Iran’s economic outlook subject to significant risks - forecast

Finance Materials 3 August 2022 16:41
Baku, Azerbaijan Trend News Agency
Iran’s economic outlook subject to significant risks - forecast

Iran’s economic outlook is subject to significant risks, Trend reports citing World Bank’s country report.

On the upside, further increases in oil prices would lead to higher oil export revenues. If global oil markets seek all available supply to ease price pressures, stronger demand could also lead to higher oil export volumes, thereby further improving Iran’s fiscal and external balances. With both Iran and Russia under sanctions, higher trade and investment between Iran and Russia could reduce the impact of sanctions on Iran. Iran’s oil exports to China could, however, face competition from heavily discounted Russian crude if sanctions on the two countries continue. If progress in nuclear negotiations leads to a significant easing or removal of sanctions, this could further improve Iran’s economic prospects and curb inflationary expectations.

Downside risks relate to the impact of surging global food prices, the resurgence of new COVID-19 variants, and a worsening of the climate change impact. Global food prices are soaring at the fastest pace ever due to the war in Ukraine, which, if prolonged, could heavily impact crop and fertilizer supplies. Higher imported commodity prices would lead to a further increase in Iran’s import bill and put more pressure on the government and its limited accessible foreign exchange reserves. The resulting inflationary pressures, if unmitigated, would increase pressures on lower-income deciles and add to social grievances.

Adaptation and mitigation policies are an increasingly urgent priority to address Iran’s climate change challenges. Addressing depleting water resources and overextraction from scarce groundwater sources is more crucial than ever. This requires improved demand management via price signals and increased efficiency. The special focus chapter of this report outlines four main pathways to water security for Iran, including on better resource management and other policies that can help address the climate change impact of Iran’s water shortage challenges. In addition, highly subsidized energy prices have promoted intensive energy use and have turned Iran to one of the highest per capita energy consumers in the world, including through high gas flaring (the third highest in the world).

Given the adverse effects of intensified air pollution and dust storms on the health and daily life of Iranians, the government could introduce regulations and environmental levies, and realign energy prices to incentivize new investments in cleaner production processes especially in steel, cement, and petrochemical sectors.

Finally, the preparation of a blueprint for Iran’s economic transition out of fossil fuel dependence would allow the country to be ready for the global shift towards net-zero goals. Addressing the above-mentioned challenges requires a comprehensive package of economic reforms that needs to be complemented by an adequate social protection system. Economic policies could be better geared towards creating much-needed jobs. This could be achieved through investment in infrastructure, especially in under-developed regions, stimulating private sector activity via an improved business environment, and reducing distortive pricing interventions. De-carbonizing infrastructure, a transition towards sustainable sources of energy, and accelerated adoption of climate-smart water and agriculture interventions will also be key in managing climate change risks.

Rightsizing current expenditures, including reforming domestic energy price subsidies, and increasing tax revenues through the removal of exemptions, addressing tax evasion, and improving value-added tax collection can create much-needed fiscal space. Relatively low public debt allows the government to finance its deficit by issuing government bonds within a well-defined medium-term fiscal framework; this reduces reliance on the banks’ resources or the central bank’s balance sheet.

To rein in inflationary pressures, monetary policy needs to be less accommodative. To address the income and distributional impact of these policies, the most vulnerable households would need to be protected through well-targeted social safety transfers.