In the year 1401, Iran’s economy experienced one of the toughest and most challenging periods after the revolution. In this year, at both macro and micro levels, the country faced unprecedented challenges; issues related to politics, both domestically and internationally, further exacerbated the economic challenges of the country.

The continuation of inflation over 40%, the suspension of negotiations to revive the JCPOA, the widespread unrest in the country for several months, the increase in currency rates in the last three months of the year, and the growing tensions between Iran and Europe were among the factors that contributed to the economic crisis in the country last year.

With these characteristics, serious questions arise with the start of the new year (1402): which direction will Iran’s economy go? What challenges will the country face in the new year in terms of the economy and what decisions should economic managers make? The economic outlook of Iran in 1402 may be more of an issue for the Iranian society than ever before.

The International Monetary Fund (IMF) in a report titled “Regional Economic Outlook: Middle East and Central Asia” has examined the economic outlook of 32 countries in the region – including Iran – in 2023; a report that shows some indicators will improve and it is unlikely that a miracle will happen in some areas. (1)

Ebrahim Raisi’s government began its work while Iran’s economy was experiencing special conditions. Several years after the imposition of new sanctions by the United States, the country’s economic growth had experienced several years of negative numbers, the inflation rate had reached over 40%, the level of new investment was disastrous, and most importantly, the living conditions of the people were getting worse every year.

In such an environment, the new team started their work with grand economic slogans. Improving livelihoods, reducing inflation to single digits, significant increase in employment, and lifting sanctions were just some of the slogans that Rouhani began his work with in the summer of 1400. However, now, after almost two years of the new government’s work, many of these indicators have not only not improved, but people are also experiencing a more difficult situation.

The inflation rate has reached 45%, new investments have not changed significantly, the exchange rate has also reached a record high of 43,000 tomans, and the market for cars, housing, and gold has become extremely volatile and has seen an upward trend. In such conditions, it is still unclear whether there will be a chance to revive the JCPOA or if the sanctions will remain in place, and after the change in the head of the central bank and changes in several economic ministries, efforts will be made to give a positive shock to the markets.

The International Monetary Fund has released its new analysis of the economic situation in Iran in 2023 in such an environment, which shows that if nothing special happens, there will be no miracle in the Iranian economy; although progress in some areas is also predictable.

A future with inflation, with minimal growth.

According to the predictions of this fund, Iran’s economy will grow by 91 billion dollars this year and for the first time will reach the threshold of 1,700 billion dollars. Iran’s gross domestic product, based on the purchasing power index estimated at over 1,599 billion dollars in 2022, will increase to 1,690 billion dollars in 2023. Similarly, Iran’s per capita gross domestic product, based on the purchasing power index, will increase to 865 dollars and will reach over 19,528 dollars in 2023, up from 18,663 dollars in 2022.

Iran’s economy is expected to grow by an average of 2% in 2023. After a negative growth of 3.1% in 2019, 2023 will be the fourth consecutive year that Iran experiences positive growth. Iran had growth rates of 3.3%, 4.7%, and 3% in the years 2020 to 2022, respectively.

These numbers and figures become important when, according to government officials’ admissions, if Iran’s economy grows at an 8% rate in the next six years, the size of this economy at the end of the continuous growth period will be the same as in 2011. In other words, a growth rate lower than 8% annually will shrink Iran’s economy. (2)

The International Monetary Fund has announced that the unemployment rate of the country in 2022 is 9.5%, which has decreased compared to 2021. According to the previous report of this international institution, the unemployment rate of the country was announced as 9.8% in this year (2021).

Furthermore, according to the International Monetary Fund’s forecast, Iran’s unemployment rate will reach 9.8% in 2023 – meaning the current year – thus the unemployment rate will increase in the upcoming year.

It is predicted that the non-oil sector of Iran will face a 2% growth in 2023, and the growth of the oil sector in this year will also reach 2.1%. This international institution expects Iran’s oil production and exports to continue to grow in 2023. This report estimates Iran’s oil production in 2022 to be 2.58 million barrels per day and expects this figure to reach 2.62 million barrels per day in 2023 with a growth of 40,000 barrels per day.

Iran’s gas production in 2022 is equivalent to four million and 460 thousand barrels of oil per day and it is predicted that this figure will reach four million and 600 thousand barrels of oil per day, which is an increase of 140 thousand barrels per day compared to the previous year. Iran’s announced oil exports in 2023 will face a growth of 40 thousand barrels per day, increasing from 850 thousand barrels per day in 2022 to 890 thousand barrels per day. Iran’s gas exports will also increase from the equivalent of 320 thousand barrels of oil per day in 2022 to the equivalent of 330 thousand barrels of oil per day in 2023.

One of the most important concerns of the people and of course the government officials is the future inflation rate. While according to the latest promise of the Ministry of Economy, signs of inflation reduction will be shown from the beginning of this year and of course the head of the Martyrs Foundation said a few weeks ago that the decrease in prices may take a few years, this fund has predicted that if conditions do not become more difficult, there will be no news of improvement at least.

The inflation rate in Iran’s economy for the year 2023 is predicted to be over 40%, which will not see an increase or decrease compared to the 40% inflation rate in 2022.

In its previous report, the International Monetary Fund had estimated the inflation rate for 2022 to be 33.3% and had predicted a decrease to 27.5% in 2023.

The current situation has shifted the optimistic evaluations to a frightening estimate, with the inflation rate moving. If these predictions come true, it will be the first time in the years after the Islamic Republic’s rule that for three consecutive years, an inflation rate higher than 40% will be imposed on Iran’s economy.

It is natural that experiencing a 40% or higher inflation rate for three years will increase the number of poor, make livelihoods more difficult, and push a larger group of society – especially low-income households – into deeper poverty.

The box has not written anything about the reasons for its pessimistic evaluations, but one can refer to the structural roots of inflation in Iran; the government’s budget imbalance, financial constraints, and the use of risky methods to finance the budget, which increases the monetary base, triggers a liquidity crisis and destroys the economy under such heavy floods.

One of the main causes of inflation is the increase in liquidity due to the government’s mounting debts. The Fund expects the pace of liquidity growth in Iran’s economy to slow down during the year 2023. The liquidity growth, which reached 47.5% in 2022, will decrease to 45.6% in 2023.

State Unprotected

According to the report of the International Monetary Fund, the budget deficit of the Iranian government in 2023 will reach six percent of the gross domestic product, which is higher than the 4.2 percent budget deficit in 2022. The government’s revenues will not change compared to the previous year. The government’s revenue in 2023 is predicted to be 8.3 percent of the gross domestic product, which will not change compared to the previous year. However, non-oil revenue of the government will increase and reach 7.5 percent of the gross domestic product in 2023, compared to 7.4 percent in 2022.

The government’s gross debt will see a significant decrease in 2023. Iran’s gross government debt has increased in the years 2020 and 2021, but decreased in 2022 and has reached 34.2% of the gross domestic product. The International Monetary Fund predicts that this downward trend will continue in 2023, and Iran’s gross government debt will decrease to 31.9% of the gross domestic product in that year.

This report has predicted Iran’s current account balance to be $30.2 billion in 2023. Iran’s current account balance was estimated to be over $32 billion in 2022. This organization expects Iran’s foreign reserves to increase to over $11.4 billion and reach $42.2 billion in 2023. Iran’s foreign reserves were also estimated to be $30.8 billion in 2022. This international institution has announced Iran’s foreign reserves to be over $120 billion, but claims that due to US sanctions, Iran only has access to a small portion of these reserves.

According to the International Monetary Fund’s estimate, Iran’s external debt in 2022 is equivalent to half a percent of its gross domestic product, and it is predicted that this figure will remain unchanged at the same level in 2023.

The statistics of the International Monetary Fund show that the net debt of the Iranian government increased by 576 trillion tomans last year and is expected to reach around 3900 trillion tomans this year with a growth of one thousand trillion tomans, which is equivalent to approximately 27% of the country’s gross domestic product.

This report has predicted that in the next year, the net debt of the Iranian government will increase to 5,380 trillion tomans.

Such a huge volume and skyrocketing growth in the government’s net debt is happening while President Ebrahim Raisi had promised to stop borrowing and control inflation at the beginning of his government.

What has been evaluated in the reports of this fund is the preservation of the current conditions for the economy of Iran. If, as the government says, there is readiness to sign the JCPOA and of course both sides reach a final point in the negotiations, there will be a significant difference in the situation of Iran’s economy, both in the path of selling oil and in access to foreign resources, which can have its effects in various sectors. However, the fact that in the current situation, this fund does not see much chance for reducing inflation and serious economic growth, is a new warning sign that can be a serious warning for the government at the beginning of the year.

More indebted than ever before

According to the report of the International Monetary Fund, which has focused on the financial situation of the world’s economies, government expenditures are increasing relative to gross domestic product and will rise from 12.5% in the current year to 14.3% and 14.9% in 2023 and 2024.

Among these, the most important task of the government’s economic program is to change the payment of the 4200-toman currency subsidy from cash to electronic card payment, as well as the subsidy for flour, bread, and medicine, which is also due to this reason.

At the same time, the government, as has been repeatedly stated by Ehsan Khazaei, the former Minister of Economy, and Masoud Mir-Kazemi, the former head of the Organization for Budget and Planning, has been cautious in selling government debt securities. The government’s debt from this source has increased significantly in recent years, and in a report by the Organization for Budget and Planning, warnings were issued regarding the repayment of principal and interest on a debt of over 530 trillion tomans by the year 2024. These warnings were also highlighted in the recent report by the International Monetary Fund on the Iranian economy, which includes the government’s debt to the National Development Fund, private employers, social security organizations and pension funds, banks, and the general public.

The International Monetary Fund has predicted in this report that the increasing trend of Iran’s government debt, which has doubled from 2020 to the current year, will continue.

The net debt of the Iranian government will reach over 2852 trillion tomans in the year 2022, which is equivalent to approximately 28.6% of Iran’s gross domestic product. This is an increase from 1474 trillion tomans in the year 2020.

The International Monetary Fund has warned that economic conditions may significantly worsen in the coming year, and this is concerning for an economy that is still suffering from numerous uncertainties and hardships. This means that we should expect a dark year ahead in terms of the economy.

The challenges ahead give the promise of a difficult year.

In the year 1402, there are several important and fundamental issues in the economy of Iran. One of them will be the situation of pension funds. This crisis began in 1400 and has gradually become deeper, and now in 1402, the issue of providing resources for these funds will be more pressing for the government; especially when the government wants to present the budget for 1403 to the parliament in the upcoming year, it will face serious problems in this area and this crisis will practically become more apparent and public.

Another issue is the aging infrastructure that has emerged in the Iranian economy since 2018. After that, foreign investment did not take place in the country and this aging became more severe every year. Therefore, in the coming year, this accumulated aging will become another major challenge for the government.

The third challenge of this year is the issue of financial resources and the scarcity of financial resources in the country. It is still unclear whether the generation of government assets will take place or not. Will it be done correctly or not? If the sale and lease of government assets is carried out, will it contribute to generating income or not? Because in the budget of 1402, an amount of over 108 trillion tomans has been allocated for government income from asset generation. This is not a small amount and will make the task very difficult for the generation committee. (5)

The fourth challenge is the issue of ongoing inflation in the economy of Iran. In 1401, inflation was close to 50%, and the average inflation in the past 5 years has been around 40%; therefore, naturally, in 1402, controlling inflation should be one of the government’s top priorities. In this path, the biggest issue that needs to be resolved is the imbalances that create inflation.

In reality, the fact is that the Iranian economy has reached its maximum capacity to endure problems and shortages. In the past years, neglecting these problems has led to their accumulation and now we are in a situation where not only has this accumulation made conditions difficult, but other problems are also expected to be added to them. In these circumstances, neither the people nor the Iranian economy can bear them. On the other hand, it does not seem that the government will be able to solve or at least reduce these problems in the year 1402; therefore, the year 1402 will undoubtedly be a very difficult year.

What is the economic outlook for 1402?

To evaluate the current economic conditions of Iran and draw a simple picture, you don’t need to be an economist; by looking at the trend of general indicators such as inflation, economic growth, investment, etc., it can be understood to what extent the economic conditions are bad.

As the mechanisms shaping these conditions, including monetary and fiscal policies, foreign policy, government intervention, and strategies such as creating welfare based on subsidies, have not changed – or at least have not yet changed – and there is no intention or will to change in the actions and words of policymakers, the path of Iran’s economy in the coming year will also be the same.

If Iran’s economy continues with the same policies and strategies that it has had in the past decades, especially in the past one or two years, the result will be a continuation of high inflation, and possibly increasing, low growth of around two percent and markets remaining in a state of fluctuation.

In another scenario, it is possible for the government to reach an agreement with the West and regional countries to lift sanctions and remove the economy from the trap of isolation. In this case, with the facilitation of oil sales and exports, increase in foreign currency revenues, and opening of trade routes and money transfers, a short period of relief accompanied by positive expectations adjustment will take place, providing a suitable opportunity for strengthening the economy and implementing some structural reforms. The recent trips of Ali Shamkhani, the Secretary of the National Security Council, are evaluated in this direction.

The third scenario, which is less likely to happen but not impossible, is getting caught in consecutive economic and social crises that create the conditions for very high inflation and extremely critical economic situations.

Which one of these scenarios will occur is more dependent on the overall policies of governing the country, rather than being related to the government’s economic team or economic policymakers. It also depends on the decisions made by decision-makers and the policies they implement.

Notes:

1- “Regional Economic Outlook: Middle East and Central Asia”, International Monetary Fund, April 11, 2023.

2- If the country has a 6% economic growth in 6 years, we will reach the situation of 1390, Imna News Agency, 13 Azar 1400.

3- Signs of Inflation Reduction; Maybe Spring 1402!, Taadol Newspaper, 12 Azar 1401.

4- Mir Kazemi: We received the government with 1400 trillion tomans of debt, Panah News Agency, 6th of Shahrivar 1401.

5- Sensitive project worth 108 trillion tomans by the government, Farhikhtegan newspaper, 7 Bahman month 1401.