## cr1894

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**Canonical URL:** [cr1894](https://www.imf.org/-/media/files/publications/cr/2018/cr1894.pdf)

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---

### Developing the domestic government securities market — current structure and recent developments
- Debt Management Office (DMO) established in 2015; the DMO has 45 staff and front-mid-back office functions in place.
- An on-going audit of arrears revealed government arrears of about 30 percent of GDP, which brought the debt-to-GDP ratio to near 50 percent in 2016/17.
- Distribution of public debt, 2016/17:
  - 1.5% External Debt
  - 4.3% Securitized Domestic Debt
  - 43.3% Unsecuritized Domestic Debt
- Distribution of government arrears, 2016/17:
  - 18% Social security institutions and other
  - 37% Private contractors
  - 45% Banks
- The CG interest bill is expected to reach 4.8 percent of GDP by 2019/20 reflecting bonds issued for bank recapitalization and securitization of arrears.
- The CG’s gross financing need is projected to rise from 4.5 percent of GDP in 2017/18 to about 15 percent of GDP in 2019/20.
- Government securities issuance accelerated after the DMO was established:
  - first government Sukuk Al-Ijara (rent) in 2015 and Morabaha (cost-plus) Sukuk in 2016;
  - maturities of two to five years and returns/profit set around 20 percent.
- Islamic Treasury Bills (ITBs) are the largest share of government securities issued: zero-coupon securities with maturities of 4 months, 6 months, or 1-year. The government has issued ITBs that cover 4.6 percent of total stock of arrears.
- By November 2017, the MOEF issued Rial 50,000 billion (3.4 percent of GDP) of settlement papers.

### Key legal and institutional findings and recommendations
- Legal basis for issuances: Law on Issuance of Participation Papers (1997); Law on Facilitating Competitive Production and Improvement of Financial System (LFCPIFS, 2015); annual budget laws. Issuances supervised by a Sharia committee in the Securities and Exchanges Organization (SEO).
- Types of Bonds and Legal Basis:
  - Participation Papers (Musharakah) — 1997 Law on Issuance of Participation Papers
  - Morabaha Sukuk — LFCPIFS
  - Al-Ijara Sukuk — LFCPIFS and Annual Budget Laws
  - Settlement Papers — LFCPIFS and Annual Budget Laws
  - Islamic Treasury Bills — Annual Budget Laws
- Recommendations:
  - Borrowing authority for government should be issued solely to the Ministry of Economy and Finance (MOEF) to strengthen control over debt and improve treasury management.
  - A public debt law should identify the MOEF as the sole issuer and require governance, audit, reporting, publication of a medium-term debt management strategy, annual borrowing program, and publication of debt and asset data. The MOEF is preparing a draft public debt law and has requested IMF TA assistance.

### Debt Management Strategy (DMS) — findings and recommendations
- A sound DMS is key to sustainable public debt management; the DMS should operationalize debt management objectives and explicitly address cost-risk trade-offs.
- Vulnerabilities highlighted: currency composition and off-budget arrears or contingent liabilities (examples cited: Argentina, Brazil, Indonesia, Russia).
- Recommendations:
  - Develop and publicly disclose a DMS to build investor trust and lower borrowing costs.
  - DMS should define scope, preferred risk profile, instrument review, targets for securitization of arrears, minimum average maturity/duration, maximum share of short-term to long-term debt, currency composition, and interest rate structure (fixed vs floating).
  - DMO should prepare a strategy proposal and coordinate with the Central Bank of Iran (CBI) and the Planning and Budget Organization (PBO); the strategy should be reviewed at least annually.
  - Operationalize DMS through an annual borrowing program presenting annual financing requirement and issuance timing; as market develops include buybacks and exchanges.
  - Develop a clear strategy and timetable to securitize remaining arrears to provide certainty to private contractors and set transparent selection criteria for creditor payment.

### Market infrastructure, trading, and settlement
- Iran has an automated securities settlement infrastructure with IFB acting as the central depository; settlement allows T+1 delivery versus payment and can settle forward trading and repurchase agreements as successive spot deals.
- IFB provides comprehensive, timely, and reliable information on holders and trading developments; market is supervised by SEO.
- Recommendation: Continue to leverage electronic platforms to lower costs, eliminate delays, and reduce fraud risk.

### Money market and monetary policy linkages
- An active, liquid money market supports bond market development by increasing liquidity and reducing warehousing and funding costs for trading portfolios.
- Recommendation: Move to a market-based monetary policy framework — replace directed credit targets and interest rate caps with a policy rate consistent with the CBI’s inflation target and fund healthy banks at the CBI’s policy rate against collateral.
- The 2018/19 budget’s sizable offset operation (offsetting government debt to contractors against banks’ outstanding debt to the CBI) could provide CBI securities enabling open market operations — therefore government securitization of its debt to the CBI with tradable securities bearing market interest rates is essential.
- Securitization of arrears and recapitalization of the financial system through issuance of government bonds would provide high quality collateral for financial institutions to access CBI liquidity facilities and supply liquidity to the securities market.

### Taxation considerations
- Current treatment: Return on financial instruments, including earnings from government securities, are exempt from capital gains and income tax in Iran, achieving tax neutrality and supporting market development.
- Recommendation: As markets deepen, consider taxation of financial instruments to improve the revenue base, ensuring any new taxes maintain tax neutrality by equalizing effective tax rates across instruments.

### Issuance techniques, investor base, and market-deepening measures
- Current practice: State banks conduct sukuk sales on behalf of government in IFB; prices fixed, banks collect bids, process can last a week, banks receive fees but do not underwrite; securities remain on sale at fixed prices for a period.
- Recommendations:
  - The DMO should consider competitive price auctions as the main distribution channel for government securities to better meet cost objectives for larger and more frequent borrowings.
  - Reopen previously issued securities to build benchmark issues and enhance market liquidity; use buybacks, exchanges, or switches to spread maturity profile and avoid refinancing risk.
  - Move to a primary dealer system in the medium-term to diversify the investor base and foster deeper markets.
- Investor base composition and prospects:
  - About 80 percent of the bonds are held by Asset Management Companies that are owned by local banks.
  - Banks hold only a small portion of bonds in their own balance sheets.
  - Foreign ownership is about 10 percent.
  - The remainder is held by individuals and corporates.
  - The implementation of the pension reform (see IMF Country Paper 18/xx, Box 3) could make pension funds important investors in the government securities markets in the medium-term.
- Primary dealers / market makers:
  - Introducing a network of primary dealers or market makers could help diversify the investor base and foster deeper and more liquid markets in the medium-term.
  - Incentives and obligations as well as eligibility criteria to become a primary dealer need to be clearly defined and disclosed.
  - While premature for Iran now, authorities could consider introducing a primary dealer system after restructuring the financial system and adopting a market-based monetary framework.
- Inclusion in international bond indices — preconditions:
  - local bonds to be traded on an international clearing house;
  - a certain size for a single bond issuance in local currency;
  - existence of primary dealers to ensure liquidity and consistent bid/ask spreads;
  - market liquidity to reach certain level of transaction volume.

### Export diversification — current status and policy recommendations
- Key facts:
  - Natural resources represent almost 53 percent of total exports but account only for 12.3 percent of Iran’s GDP.
  - Non-oil exports represent only 11 percent of GDP.
    - Comparison: oil exporting countries average = 10.4 percent of GDP; upper middle-income average = 24.2 percent of GDP.
  - Iran exports polyethylene (top plastic and rubber export) representing 11.6 percent of Iran’s non-oil exports.
    - Iran mainly exports polyethylene to China (84 percent) and Turkey (10 percent).
    - The large European market imported US$ 9.5 billion of polyethylene in 2015 and accounted for 35 percent of the global market.
  - Car parts represent 0.1 percent of Iran non-oil exports.
    - Iran mainly exports car parts to Turkey (72 percent), France (24 percent), and Russia (3 percent).
  - Pistachios represent 5.9 percent of Iran non-oil exports.
  - Trade concentration: 37 percent of Iran’s non-oil exports go to China.
  - Objective: Sixth Development Plan target to grow non-oil exports to 15 percent of GDP by 2020.
- Policy findings and recommendations:
  - Improving export competitiveness is key; reforms to unify the exchange rate must be accompanied by deep structural reforms.
  - Global Competitiveness Index rank improved seven notches to 69th but constraints remain: access to finance, bureaucracy and policy uncertainty.
  - The export sector is small: some 250 companies account for 60 percent of total goods exports.
  - Attracting more FDI:
    - Current FDI net inflows represent only 0.02 percent of GDP.
    - Comparison: other MENA countries average = 2 percent of GDP.
  - Lower administrative barriers to trade:
    - It takes 25 days to clear exports, the longest in non-conflict MENA countries.
    - Domestic import tariffs averaged 20.9 percent in 2016.
    - Restrictions on service trade are the fourth highest in the world.
    - Proposed amendments to the Customs Law should help improve trade processing time.
  - Bilateral and multilateral trade agreements:
    - Tariffs applied to Iran’s exports by its trading partners averaged 8.9 percent in 2014 (compared to an average of 2.9 percent applied to all other countries).
    - Developing bilateral agreements, notably with the European Union (EU), could benefit Iran non-oil exporters.
  - Iran has 12 FTA/PTA agreements with: Afghanistan, Bangladesh, Belarus, Bosnia-Herzegovina, Cuba, Lebanon, Pakistan, Sri Lanka, Syria, Tunisia, Turkey, and Uzbekistan.

### Female labor force participation — facts, modeled reforms, and impacts
- Human development and labor facts:
  - Years of schooling attained by women expanded by 40 percent within one generation to reach an average of 9 years.
  - Fertility rate has been below two children per woman since the 2000s.
  - Life expectancy at birth: women 76.7 years versus men 74.5 years.
  - Female labor force participation (FLFP) was 16.2 percent in 2016.
  - Some 83.8 percent of all females over the age of 10 are inactive and out of the labor force—the fourth highest rate in the world.
  - Female unemployment rate in 2016 = 18.9 percent.
  - Female employment share: only 13 percent were working (2016); 3.2 percent of women were unemployed.
  - Women represent 13.3 percent of legislators, senior officials and managers and hold 3.1 percent of seats in the parliament.
  - Joblessness duration:
    - 30 percent of men remain unemployed for less than 3 months (versus only 11 percent of women).
    - Almost 48 percent of women remain unemployed for more than 19 months (versus only 28 percent of men).
  - Informal economy estimated at 36.5 percent of total GDP in 2016.
  - Part-time employment reported as 5 percent of the 5 million total female jobs in 2016 (likely understated).
  - World Economic Forum survey estimate: pay premium between men and women for similar work = 42 percent in 2017, placing Iran 99th out of 131 countries surveyed.
  - In a 2015 labor force survey, 72 percent of Iranian women replied they were not looking for a job because of personal and family responsibilities, compared to only 2 percent for men.
- Labor market responsiveness:
  - Each percentage point of non-oil GDP growth increases employment by just 0.2 percentage points.
  - 614,000 jobs were created in Iran in 2017, the majority in agriculture and lower-skill services.
- Model, calibration, and mechanisms:
  - Uses a dynamic general equilibrium model with heterogeneous agents and overlapping generations calibrated to Iran’s macro and micro statistics.
  - Model replicates: taxes, cash-transfer programs, pension systems, mean and variance of the income distribution, education spending, size of the informal sector, share of part-time labor, and female labor force participation.
  - Main sources of gender inequality in the model:
    - Disutility a family experiences when a woman works outside the home.
    - An “unexplained” gender wage gap that proxies discrimination in formal and informal labor markets.
- Reform simulations and quantitative impacts (preserving reported magnitudes):
  - Reform 1 — Halving the unexplained wage gap (from 40 percent to 20 percent):
    - FLFP doubles to 80 percent.
    - Average female formal-sector wage +23 percent.
    - Average female informal-sector wage +36 percent.
    - Average earnings of males in the formal sector −10 percent.
    - Real GDP +26 percent relative to no change in policy.
    - Government total revenues grow 22 percent (from 15 to 18 percent of GDP).
  - Alternative moderate calibration: unexplained wage gap reduced from 20 percent to 10 percent:
    - Real GDP rises by 2.6 percent.
    - Total revenue collections increase by 2 percent (from 15.1 to 15.4 percent of GDP).
    - Women’s average earnings in formal and informal sectors rise by 13 percent.
  - Reform 2 — Reducing disutility so FLFP increases by 10 percentage points:
    - Real GDP +8.7 percent.
    - Government revenues +6.8 percent.
    - Female earnings +13 percent; male earnings +4 percent.
  - Reform 3 — Targeted childcare subsidy for mothers in bottom 70 percent of income distribution working in the formal sector (subsidy proportional to hours; maximum value referenced as "Around 450,000 2015 Iranian Rials per month"):
    - Formal-sector FLFP +40 percent.
    - Partial crowding-out: older females may leave the labor market.
    - Net effect: women work 10 percent more hours overall.
    - Men’s average earnings +2 percent.
    - Long-term real GDP +2 percent.
    - Government revenues +3.2 percent.
    - Fiscal cost of the childcare subsidy program = 0.7 percent of GDP.
    - Gini coefficient falls.
- Policy implications:
  - Narrowing unexplained pay gaps, lowering social and cultural costs of women’s work, and targeted childcare subsidies each raise FLFP and output; wage-gap reductions produce the largest GDP gains in the model.
- Policy priorities to encourage greater female participation:
  - Education campaigns to reduce discrimination against women.
  - Strengthening legal rights for women to remove gender-based legal restrictions.
  - Subsidizing affordable child care for lower income women.
  - Reforms to boost job creation in the private sector and more high-skill job opportunities aligned with female college graduates.
  - Measures to formalize and recognize part-time and informal work to better capture female employment.

### AML/CFT framework, anti-corruption, and financial integrity recommendations
- National Risk Assessment:
  - Conducting a National Risk Assessment on ML/TF will improve authorities’ understanding of risks, enhance risk-based policy design and implementation, and improve allocation of resources.
  - Priorities: enhance AML/CFT risk based supervision of banks and other financial institutions and impose corrective actions when relevant; enhance licensing and fit and proper requirements to prevent criminals from owning and/or controlling financial institutions.
  - Expected outcomes: reduce the risk of financial abuse, enhance detection and prevention of ML, proceeds of fraud and corruption, and TF activities, improve compliance and bolster correspondent bank relationships.
- Beneficial ownership, PEPs, and compliance:
  - Improve compliance by financial institutions in identifying beneficial owners and domestic politically exposed persons (PEPs).
  - Require financial institutions to apply preventive measures commensurate with their risks.
  - Measures: issue CBI guidance to assist banks, focus CBI inspections on these areas, improve banks’ internal controls and compliance systems.
  - Consider mechanisms such as a public registry for beneficial ownership to enhance transparency and timely access to accurate beneficial ownership information, including for correspondent banks.
- Enhancing the anti-corruption framework:
  - Multiple laws criminalize corruption but the legislative framework may not always permit effective pursuit of corruption.
  - Priority reforms:
    - Upgrade legislative framework to criminalize bribery, illicit enrichment and other corruption offenses in line with UNCAC Peer Review recommendations.
    - Enhance system of declaration of assets of senior public officials with publication and sanctions for noncompliance.
    - Establish an independent anti-corruption agency with law enforcement powers; ensure prosecution and adjudication are autonomous and protected from interference.
    - Build synergies between AML and anti-corruption frameworks: coordinate domestic agencies, enable FIU disseminations to anti-corruption agencies, and allow information sharing to “follow the money.”
- Notable numeric/reference points in text:
  - The convention adopted in December 1999 was ratified by 188 countries.
  - Footnote references appearing in the text: 12, 13, 14, 15.

*Source: cr1894 - References ____________________________________________________________________________ 10 (PDF chapter/section).*

### References ____________________________________________________________________________ 10

### cr1894 - References ____________________________________________________________________________ 10

### Developing the Domestic Government Securities Market in Iran — Current Structure and Recent Developments
- The government established the Debt Management Office (DMO) in 2015; the DMO has 45 staff and front-mid-back office functions in place.
- An on-going audit of arrears revealed government arrears of about 30 percent of GDP, which brought the debt-to-GDP ratio to near 50 percent in 2016/17.
- The distribution of public debt, 2016/17: 1.5% External Debt; 4.3% Securitized Domestic Debt; 43.3% Unsecuritized Domestic Debt. (Exact labels and charting referenced in source.)
- Distribution of government arrears, 2016/17: 18% Social security institutions and other; 37% Private contractors; 45% Banks.
- The CG interest bill is expected to reach 4.8 percent of GDP by 2019/20 reflecting bonds issued for bank recapitalization and securitization of arrears.
- The CG’s gross financing need is projected to rise from 4.5 percent of GDP in 2017/18 to about 15 percent of GDP in 2019/20.
- Government securities issuance accelerated after the DMO was established: first government Sukuk Al-Ijara (rent) in 2015 and Morabaha (cost-plus) Sukuk in 2016; maturities of two to five years and returns/profit set around 20 percent.
- Islamic Treasury Bills (ITBs) are the largest share of government securities issued: zero-coupon securities with maturities of 4 months, 6 months, or 1-year. The government has issued ITBs that cover 4.6 percent of total stock of arrears.
- By November 2017, the MOEF issued Rial 50,000 billion (3.4 percent of GDP) of settlement papers.

### Key Legal and Institutional Findings
- Legal basis for issuances: Law on Issuance of Participation Papers (1997); Law on Facilitating Competitive Production and Improvement of Financial System (LFCPIFS, 2015); annual budget laws. Issuances supervised by a Sharia committee in the Securities and Exchanges Organization (SEO).
- Types of Bonds and Legal Basis listed explicitly in source:
  - Participation Papers (Musharakah) — 1997 Law on Issuance of Participation Papers
  - Morabaha Sukuk — LFCPIFS
  - Al-Ijara Sukuk — LFCPIFS and Annual Budget Laws
  - Settlement Papers — LFCPIFS and Annual Budget Laws
  - Islamic Treasury Bills — Annual Budget Laws
- Recommendation: Borrowing authority for government should be issued solely to the Ministry of Economy and Finance (MOEF) to strengthen control over debt and improve treasury management.
- Recommendation: A public debt law should identify the MOEF as the sole issuer and require governance, audit, reporting, publication of a medium-term debt management strategy, annual borrowing program, and publication of debt and asset data. The MOEF is preparing a draft public debt law and has requested IMF TA assistance.

### Debt Management Strategy (DMS) — Findings and Recommendations
- A sound DMS is key to sustainable public debt management; the DMS should operationalize debt management objectives and explicitly address cost-risk trade-offs.
- The source highlights vulnerabilities from currency composition and off-budget arrears or contingent liabilities (examples cited: Argentina, Brazil, Indonesia, Russia).
- Recommendations:
  - Develop and publicly disclose a DMS to build investor trust and lower borrowing costs.
  - DMS should define scope, preferred risk profile, instrument review, targets for securitization of arrears, minimum average maturity/duration, maximum share of short-term to long-term debt, currency composition, and interest rate structure (fixed vs floating).
  - DMO should prepare a strategy proposal and coordinate with the Central Bank of Iran (CBI) and the Planning and Budget Organization (PBO); the strategy should be reviewed at least annually.
  - Operationalize DMS through an annual borrowing program presenting annual financing requirement and issuance timing; as market develops include buybacks and exchanges.
  - Develop a clear strategy and timetable to securitize remaining arrears to provide certainty to private contractors and set transparent selection criteria for creditor payment.

### Market Infrastructure, Trading, and Settlement
- Iran has an automated securities settlement infrastructure with IFB acting as the central depository; settlement allows T+1 delivery versus payment and can settle forward trading and repurchase agreements as successive spot deals.
- IFB provides comprehensive, timely, and reliable information on holders and trading developments; market is supervised by SEO.
- Recommendation: Continue to leverage electronic platforms to lower costs, eliminate delays, and reduce fraud risk.

### Money Market and Monetary Policy Linkages
- An active, liquid money market supports bond market development by increasing liquidity and reducing warehousing and funding costs for trading portfolios.
- Recommendation: Move to a market-based monetary policy framework — replace directed credit targets and interest rate caps with a policy rate consistent with the CBI’s inflation target and fund healthy banks at the CBI’s policy rate against collateral.
- The 2018/19 budget’s sizable offset operation (offsetting government debt to contractors against banks’ outstanding debt to the CBI) could provide CBI securities enabling open market operations — therefore government securitization of its debt to the CBI with tradable securities bearing market interest rates is essential.
- Securitization of arrears and recapitalization of the financial system through issuance of government bonds would provide high quality collateral for financial institutions to access CBI liquidity facilities and supply liquidity to the securities market.

### Taxation Considerations
- Current treatment: Return on financial instruments, including earnings from government securities, are exempt from capital gains and income tax in Iran, achieving tax neutrality and supporting market development.
- Recommendation: As markets deepen, consider taxation of financial instruments to improve the revenue base, ensuring any new taxes maintain tax neutrality by equalizing effective tax rates across instruments.

### Issuance Techniques and Investor Base Diversification
- Current practice: State banks conduct sukuk sales on behalf of government in IFB; prices fixed, banks collect bids, process can last a week, banks receive fees but do not underwrite; securities remain on sale at fixed prices for a period.
- Recommendation: The DMO should consider competitive price auctions as the main distribution channel for government securities to better meet cost objectives for larger and more frequent borrowings.
- Recommendation: Reopen previously issued securities to build benchmark issues and enhance market liquidity; use buybacks, exchanges, or switches to spread maturity profile and avoid refinancing risk.
- Medium-term recommendation: Move to a primary dealer system to diversify the investor base and foster deeper markets.

*Source: cr1894 - References ____________________________________________________________________________ 10 (PDF chapter/section).*

### 22.      Currently the investor base in government securities is not very diversified. According

### cr1894 - 22.      Currently the investor base in government securities is not very diversified. According

### Investor base in government securities: current composition and prospects
- About 80 percent of the bonds are held by Asset Management Companies that are owned by local banks.
- Banks hold only a small portion of bonds in their own balance sheets.
- Foreign ownership is about 10 percent.
- The remainder is held by individuals and corporates.
- The implementation of the pension reform (see IMF Country Paper 18/xx, Box 3) could make pension funds important investors in the government securities markets in the medium-term.

### Market development: primary dealers / market makers
- Introducing a network of primary dealers or market makers could help diversify the investor base and foster deeper and more liquid markets in the medium-term.
- Incentives and obligations as well as eligibility criteria to become a primary dealer need to be clearly defined and disclosed.
- While it is premature for Iran to consider a primary dealer system, following restructuring of the financial system and adopting a market-based monetary framework, the authorities could consider introducing a primary dealer system.

### Strategy to secure sustained demand: inclusion in international bond indices
- To ensure investor diversity and sustained demand at treasury auctions, the authorities could target inclusion in the international bond indices in the long-run.
- Preconditions identified for index inclusion:
  - local bonds to be traded on an international clearing house;
  - a certain size for a single bond issuance in local currency;
  - existence of primary dealers to ensure liquidity and consistent bid/ask spreads;
  - market liquidity to reach certain level of transaction volume.

### Expanding Iran’s non-oil exports — key facts (Current Status)
- Natural resources dominate Iran’s exports but account only for a small share of Iran’s GDP.
  - Natural resources represent almost 53 percent of total exports but account only for 12.3 percent of Iran’s GDP.
- Non-oil exports represent only 11 percent of GDP.
  - Comparison: oil exporting countries average = 10.4 percent of GDP; upper middle-income average = 24.2 percent of GDP.
- Iran exports polyethylene (top plastic and rubber export) representing 11.6 percent of Iran’s non-oil exports.
  - Iran mainly exports polyethylene to China (84 percent) and Turkey (10 percent).
  - The large European market imported US$ 9.5 billion of polyethylene in 2015 and accounted for 35 percent of the global market.
- Car parts represent 0.1 percent of Iran non-oil exports.
  - Iran mainly exports car parts to Turkey (72 percent), France (24 percent), and Russia (3 percent).
- Pistachios represent 5.9 percent of Iran non-oil exports.
  - Iran exports pistachios to a large share of world buyers.
- Trade concentration: 37 percent of Iran’s non-oil exports go to China.
- Objective: Sixth Development Plan target to grow non-oil exports to 15 percent of GDP by 2020.

### Policies to diversify and grow non-oil exports — findings and recommendations
- Improving export competitiveness is key; reforms to unify the exchange rate must be accompanied by deep structural reforms.
- Global Competitiveness Index rank improved seven notches to 69th but remains constrained by:
  - problems of access to finance, bureaucracy and policy uncertainty.
  - The export sector is small: some 250 companies account for 60 percent of total goods exports.
- Attracting more Foreign Direct Investment (FDI):
  - Current FDI net inflows represent only 0.02 percent of GDP.
  - Comparison: other MENA countries average = 2 percent of GDP.
  - FDI can help develop human-capital intensive exports and create high skill jobs.
- Lower administrative barriers to trade:
  - It takes 25 days to clear exports, the longest in non-conflict MENA countries.
  - Domestic import tariffs averaged 20.9 percent in 2016.
  - Restrictions on service trade are the fourth highest in the world.
  - Proposed amendments to the Customs Law should help improve trade processing time.
- Bilateral and multilateral trade agreements:
  - Tariffs applied to Iran’s exports by its trading partners averaged 8.9 percent in 2014 (compared to an average of 2.9 percent applied to all other countries).
  - Developing bilateral agreements, notably with the European Union (EU), could benefit Iran non-oil exporters.
- Iran has 12 FTA/PTA agreements with: Afghanistan, Bangladesh, Belarus, Bosnia-Herzegovina, Cuba, Lebanon, Pakistan, Sri Lanka, Syria, Tunisia, Turkey, and Uzbekistan.

### Fostering incentives for women to work — key facts and impacts
- Iran’s achievements in human development:
  - Years of schooling attained by women expanded by 40 percent within one generation to reach an average of 9 years.
  - Fertility rate has been below two children per woman since the 2000s.
  - Life expectancy at birth: women 76.7 years versus men 74.5 years.
- Female labor force participation (FLFP) was 16.2 percent in 2016.
  - Some 83.8 percent of all females over the age of 10 are inactive and out of the labor force—the fourth highest rate in the world.
  - Female unemployment rate in 2016 = 18.9 percent (about twice as high as males).
  - Female employment share: only 13 percent were working (2016); 3.2 percent of women were unemployed.
  - Women represent 13.3 percent of legislators, senior officials and managers and hold 3.1 percent of seats in the parliament.
- Joblessness duration:
  - 30 percent of men remain unemployed for less than 3 months (versus only 11 percent of women).
  - Almost 48 percent of women remain unemployed for more than 19 months (versus only 28 percent of men).
- Macroeconomic potential of higher FLFP:
  - Simulations suggest that reducing the gender pay gap by half has the potential to boost GDP by up to 26 percent.
  - Policies that reduce the costs for women to work outside the home could boost GDP by about 9 percent.
- Labor market and structural constraints:
  - Each percentage point of non-oil GDP growth increases employment by just 0.2 percentage points.
  - 614,000 jobs were created in Iran in 2017, the majority in agriculture and lower-skill services.
  - Informal economy estimated at 36.5 percent of total GDP in 2016.
  - Part-time employment reported as 5 percent of the 5 million total female jobs in 2016 (likely understated).
- Gender-based legal restrictions:
  - The World Bank’s Women, Business, and the Law: 2016 study found Iran had 23 gender-based legal restrictions on women’s employment and entrepreneurship, the third highest number in the world.
  - Examples: married women need husband’s permission to start a business (Civil Code Art. 1117), to apply for a passport, and can be required to ask permission to get a job (although typically not used). Income tax deductions are granted only to the husband (Direct Tax Act Art. 101).
  - On the plus side, wage equality is explicitly guaranteed for women (Labor Code Art. 38).
- Pay gap indicators:
  - World Economic Forum survey estimate: pay premium between men and women for similar work = 42 percent in 2017, placing Iran 99th out of 131 countries surveyed.
- Social factors:
  - In a 2015 labor force survey, 72 percent of Iranian women replied they were not looking for a job because of personal and family responsibilities, compared to only 2 percent for men.

### Policies to encourage greater female participation — priorities
- Education campaigns to reduce discrimination against women.
- Strengthening legal rights for women to remove gender-based legal restrictions.
- Subsidizing affordable child care for lower income women.
- Reforms to boost job creation in the private sector and more high-skill job opportunities aligned with female college graduates.
- Measures to formalize and recognize part-time and informal work to better capture female employment.

*Source: IMF staff report (cr1894).*

### 10. This section studies the impacts of three reforms that could help to narrow gender

### 10. This section studies the impacts of three reforms that could help to narrow gender

### Model, calibration, and mechanisms
- Uses a dynamic general equilibrium model with heterogeneous agents and overlapping generations calibrated to Iran’s macro and micro statistics.
- Model replicates: taxes, cash-transfer programs, pension systems, mean and variance of the income distribution, education spending, size of the informal sector, share of part-time labor, and female labor force participation.
- Agents differ by age, gender, and initial endowment; decisions on consumption, formal and informal labor supply, and investment in children’s education are endogenous.
- Human capital formation is endogenous.
- Main sources of gender inequality in the model:
  - Disutility a family experiences when a woman works outside the home (capturing coordination costs of household activities and childcare).
  - An “unexplained” gender wage gap (after controlling for type of job, education, age) that proxies discrimination in formal and informal labor markets.
- Household decision rules:
  - Husbands always work; only choice is allocation of time between formal and informal sectors.
  - Wives may choose not to work; when working the family incurs the disutility cost.

*Full model description, calibration and data sources referenced to Malta, Mendes Tavares and Pinat (2018) (as cited in source).*

### Reform 1 — Reducing the unexplained gender wage gap: impacts and channels
- Baseline simulated unexplained wage gap: 40 percent in formal and informal labor markets.
- Simulation: reduce the unexplained wage gap by half (i.e., from 40 percent to 20 percent).
- Key outcomes from halving the 40 percent gap:
  - Female labor force participation (FLFP) doubles to 80 percent.
  - Average female formal-sector wage increases by 23 percent.
  - Average female informal-sector wage increases by 36 percent.
  - Average earnings of males in the formal sector fall by 10 percent (due to lower-skilled males entering formal firms).
  - Real GDP increases by 26 percent relative to no change in policy.
  - Government total revenues grow 22 percent (from 15 to 18 percent of GDP), driven by higher consumption taxes, labor taxes (more formal workers), and corporate taxes (boost in formal production).
- Alternative, more moderate calibration: unexplained wage gap reduced from 20 percent to 10 percent:
  - Real GDP rises by 2.6 percent.
  - Total revenue collections increase by 2 percent (from 15.1 to 15.4 percent of GDP).
  - Women’s average earnings in formal and informal sectors rise by 13 percent (reflecting lower pay gap and higher investment in education improving productivity).

### Reform 2 — Reducing costs/obstacles for women to participate in the labor market
- Motivation: 72 percent of Iranian women reported not looking for a job because of personal and family responsibilities (2015 survey data used to motivate modeling of disutility).
- Policy simulation: reduce the disutility cost in the family utility function (representing, for example, national education campaigns that limit gender bias and stigma).
- Modeled effect: FLFP increases by 10 percentage points.
- Long-term impacts:
  - Real GDP increases by 8.7 percent.
  - Government revenues increase by 6.8 percent.
  - Average earnings: women’s earnings rise by 13 percent; men’s earnings rise by 4 percent.
- Mechanisms:
  - Higher participation by highly educated women increases competition in formal sector.
  - Families invest more in education given higher returns, boosting human capital.
  - Learning-by-doing raises productivity for those working in formal sector.

### Reform 3 — Targeted childcare subsidy to low- and middle-income formal female workers
- Policy design in simulation:
  - Target: mothers from the bottom 70 percent of the income distribution working in the formal sector.
  - Subsidy proportional to number of hours worked in a formal job.
  - At maximum it is equivalent in value to the universal cash transfer for a woman working full time (note: maximum value referenced in source equals "Around 450,000 2015 Iranian Rials per month").
- Labor market impacts:
  - The reform generates a 40 percent increase in FLFP in the formal sector.
  - Partial crowding-out: older females may leave the labor market due to increased competition in formal sector.
  - Net effect on hours: women work 10 percent more hours overall.
  - Men’s average earnings increase by 2 percent (due to induced household investment in education and higher steady-state education).
- Macro and fiscal impacts:
  - Long-term real GDP increases by 2 percent.
  - Government revenues increase by 3.2 percent, reflecting higher income and labor tax payments from formal female workers.
  - Fiscal cost of the childcare subsidy program is 0.7 percent of GDP (the higher revenues offset the expected cost).
  - Income inequality, as measured by the Gini coefficient, falls because the reform targets women from lower deciles.

### Summary of comparative effects (selected magnitudes preserved)
- Halving a 40 percent unexplained wage gap:
  - FLFP → 80 percent.
  - Female formal wage +23 percent; female informal wage +36 percent.
  - Male formal earnings −10 percent.
  - Real GDP +26 percent.
  - Government revenues +22 percent (15 to 18 percent of GDP).
- Reducing disutility so FLFP rises by 10 percentage points:
  - Real GDP +8.7 percent.
  - Government revenues +6.8 percent.
  - Female earnings +13 percent; male earnings +4 percent.
- Targeted childcare subsidy (bottom 70 percent, proportional to hours):
  - Formal-sector FLFP +40 percent.
  - Women work 10 percent more hours (net).
  - Real GDP +2 percent.
  - Government revenues +3.2 percent; subsidy cost 0.7 percent of GDP.
  - Men’s earnings +2 percent.
  - Gini coefficient falls.

*Policy implications drawn from simulations: narrowing unexplained pay gaps, lowering social and cultural costs of women’s work, and targeted childcare subsidies each raise female labor force participation and output; effects vary substantially in magnitude and distributional incidence, with wage-gap reductions producing the largest GDP gains in the model.*

*Italicized source attribution below as provided by the content unit.*

### 11.      Improving the effectiveness of the AML/CFT framework should continue. Conducting a

### 11.      Improving the effectiveness of the AML/CFT framework should continue. Conducting a

### AML/CFT risk assessment and supervision
- Conducting a National Risk Assessment on ML/TF will improve the authorities understanding of risks, enhance risk-based policy design and implementation, and improve the allocation of resources.
- Priorities include:
  - Enhancing the AML/CFT risk based supervision of banks and other financial institutions and imposing corrective actions when relevant.
  - Enhancing licensing and fit and proper requirements to prevent criminals from owning and/or controlling financial institutions.
  - Effective supervision is expected to:
    - reduce the risk of financial abuse in the financial sector,
    - enhance the detection and prevention of ML, proceeds of fraud and corruption, and TF activities,
    - improve compliance and enhance the relationship and bolster trust between Iranian banks and their correspondent banks.

### Beneficial ownership, PEPs, and compliance of financial institutions
- Improve the compliance of financial institutions—particularly banks—in identifying beneficial owners and domestic politically exposed persons (PEPs).
- Financial Institutions should be required to adequately apply preventive measures commensurate with their risks.
- Measures required include:
  - Issuing CBI guidance to assist banks in implementing these requirements.
  - Focusing CBI inspections on these areas.
  - Improving the capacity of banks’ internal controls and compliance systems.
- Expected outcomes:
  - Allow banks to detect and report suspicious activities including those related to proceeds of corrupt public officials and misuse of legal entities.
  - Reassure correspondent banks that they will not deal with prohibited individuals and entities that are under economic sanctions.
- Developing mechanisms to ensure the transparency and timely availability of accurate beneficial ownership information of legal entities established in Iran:
  - A public registry for beneficial ownership is one approach that would enhance transparency about the ownership of corporations.
  - Timely access—including by correspondent banks—to adequate, accurate, and current information of all types of entities established in Iran—could enhance access to the global financial system.

### Enhancing the anti-corruption framework
- Current situation:
  - Multiple laws criminalize various forms of corruption in both the public and private sectors, but the legal framework may not be adequate to always permit effective pursuit of corruption.
  - In line with the recommendations of the UNCAC Peer Review Executive Summary, the legislative framework should be upgraded to properly criminalize bribery, illicit enrichment and other corruption offenses.
- Priority reforms include:
  - Enhancing the system of declaration of assets of senior public officials in line with international best practices.
    - A comprehensive asset declaration regime should include:
      - (i) targeted to senior public officials, their family members and close associates, and assets beneficially owned,
      - (ii) transparent and requires publication of asset declarations, and
      - (iii) provisions for dissuasive measures or sanctions for noncompliance (e.g., criminal offense for intentionally declaring false information or not declaring).
  - Establishing an independent anti-corruption agency with law enforcement powers to focus on implementing a holistic strategy to fight corruption, and prioritizing and pursuing corruption cases. Prosecution and adjudication of corruption cases should be autonomous and protected from interference.
  - Building synergies between the AML and anti-corruption frameworks:
    - Domestic coordination should allow the two systems to operate in tandem.
    - Concerned agencies should coordinate and cooperate to tackle corruption and its proceeds.
    - Example interactions:
      - The FIU, which receives suspicious reports related to PEPs, could enhance its ML disseminations to anti-corruption agencies investigating proceeds of corrupt officials.
      - Agencies in charge of an anti-corruption agency could share information with the FIU to trigger money laundering analysis by “following the money” generated from corruption, identifying perpetrators of corruption (and their associates), and tracing their assets domestically and abroad.

### Notable numeric and reference points in text
- The convention adopted in December 1999 was ratified by 188 countries.
- Footnote references appearing in the text: 12, 13, 14, 15.

*ISLAMIC REPUBLIC OF IRAN 28 INTERNATIONAL MONETARY FUND*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1894.pdf_