IMF Executive Board Concludes 2011 Article IV Consultation with the Islamic Republic of Iran

Public Information Notice (PIN) No. 11/107
August 3, 2011

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2011 Article IV Consultation with the Islamic Republic of Iran is also available.

On July 20, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Islamic Republic of Iran.1


Iran has started implementing a major subsidy reform by raising sharply the prices of energy and agricultural products in December 2010, removing close to US$60 billion dollars (about 15 percent of GDP) in annual product subsidies. The subsidy reform is expected to increase efficiency and competitiveness of the economy, improve income distribution, reduce poverty, and help Iran unlock its full growth potential.

Economic growth rebounded from the cyclical downturn in 2008/09 to reach 3.2 percent for the 2010/11, spurred by a recovery in agriculture production, and higher oil prices. Building upon their success in reducing inflation from 25.4 percent in 2008/09 to 12.4 percent in 2010/11, the Central Bank of Iran was able to contain inflation in the aftermath of the subsidy reform. As a result, consumer price inflation has only increased from 10.1 percent in December to 14.2 percent at end-May 2011.

Other key macroeconomic indicators continued to improve in 2010/11. The overall fiscal surplus is estimated at 1.7 percent of GDP in 2010/11, reflecting prudent spending policies. The current account surplus increased to 6 percent of GDP in 2010/11, in line with the recovery of oil prices.

While overall money growth had remained moderate, an increase in central bank credit to banks, mainly related to the financing of subsidized housing, led to the emergence of a wide spread between the interbank rate and the parallel rate, as well as a rapid increase in gold coin prices.

On the backdrop of high oil prices and expected efficiency gains resulting from the domestic subsidy reform, the outlook is positive with growth expected to rebound in the medium-term. Average inflation is expected to rise in 2011/12 because of a step increase in prices, but should come down in 2012/13 if the authorities implement sufficiently tight credit and fiscal policies. The fiscal balance and the current account surplus are projected to improve in line with the rise in oil prices in 2011/12.

Executive Board Assessment

Directors welcomed the economic recovery, the decline in inflation, and the improvement in the external and fiscal positions in 2010/11. Directors noted that the medium-term outlook remains positive on the strength of high oil prices and potential efficiency gains related to the recent subsidy reform. They stressed, however, that continued prudent policies are essential to maintain macroeconomic stability and lay the basis for sustained growth.

Directors welcomed the early success in the implementation of the subsidy reform, which is a critical step in enhancing energy efficiency, supporting growth, and moving further towards a market-based economy. Directors noted that cash transfers, financed out of the revenues arising from the energy price increases, were instrumental in supporting domestic demand, improving income distribution, and reducing poverty.

Directors stressed that tight fiscal and monetary policies are necessary to contain inflation and allow a smooth adjustment of relative prices following the subsidy reform. In particular, they encouraged the authorities to save any oil revenue windfall and sterilize the related foreign exchange inflows. They also emphasized that monetary policy should gear toward positive real rates of return and that central bank credit to banks should be restrained.

Directors noted the recent developments in the foreign exchange market and the authorities’ commitment to a unified exchange rate. They encouraged the authorities to manage the exchange rate more flexibly and maintain a strong international reserve position.

Directors welcomed the authorities’ efforts to strengthen the banking sector and agreed on the need to raise minimum capital adequacy and provision cover and put in place a comprehensive contingency preparedness framework. Directors noted that additional steps are needed to further reduce the large non-performing loan portfolio and that bank profitability would benefit from allowing banks more flexibility in setting rates of return and reducing operating costs. They supported the recent decision to increase the central bank’s supervisory powers, but underscored that full autonomy would be necessary for the central bank to exercise its enforcement powers.

Directors welcomed the authorities’ reform strategy based on privatization, a reduction of the role of the government, and market-based prices for energy and agricultural goods, with a view to achieving higher employment and growth. They considered it critical to restructure the enterprise sector through the adoption of energy-efficient technologies, while stressing the need to support the development of new growth sectors through labor market reforms, including adequate unemployment benefits. Directors also agreed that the full removal of subsidies and steadfast implementation of the ongoing tax and customs reforms are essential to further reduce Iran’s dependency on oil and natural gas.

Directors noted the progress made in enhancing Iran’s AML/CFT framework, and urged the authorities to step up efforts to bring the existing framework in line with international standards.

Many Directors noted the authorities’ concern about the impact of sanctions on the transfer of oil export proceeds, including potential adverse effects on oil markets, and some Directors called on the staff to monitor and assess Iran’s access to the international payment system.

Directors considered that economic data are broadly adequate for surveillance purposes, and encouraged the authorities to improve the timeliness of data provision.

Islamic Republic of Iran: Selected Economic Indicators, 2008/09–2010/11



2008/09 2009/10 2010/11



Real GDP growth (factor cost; percentage change)

0.6 3.5 3.2  

CPI inflation (period average; percentage change)

25.4 10.8 12.4  

CPI inflation (end of period; percentage change)

17.8 10.4 19.9  

Unemployment rate (in percent)

10.4 11.9 14.6


Central government balance (in percent of GDP)

0.7 1.0 1.7  

Broad money growth (percentage change)

15.2 23.5 26.7  

Current account balance (in percent of GDP)

6.5 3.0 6.0  

Gross international reserves (in billions of U.S. dollars)

79.6 78.0 78.9  

Public and publicly guaranteed external debt (in percent of GDP)

6.1 5.9 5.4  

Exchange rate (period average; rials per U.S. dollar)

9,574 9,920 10,339  

Sources: Iranian authorities; and IMF staff estimates.

1/ Estimate.

2/ Data for the first quarter.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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