Iran

Economic outlook

The COVID-19 pandemic added to pressures on the Iranian economy already-struggling from the reimposition of US sanctions in 2018 and 2019. Despite an initial COVID-19 induced shock to GDP, recovery in external demand, limited COVID-19 lockdowns and rising oil prices led GDP to grow 3.4% in 2020-21. But declining oil revenues and the cost of COVID-19 mitigation measures has driven a sharp rise in government debt and constrained authorities’ scope to counter future shocks. Restricted access to foreign capital due to US sanctions has led to sharp exchange rate depreciation, in turn stoking inflation and weighing on households’ purchasing power.

The IMF expects growth of 2% per annum, on average, over the next five years. In the near term, the outlook hinges on the evolution of the COVID-19 pandemic and domestic vaccination rates, the pace of the global economic recovery and geopolitical developments. Limited fiscal space and high inflation will continue to pressure lower income households. Should US sanctions be lifted, favourable demographics and abundant energy resources (Iran has significant oil and gas reserves) offers Iran robust growth potential.

Iran gained upper-middle income status in 2019. Job losses through the COVID-19 pandemic and high inflation contributed to budget pressures on already-vulnerable households. Unemployment remains high and youth unemployment is a significant issue. Recovery in economic activity should lift incomes in coming years. But ongoing economic sanctions will remain a notable headwind to growth in employment, income and GDP.