New Data Show Iran’s Economy Improving as Nuclear Talks Reach a Critical Stage

Editor’s Note: The Bourse & Bazaar Foundation is proud to publish this new column from Djavad Salehi-Isfahani. The column shares a name with Salehi-Isfahani’s widely-read blog page, which has for many years been a foremost source of commentary on Iranian macroeconomics.

If you are a regular reader of this column, you are not surprised by the inflation data for Mordad (the Iranian month ending August 21). As in previous cost-push price increases, inflation spiked three months ago following the removal of food subsidies, but in the last two months it has moderated. Last month prices rose by under 2%, much lower than in June and July. The annual inflation rate is 26.3%. Inflation will moderate further if a nuclear deal is reached and sanctions ease.

Data from the survey of expenditures of incomes for the Iranian year 1400 (March 2021-March 2022) published by the Statistical Center of Iran (SCI) last week offers more insight into how living standards changed in 2021. Per capita expenditures in real terms increased by 7.1% in rural and 10.1% in urban areas (my calculations from the raw survey data). Yes, inflation was very high—average prices rose by 42% in rural and 36% in urban areas, and food prices rose by about 51%—but incomes rose by even more, 53%. Real per capita expenditures (rials per person per day in 2021 prices) for the last few years are shown in the table below.

Survey data corroborate what we know from the national accounts data, also published by the SCI. They show that GDP rose by 4.3% last year, buoyed by a 9.8% increase in oil and gas extraction. Together, these data provide convincing evidence that the economy has finally turned around after three years of decline caused by Trump’s maximum pressure campaign.

Survey data allow me to estimate poverty rates as well. Using the international poverty line for upper middle income countries of $5.50 per person per day in 2011, my estimates are in the table below. In 2021, the poverty rate for urban households was 6.5%, down from 9.2% the year before but still above its level in 2017 before Trump sanctions took effect. Poverty in rural areas has also declined but less so, and it is still very high. The poverty rate for the country as a whole is now below 10%.

I should remind readers, as I always do when I work with international poverty lines, that they are lower than those used in official reports in Iran. However, the trend is unaffected by this difference. If you use the same poverty line (in real terms) on survey data from different years you will observe the same pattern—rising from 2017 to 2020 and falling in 2021. This result does not depend on what poverty line you use.

I prefer to use the international rates because outside observers implicitly compare Iran with other countries. In an interview on CNBC on Sunday (9/21/22), the host prefaced his question to me about whether Iran was showing flexibility because it was doing very badly, by saying that one out of three Iranians are poor. I mentioned that by international standards poverty is much lower (one in 10 as it turns out now) but he did not seem interested. In fact, the part of the video in the above link does not include this part of my remarks.

These data clearly show that, as of a few months ago, living standards in Iran are not rapidly deteriorating as media chatter would like us to believe. If it has done much worse in the last six months, we do not know. But, at least for the poor, I doubt this very much because of the cash transfers that have been paid since April to individuals to offset the higher cost of food. To get an idea how far off people are when they speak of hunger in Iran, 90% of the population get monthly cash that can buy 10-13 loaves of lavash bread per day per person.

The vitriol on the social media by Iran hawks against Biden’s attempt to revive the JCPOA is in large part driven by the clearly false belief that Iran’s economy is getting worse by the day and Biden is wrong not to wait. The picture I see in these data is that Iran is approaching the JCPOA negotiations having proved wrong those who encouraged Trump to ditch the deal in 2018 expecting economic collapse and a quick return of Iran to the negotiating table.

Social media inside Iran have also been mostly expressing very negative views of the economy. Many well-meaning critics think that living standards have been falling continuously because prices have been rising fast. This is the widely-shared but mistaken belief that every price increase is a decline in purchasing power. What this thinking ignores is that wages are also prices and rise with inflation—not always and not for everyone in tandem—but they rise. The value of survey data, which report actual incomes and expenditures, is to correct what economists call money illusion.