Iran's GDP Growth Slows Despite Government Spending And Oil Support
Dalga Khatinoglu
Oil, gas and Iran economic analyst
Oil, gas and Iran economic analyst
Data from the Statistical Center of Iran shows that the country’s GDP growth has been slowing, while remaining growth is fueled by higher government spending and more oil production.
According to the Statistical Center’s data, released on February 24, Iran’s GDP growth stood at 5.1 percent in autumn (4Q2023).
This is the second consecutive quarter that the country’s GDP growth slows, while some sectors like agriculture as well as energy (electricity, gas, and water) have even shrunk.
However, oil sector experienced a 21.8 percent growth, thanks to increasing shipments to China. OPEC’s data show Iran’s oil production has increased from below 2.7 mb/d in autumn 2022 to 3.16 mb/d in the same period in 2023, but the growth has stopped since November. Therefore, oil production is not expected to remain a major driving force for economic growth in 2024.
Iran was producing 3.8 mb/d and exporting 2.5 mb/d of oil before the United States pulled out of the JCPOA nuclear deal and imposed sanctions in 2018.
The Statistical Center data shows that GDP growth was 7.9 percent in spring 2023, declined to 7.1 in summer and stood at 5.1 percent in the last quarter.
It is important to note that international organizations have estimated somewhat lower numbers for Iran’s GDP growth. According to the International Monetary Fund, Iran had 3 percent GDP growth in 2023 fiscal year, expected to decrease to 2.5 percent in 2024 and plunge to 2 percent in 2025.
The most important issue in the data is the lion share of the unbridled general government spending in GDP growth.
The general government final consumption expenditure value, based on 2011 fix prices, increased by 16.7 percent during autumn 2023, compared to the same season in 2022.
Meanwhile, the private sector expenditure increased only 3.1 percent, while the gross fixed capital formation (GFCF) grew by 3.4 percent in the mentioned period.
Therefore, the current 5.1 percent GDP growth has been driven mostly by government consumption expenditure growth rather than improvement in private sector or GFCF.
To put it in simple terms, current GDP growth is not based on industrial or employment expansion and does little to alleviate economic pressure on a population that has increasingly lost its purchasing power since 2018. With a persistent 40-percent and higher annual inflation rate for the past five years, millions of people have sunk into near poverty.
The main reason for higher government spending has been the steady devaluation of Iran’s currency, rial, and the ensuing higher inflation. The higher spending is not a sign of more investments or welfare appropriations, but a sign of the government printing more money and inflating its spending numbers.
The reliance of GDP growth on the oil sector and higher government inflation-related spending is clearly seen in the deterioration of people's living conditions. Even regime officials have been sounding the alarm about growing poverty and many loyalist conservatives have been blaming the government of President Ebrahim Raisi, although continuing US sanctions is related to Iran’s foreign policy decided by Supreme Leader Ali Khamenei.
Two confidential reports by the UN nuclear watchdog, sent to member states on Monday, paint an overall bleak picture of Iran’s nuclear program with persisting obstacles to proper inspection casting a shadow over its nature and raising concerns about the intentions of the regime in Tehran.
“Only through constructive and meaningful engagement can these concerns be addressed,” International Atomic Energy Agency (IAEA) chief Rafael Grossi wrote in one of his two quarterly reports. “Public statements made in Iran regarding its technical capabilities to produce nuclear weapons only increase the Director General’s concerns about the correctness and completeness of Iran’s safeguards declarations.”
According to the reports, seen by several news outlets, Iran now has more than 5.5 tons of enriched uranium, up by a ton from October. This includes 712.2 kilograms of uranium enriched at up to 20 percent and 121.5 kilograms at up to 60 percent. It’s this latter stock that has decreased by about 7 kilograms in the past hundred days.
Iran needs a minimum of 42 kilograms of uranium enriched to 60 percent to make a nuclear bomb, based on definitions set by the IAEA. It had enough of this material at the end of 2023 to produce three nuclear bombs. The dilution last quarter means that stock is still more than enough for two.
It’s unclear why Iran decided to get rid of some of its highly-enriched uranium in the last three months. And IAEA has offered no explanation in its reports. It is hard to ignore the fact, however, that the timeframe of this ‘downblending’ matches the timeframe of the recent crisis in the Middle East, which began with Hamas’ rampage of border areas of southern Israel and the ensuing –and ongoing– Israeli onslaught on Gaza last October.
"Maybe they don't want to increase tensions (with the West). Maybe they have an agreement with somebody. We don't know," Reuters quoted a senior diplomat. "At the beginning of the year they decided to do a downblending... A couple of weeks later they did another downblending, this time with a smaller amount."
Whatever the reason behind the decision, the reduction in Iran’s near weapons-grade uranium would likely offer some relief to American and European leaders who have been struggling to find a convincing response to Iran’s nuclear ambitions.
President Joe Biden spent the first half of his term trying to revive the 2015 nuclear deal with Iran –and failed. He then turned to chasing an informal agreement, looking the other way as China purchased tens of billions of Iran’s sanctioned oil, and releasing at least $16 billion of frozen funds, all to encourage the Iranian regime to limit its enrichment program, even temporarily.
As a result of those secret talks, Iran slowed its enrichment of uranium to up to 60 percent last summer. In November, however, it resumed its pre-slowdown activities, according to an IAEA report last December.
Iranian officials have always maintained that Iran’s nuclear program is purely for peaceful purposes. But nuclear experts are almost unanimous in their assessment that enrichment to the levels and in the amounts that Iran has been doing since 2021 cannot be justified in the absence of a weapons program.
Successive US administrations, including the current one, have publicly vowed to prevent Iran from ever obtaining a nuclear weapon. In private, however, politicians and experts say that it’s near impossible to stop the Iranian regime if it ever decides to make a bomb.