle-class poverty line of (CPI) reached its highest month-to-month increase in USD 5.5 PPP per day. The chapter uses both household almost 2 years in October 2020. consumption and household income (expressed per 22 Anonymous Growth Incidence Curves 2018/19–2019/20 FIGURE 22 •  Growth Rates of Annualized Real Expenditure (a) and Real Income (b) Per Capita by Percentiles (%) 5 5 Annual growth rate (%) Annual growth rate (%) 0 0 –5 –5 –10 –10 –15 –15 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 Percentiles of expenditure per capita Percentiles of income per capita Source: Authors’ calculations based on HEIS 2018/19 and 2019/20. Headcount Poverty Rates FIGURE 23 •  Gini Index (consumption per capita) FIGURE 24 •  (consumption per capita) at USD National and by Rural/Urban Areas, 5.5 2011 PPP National and by Rural/ 2016/17–2019/20 Urban Areas, 2016/17–2019/20 37.1 37.1 37.8 37.2 30 38 24.2 36 35.6 25 22.7 22.2 28.4 34.8 34.8 20.1 34.1 20 16.4 17.6 34 34.9 14.7 14.3 33.9 33.9 15 11.6 12.3 32 33.3 10.8 10 30 31.3 31.4 31.6 8.3 9.7 29.8 5 7.5 7.0 28 0 26 2016/17 2017/18 2018/19 2019/20 2016/17 2017/18 2018/19 2019/20 National Urban National Urban Rural National – income p.c. Rural National – income p.c. Source: Authors’ calculations based on HEIS 2016/17–2019/20. Source: Authors’ calculations based on HEIS 2016/17–2019/20. rose from 12.3 in 2018/19 to 14.3 in 2019/20, when within rural areas continued to rise modestly in measured by the consumption per capita measure, 2019/20. The small drop in national inequality is not and from 17.6 to 20.1, when measured by the income a positive development. Firstly, as seen in the GIC per capita measure (Figure 23). Urban and rural earlier, the drop occurred because incomes and poverty followed similar trajectories, although rural poverty remains considerably higher and rose faster. person) to measure welfare or living standards. It follows Urban poverty stood at 9.7 percent in 2019/20, standard procedures to construct the aggregates and compared to 28.4 in rural areas. implement price adjustments to ensure comparability The recent increase in inequality stalled in within survey years and across them (Deaton and Zaidi, 2019/20, but this is hardly good news. Inequality 2002; Haughton and Khandker, 2009). In the absence of a nationally defined poverty line,the minimum level below measured by the Gini index had also been increasing which a person is considered to be poor, the chapter since 2016/17, but the rise stalled in 2019/20 when presents figures based on the international upper middle- there was a slight reversal to the 2017/18 level class line of USD 5.50 expressed in 2011 Purchasing (Figure 24). Despite the halt in urban areas, inequality Power Parity (PPP) terms (Jolliffe and Prydz, 2016). SPECIAL FOCUS ON POVERTY AND INEQUALITY IN IRAN AT THE OUTSET OF THE COVID-19 PANDEMIC 23 Headcount Poverty Rates (consumption per capita) at USD 5 and USD 10 2011 PPP by FIGURE 25 •  Province, 2019/20 80 70 60 50 40 30 20 10 0 Alborz Mazandaran Kermanshah Isfahan Tehran Gilan Qazvin Markazi Zanjan Yazd Ilam Kurdestan Bushehr Qom Ardebil Bakhtiari Hamadan Semnan Khuzestan Khorasan Razavi E. Azarbaijan Lorestan Fars N. Khorasan Kohkiloyeh W. Azarbaijan Hormozgan Golestan S. Khorasan Kerman Sistan At $10 PPP At $5.5 PPP Source: Authors’ calculations based on HEIS 2019/20. consumption fell faster for the top of the distribution, changes in the various income sources (Azevedo, rather than because they grew faster for the bottom. Sanfelice and Nguyen, 2012).18 Total income consists Secondly, it is unlikely that this reduction in inequality of labor income, cash and other transfers, pensions, will continue. Simulation analysis of the impacts of the and other incomes (property income and income from COVID-19 pandemic and inflation in Iran point to rising products sold from home).19 The main contributors to inequality in 2020/21, given the disproportionate poverty changes are the same as in previous years affectation of incomes for informal workers in services (see World Bank, 2020a). The fall in labor incomes and high-contact jobs, who are concentrated among accounted for 1.5 of the 2.5 percentage points total the poorest deciles (Box 1). increase in poverty between 2018/19 and 2019/20 National poverty numbers hide large within- (Figure 26). The continued erosion in the real value of country variations. Rural areas and the Southeast17 cash transfers was the second-largest contributor to have a much higher incidence of poverty. The poor the poverty increase. This seemingly counterintuitive in Iran are located primarily in rural areas; in all the effect of cash transfers on poverty can be explained regions, the rural poverty rates are significantly higher by their declining real value due to high inflation20 than those in urban areas (Figure 28). Poverty is also and because any change in these transfers affects heavily concentrated in the Southeast provinces of the country; the two with the highest poverty rates are located there: close to two-thirds of the people in 17 Provinces are grouped into regions. See note in Figure Sistan and Baluchestan are poor, and the same is true 28 Headcount poverty rates (consumption per capita) at for 40 percent of the population in Kerman (Figure 25). USD 5.5 2011 PPP by region, 2019/20. 18 The exercise is conducted using income poverty Meanwhile, poverty is 6 percent in the capital Tehran, and inequality. Although the indices are higher than and below 5 percent in the least poor provinces of consumption-based ones, the trends are qualitatively Alborz, Mazandaran and Kermanshah. similar. The welfare of the poor and vulnerable is 19 The income aggregate is spatially deflated to account closely tied to developments in labor incomes, for the difference in prices across different areas. A the fall of which accounted for more than half weighted spatial deflator was constructed by combining rent and food deflators. Shares of rent in the total welfare of the increase in poverty between 2018/19– aggregate were used to construct a weighted deflator for 2019/20. One way to better understand the each household. underlying factors behind observed changes in 20 The nominal amount of transfers was kept constant from poverty and inequality is to decompose them into 2018/19 to 2019/20. 24 Sources of Income Poverty Changes FIGURE 26 •  Sources of Income Inequality FIGURE 27 •  (USD 5.5 2011 PPP poverty line), Changes (Gini coefficient), 2018/19–2019/20 2018/19–2019/20 (percentage points) (percentage points) 3 1 Percentage points 2 0.5 Gini points 1 0 –0.5 0 –1 –1 Share of adults Employment Labor income Cash transfers Other transfers Pensions Other income Total change in inequality Share of adults Employment Labor income Cash transfers Other transfers Pensions Other income Source: Authors’ calculations based on HEIS 2018/19 and 2019/20. Total change in poverty Source: Authors’ calculations based on HEIS 2016/17–2019/20. the poor disproportionally more, as they comprise a Headcount Poverty Rates FIGURE 28 •  larger share of their household income. (consumption per capita) at USD 5.5 2011 PPP by Region, 2019/20 Pensions and labor income were the main contributors to the small decline in inequality. 70 60 Although only a small share of poor Iranians received 50 some pension (2.7 percent in the bottom quintile), this 40 source of income was among the few that slightly rose 30 20 in 2019/20 (1.2% on average and 3.6% for the bottom 10 40 percent), contributing to a decline in inequality. In 0 Tehran metro Caspian Northwest Northeast Central Southeast Persian Gulf Zagros contrast, the negative contribution of labor income to the inequality was not because these incomes grew, but because their decline was slightly larger for the top 60 percent of the population compared to the Region Rural Urban bottom 40 percent. The inequality increasing effect of cash transfers is again explained by the erosion Source: Authors’ calculations based on HEIS 2019/20. Note: Provinces are grouped in the following regions: Tehran metro (Urban parts of of their real value due to inflation, which was more Tehran and Alborz); Caspian (Golestan, Gilan, Mazandaran); Northwest (East and West pronounced for the poor. Azarbaijan, Zanjan, Ardebil); Northeast (Khorasan Razavi, Semnan, North and South Khorasan); Central (Rural parts of Tehran and Alborz, Qom, Qazvin, Markazi, Fars, Despite relatively moderate poverty levels Isfahan); Southeast (Kerman, Sistan and Baluchestan, Yazd); Persian Gulf (Khuzestan, Bushehr, Hormozgan); Zagros (Kermanshah, Kurdestan, Hamadan, Bakhtiari, for an upper-middle income country, many Lorestan, Ilam, Kohkiloyeh). Iranians were living closely above the poverty line at the outset of the pandemic. Figure 29 shows the distribution of the rural and urban populations considered a threshold for a global middle-class line ranked by household consumption per capita. The (e.g., Lopez-Calva and Ortiz-Juarez, 2014). bulk of the population, especially the rural one, lived Consequently, there was a sizeable group with a consumption level close to the poverty line of of vulnerable households in an insecure economic USD 5.5 (2011 PPP), as indicated by the mode of the situation. It is useful to divide the population into distribution being near this value. Most of the urban quintiles according to their welfare level (consumption population was concentrated above the poverty per capita) to examine the characteristics of the different line but still below USD 10 (2011 PPP), sometimes segments. The poor are in the bottom quintile, while SPECIAL FOCUS ON POVERTY AND INEQUALITY IN IRAN AT THE OUTSET OF THE COVID-19 PANDEMIC 25 Distribution of Consumption Per FIGURE 29 •  both sources significantly affected by the pandemic Capita (USD 2011 PPP) by Rural and and high inflation. But the vulnerable relied more on Urban Areas, 2019/20 self-employment, which represented a third of their income (compared to a fifth of the poor’s income), than 0.1 on government cash transfers, which represented 10 percent of their income (compared to 20 percent among the poor), making them more at risk of income losses 0.05 during the pandemic and less likely to benefit from government assistance. Lower educated households were more likely to be among the poor and vulnerable 0 Pov. line $10 alike (Figure 30). Female-headed and larger households ($5.5) with more dependents were common among the Per capita expenditure (2011 PPP/person/day) Rural Urban poor but less so among the vulnerable (Figure 31). Pre-pandemic, poverty had been steadily Source: Authors’ calculations based on HEIS 2019/20. rising in Iran and many households who were Note: Provinces are grouped in the following regions: Tehran metro (Urban parts of Tehran and Alborz); Caspian (Golestan, Gilan, Mazandaran); Northwest (East and West not necessarily poor were also struggling. The Azarbaijan, Zanjan, Ardebil); Northeast (Khorasan Razavi, Semnan, North and South COVID-19 pandemic will substantially raise poverty Khorasan); Central (Rural parts of Tehran and Alborz, Qom, Qazvin, Markazi, Fars, Isfahan); Southeast (Kerman, Sistan and Baluchestan, Yazd); Persian Gulf (Khuzestan, and amplify disparities in the country. In this Bushehr, Hormozgan); Zagros (Kermanshah, Kurdestan, Hamadan, Bakhtiari, Lorestan, Ilam, Kohkiloyeh). context, the need to support the most vulnerable Iranians is significant. The latest official household survey data from the 2019/20 HEIS shows that the those above the poverty line but potentially vulnerable pandemic struck when many households were already to shocks are in the second quintile. In 2019/20, their struggling with the economic downturn and cost of median consumption per capita per day was USD 7.6 living increases of recent years. While the extent of the (2011 PPP), only marginally above that of the poorest impacts will not be fully known until new data collected quintile (USD 4.8 in 2011 PPP) and the poverty line (USD during and after the pandemic becomes available, the 5.5 in 2011 PPP). The composition of their household outlook is bleak. With many Iranians already living income was similar to that of the poor, with a large share closely above the poverty line and vulnerable to derived from employment or transfers (Figure B4.3), income fluctuations and shocks, poverty is expected Head of Household’s Level of FIGURE 30 •  Female Headed Households and FIGURE 31 •  Education by Quintile, 2019/20 Household Size by Quintile, 2019/20 100 10 5 80 8 4 Number of people 60 6 Percent 3 40 2 4 20 1 2 0 0 0 Poorest 2 3 4 Richest Poorest 2 3 4 Richest quintile quintile quintile quintile Illiterate Primary Female head (RHS) Household size (LHS) Secondary Some college or above Number of children (LHS) Source: Authors’ calculations based on HEIS 2019/20. Source: Authors’ calculations based on HEIS 2019/20. 26 BOX 4  COVID-19 AND INEQUALITY IN THE MIDDLE EAST AND NORTH AFRICA (MENA) AND IRAN The socioeconomic effects of the COVID-19 pandemic are unprecedented. Beyond the average impact, what has received less attention is that its consequences are borne unequally. Across the globe, the negative effects are being disproportionally borne by those who, pre-pandemic, were already disadvantaged and vulnerable (Hill and Narayan, 2020; Oxfam International, 2021). This Box focuses on the inequality effects of COVID-19 in the Middle East and North Africa (MENA) region and in Iran specifically. The number of poor in the MENA region is estimated to increase by at least 3 million people. The COVID-19 outbreak exacerbated a series of problems that characterized the region before the crisis, such as high shares of inactivity especially among the youth, inequality in education, high levels of informality, and large gaps in economic opportunities for women. The pandemic is the fourth crisis to hit the region in the past decade, after the Arab uprisings, the 2014–2016 decline in oil prices, and the 2019 resurgence of protests in countries that had escaped the first wave in 2010–2011 (Yahya, 2020). It deserves special consideration, because of its overall impact, and particularly because of its distributional consequences. Rising inequality reduces the scope for a rapid recovery as inequality is detrimental to economic growth (Madsen et al., 2018). Moreover, the perception that the better off navigate the pandemic relatively unscathed while the most vulnerable are left coping with the brunt of its impact, deepens societal stresses. It reinforces the need to invest in restoring social contracts, which in the region were already being challenged by low levels of trust in public institutions and high levels of life dissatisfaction. There are two main reasons why inequality increases due to COVID-19. First, the health of poor and vulnerable citizens is affected more by the virus as they have greater exposure, are more likely to have underlying health conditions and fewer treatment options. Poor households across the region tend to be larger, multigenerational, and poor people are more likely to be engaged in the informal sector and in activities with intensive human interaction (food preparation, transport, construction), all risk factors for COVID-19. Second, the economic effects of COVID-19 affect the poor and vulnerable disproportionately too. Many statistical agencies started collecting data to assess the socioeconomic impacts of COVID-19 on households. The case of Tunisia, where five rounds of a phone survey were implemented between April and October 2020, is illustrative. Poor and vulnerable households were more likely to report a deterioration in welfare relative to the month before the interview (Alfani et al., 2021). The probability of a respondent declaring a worsening in living standards was positively correlated with a lower education level and with being younger, as well as with not being employed, being self-employed, or a contributing family worker at the time of the survey (compared to someone working as a civil servant) (Figure B4.1). A private sector employee receiving a partial salary, or no salary at all, also had a higher probability of reporting lower living standards than a civil servant receiving a full salary (38.5 and 19.5 percent, respectively). Similarly, respondents employed as non-wage workers with lower than usual, or no business income at all, had a higher likelihood (29.5 percent) of experiencing lower living standards, compared to a civil servant receiving a full salary. Households that were wealthier before the pandemic had a lower likelihood of reporting a deterioration in living standards than those in the lowest consumption quintile. The insights from Tunisia are typical for other countries in the region. Across MENA, poorer households are more likely to lose their income due to COVID-19 as they are disproportionately engaged in activities that shut down due to quarantining and other public health measures. Those same phone surveys demonstrate that mitigation measures are limited in scope and insufficient to avoid significant increases in poverty. Relatively few households benefited from cash transfer programs, largely because many are informally employed and therefore outside the existing benefit schemes (Figure B4.2). Even the most extensive transfer systems only reached 25 percent of the poor. Therefore, the fraction of households reporting to be food insecure has reached dramatic levels. In Palestine, as many as 42 percent of households reported consuming less food, 26 percent in Djibouti and 16 percent in Tunisia. In Iraq, almost half the households implemented at least one negative coping strategy (such as the sale of assets) to make sure the family has enough to eat. The exception may have been Morocco, which rapidly scaled up cash transfer programs to reach 5.2 million people (about 20 percent of the working age population) who had lost their jobs in the informal sector and requested government assistance (Lopez-Acevedo, 2021). Evidence of the impact of COVID-19 on inequality in Iran In Iran, the pandemic also had different impacts on households across the welfare distribution and in different regions of the country. In the absence of real-time data, a microsimulation analysis conducted using recent household survey data (Rodriguez and Atamanov, 2021) helps to shed light on the unequal impacts of the pandemic and high inflation in the country. The analysis shows that not only poverty will substantially rise, by up to 21 percentage points, as a combined result of the fall in household incomes and inflation through the pandemic, but also, since Iranians in the bottom of the welfare distribution are disproportionately affected, inequality measured by the Gini index will also rise by 2 points as a result. The high inflationary trend that the country was experiencing since mid-2018 continued and intensified in 2020 in parallel to the pandemic. By October 2020, the average household consumption basket was 1.3 times more expensive than at the beginning of the year, but not everyone was equally affected by rising living costs. The degree to which purchasing power declines with inflation depends on the items that households consume and on spatial variations in price increases. For instance, food items had the highest price increases, and these rising food costs have deeper implications for the poor, who in Iran spend as much as 46 percent of their budget on these items. This (continued on next page) SPECIAL FOCUS ON POVERTY AND INEQUALITY IN IRAN AT THE OUTSET OF THE COVID-19 PANDEMIC 27 BOX 4  COVID-19 AND INEQUALITY IN THE MIDDLE EAST AND NORTH AFRICA (MENA) AND IRAN (continued) FIGURE B4.1 • Probability of Declaring Respondents to High Frequency FIGURE B4.2 •  a Deterioration in Living Surveys Receiving Support from Standards Compared to the Public Cash Transfer Programs Month Before the Interview, Following COVID-19, MENA Tunisia 30 Male household head 35-44 45-64 25 65+ Primary education Secondary education Respondents (%) Tertiary education 20 Not employed Privete sector employee Self-employed/employer Partial salary 15 No salary Lower/No business income 2nd consumption quintile 3rd consumption quintile 5 4th consumption quintile 5th consumption quintile Round 4 Round 5 0 Total Poor Non-poor Febr Jul Aug Sept Bottom quintile 2 3 4 Top quintile Bottom quintile 2 3 4 Top quintile Bottom quintile 2 3 4 Top quintile –0.2 0 0.2 0.4 0.6 Welfare deterioration Estimation coefficients of a linear probability model. Reference categories: 15–34; no education; public sector employee; full salary, business income as usual or more than usual; Quintile 1; Round 3. Source: Alfani et al., 2021. Estimation based on data from the Enquête téléphonique PSE DJI IRQ EGY MAR TUN auprès des ménages pour étudier et suivre l’impact du COVID19 sur le quotidien des Tunisiens, Institut national de la statistique (INS) and World Bank. Source: World Bank, 2020c. explains why the cost of the consumption basket rose more for households in the bottom consumption decile, especially in rural areas and in the poorer provinces of South Khorasan and Sistan and Baluchestan. Pre-pandemic income patterns also indicate a greater vulnerability of poorer households to earning losses arising from restrictions to work or reduced working hours. Households in the lower half of the welfare distribution derive a greater share of their income from wages and self-employment in sectors that are more vulnerable to lay-offs or income reductions during the pandemic, such as construction, retail, transport, hotels and restaurants, communications, real estate, administrative and support activities and entertainment and art (‘hard-hit sectors’ in Figure B4.3). The poorest also derive up to a quarter of their income from social transfers, which in Iran have lost much of their real value in recent years because of high inflation. They were also more likely to receive private transfers from other households. While these transfers typically increase during crises to help cushion shocks, they are less likely to be a source of consumption smoothing during the COVID-19 pandemic as sending households across the country and the world also experience economic disruptions. Richer households, in contrast, are more likely to work in sectors more isolated from income shocks, including the public sector, and to receive pensions, both sources of income that are less volatile during hard times. Because of these differences in household income composition, the labor income and private transfers losses during the pandemic are estimated to result in a reduction in total household income of between 15 to 17 percent for households in the bottom half of the welfare distribution, and between 10 to 14 percent for those in the top half (Rodriguez and Atamanov, 2021). The recovery path from the pandemic is also likely to be uneven. Poor and vulnerable people will continue to experience the effects of prolonged income shocks and diminished job opportunities. Those who lose their jobs or are out of the labor force will struggle to (re)enter the job market; the longer people are out of a job, the harder this will be. In Iran, as in other neighboring Mashreq countries (World Bank, 2020b), the very low female labor force participation and employment, even among younger women (Figure B4.4), is likely to be exacerbated by the COVID-19 pandemic. The weaker labor demand will add to pre-existing barriers for women to obtain gainful employment, such as those related to social norms, legal constraints, access to childcare and safe transportation. (continued on next page) 28 BOX 4  COVID-19 AND INEQUALITY IN THE MIDDLE EAST AND NORTH AFRICA (MENA) AND IRAN (continued) FIGURE B4.3 • Household Income Sources FIGURE B4.4 • Labor Force Status by Gender by Consumption Per Capita and Age, Iran Quintile, Iran 100 100% 80% 80 60% 60 40% 20% 40 0% Bottom 2 3 4 Top quintile quintile 20 Self-employment: hard-hit sectors Self-employment: others Salaries (private): hard-hit sectors 0 Men Women Men Women Salaries (private): others (15–64) (15–64) (15–34) (15–34) Salaries (public) Social assistance Employed Unemployed Retired Transfers form hholds. In school Homemaker Pension Authors’ calculations based on HEIS 2019/20. Authors’ calculations based on HEIS 2019/20. The rising inequality has consequences for planning the post-COVID period. Building back better will require to offer the poorest and most vulnerable the opportunity to regain what they have lost. Labor market, social protection, health and education policies will need to be (re) considered through a lens of equity and inclusion and considering how they can be designed in such a way that productivity and welfare are improved in a progressive way. This would allow to make up for the large losses that have been experienced, and help build the foundations for a stronger, more inclusive social contract. to further increase as a consequence of the COVID-19 21 Estimations from a microsimulation model suggest shocks which will heighten already strained household poverty will rise by close to 20 percentage points as finances.21 Additional cash transfers and social a combined result of high inflation and income losses protection measures adopted in 2020/21 can partially associated with the economic shock of the COVID-19 offset the economic strain on the most vulnerable pandemic (Rodriguez and Atamanov, 2021). households but will remain insufficient in view of the country’s larger structural challenges. SPECIAL FOCUS ON POVERTY AND INEQUALITY IN IRAN AT THE OUTSET OF THE COVID-19 PANDEMIC 29 References Lopez-Acevedo, G., Betcherman, G., Khellaf, A., Molini, V. (2021). Morocco’s Jobs Landscape: Alfani, F., Dhrif, D. 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