The recession in Iran accelerated in 2019/20 as US sanctions progressively tightened. Iran¡¯s GDP contracted by 7.6% in the first 9 months of 2019/20 (Apr-Dec 2019) largely due to a 37% decline in the oil sector. Since the reintroduction of US sanctions in 2018, oil production has dwindled reaching a record low of 2 mbpd in December 2019. Non-oil GDP growth in Apr-Dec 2019 was close to zero, a marginal improvement compared to the sector¡¯s 2.1% contraction in 2018/19. In the same period, non-oil industries grew by 2% driven by construction and the utilities sectors, while services value-added contracted by 0.2%. The recent COVID-19 outbreak has significantly disrupted trade, tourism and retail business during the busiest period for travel and commerce.
Facing a growing pandemic, low oil prices and increasing sanctions, Iran¡¯s GDP growth is projected to remain subdued in 2020/21-2022/23. The baseline outlook is primarily driven by COVID-19 outbreak reducing oil and non-oil GDP in 2020/21 and two subsequent years of modest recovery. Oil production in 2021/22 and 2022/23 is expected to grow in line with long term domestic consumption growth. The fiscal deficit is projected to widen as revenues fall short of targets and COVID-19 adds to expenditures. The 2020/21 draft budget, though contractionary in real terms, relies on optimistic assumptions. The expected widening budget deficit especially in light of COVID-19 and other exogenous shocks are likely to lead to further debt issuance and withdrawals from strategic reserves.
The current unique situation of Iran¡¯s economy presents significant downside risks for the baseline forecast. The most significant risk is a stronger and more protracted impact of the COVID-19 outbreak through various channels including widescale contractions in commerce, tourism and trade as well as higher production costs. Persistence of lower oil prices and export volumes (e.g., due to a significant decline in China¡¯s oil demand) would result in a substantially larger overall shock and fiscal deficit in 2020/21.