Public Information Notice: IMF Executive Board Concludes 2011 Article IV Consultation with the Islamic Republic of Iran
IMF News, August 3, 2011
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- Published: August 3, 2011
Background
- Iran implemented 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.
- The staff report for the 2011 Article IV Consultation with the Islamic Republic of Iran is available.
Economic developments and outlook
- Real GDP growth rebounded to 3.2 percent for 2010/11, spurred by a recovery in agriculture production and higher oil prices.
- Inflation developments:
- Inflation fell from 25.4 percent in 2008/09 to 12.4 percent in 2010/11.
- Consumer price inflation increased from 10.1 percent in December to 14.2 percent at end-May 2011 following the subsidy reform.
- Fiscal and external positions in 2010/11:
- Overall fiscal surplus estimated at 1.7 percent of GDP in 2010/11, reflecting prudent spending policies.
- Current account surplus increased to 6 percent of GDP in 2010/11, in line with the recovery of oil prices.
- Monetary and financial developments:
- Overall money growth remained moderate, but an increase in central bank credit to banks (mainly financing subsidized housing) led to a wide spread between the interbank rate and the parallel rate and a rapid increase in gold coin prices.
- Outlook:
- On the backdrop of high oil prices and expected efficiency gains from the subsidy reform, the medium-term outlook is positive with growth expected to rebound.
- 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 — findings and policy recommendations
- Directors welcomed the economic recovery, the decline in inflation, and the improvement in the external and fiscal positions in 2010/11.
- Directors noted the medium-term outlook remains positive on the strength of high oil prices and potential efficiency gains related to the subsidy reform, but stressed that continued prudent policies are essential to maintain macroeconomic stability and lay the basis for sustained growth.
- On subsidy reform:
- Directors welcomed early success in implementation, calling it critical for enhancing energy efficiency, supporting growth, and moving toward a market-based economy.
- Noted that cash transfers financed from energy price increases were instrumental in supporting domestic demand, improving income distribution, and reducing poverty.
- Fiscal and monetary policy recommendations:
- Tight fiscal and monetary policies are necessary to contain inflation and allow a smooth adjustment of relative prices following the subsidy reform.
- Encouraged authorities to save any oil revenue windfall and sterilize the related foreign exchange inflows.
- Emphasized that monetary policy should gear toward positive real rates of return and that central bank credit to banks should be restrained.
- Exchange rate and reserves:
- Noted developments in the foreign exchange market and authorities’ commitment to a unified exchange rate.
- Encouraged authorities to manage the exchange rate more flexibly and maintain a strong international reserve position.
- Banking sector reforms:
- Welcomed 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.
- Noted additional steps are needed to reduce the large non-performing loan portfolio.
- Bank profitability would benefit from allowing banks more flexibility in setting rates of return and reducing operating costs.
- Supported the 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.
- Structural reforms and diversification:
- Welcomed authorities’ reform strategy based on privatization, reduction of government role, and market-based prices for energy and agricultural goods to achieve higher employment and growth.
- Considered critical to restructure the enterprise sector through adoption of energy-efficient technologies and to support development of new growth sectors through labor market reforms, including adequate unemployment benefits.
- Agreed that full removal of subsidies and steadfast implementation of ongoing tax and customs reforms are essential to further reduce dependency on oil and natural gas.
- AML/CFT and sanctions:
- Noted progress in enhancing Iran’s AML/CFT framework and urged authorities to align the framework with international standards.
- Many Directors noted concerns about the impact of sanctions on transfer of oil export proceeds and some Directors called on staff to monitor and assess Iran’s access to the international payment system.
- Data and surveillance:
- Directors considered economic data broadly adequate for surveillance purposes and encouraged authorities to improve the timeliness of data provision.
Selected economic indicators, 2008/09–2010/11
- Real GDP growth (factor cost; percentage change)
- 2008/09: 0.6
- 2009/10: 3.5
- 2010/11: 3.2
- CPI inflation (period average; percentage change)
- 2008/09: 25.4
- 2009/10: 10.8
- 2010/11: 12.4
- CPI inflation (end of period; percentage change)
- 2008/09: 17.8
- 2009/10: 10.4
- 2010/11: 19.9
- Unemployment rate (in percent)
- 2008/09: 11.9
- 2009/10: 14.6
- 2010/11: 2/ (Data for the first quarter.)
- Central government balance (in percent of GDP)
- 2008/09: 0.7
- 2009/10: 1.0
- 2010/11: 1.7
- Broad money growth (percentage change)
- 2008/09: 15.2
- 2009/10: 23.5
- 2010/11: 26.7
- Current account balance (in percent of GDP)
- 2008/09: 6.5
- 2009/10: 3.0
- 2010/11: 6.0
- Gross international reserves (in billions of U.S. dollars)
- 2008/09: 79.6
- 2009/10: 78.0
- 2010/11: 78.9
- Public and publicly guaranteed external debt (in percent of GDP)
- 2008/09: 6.1
- 2009/10: 5.9
- 2010/11: 5.4
- Exchange rate (period average; rials per U.S. dollar)
- 2008/09: 9,574
- 2009/10: 9,920
- 2010/11: 10,339
Source: International Monetary Fund.