IMF Survey : Iran Presses Ahead with Economic Reforms
IMF News, April 4, 2014
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- Published: April 4, 2014
Economic health check
- First annual health check of the economy in 2½ years.
- Near-term outlook remains uncertain.
- Real GDP growth is expected to begin to stabilize in the current fiscal year after two consecutive years of sharp contraction.
- Recovery is expected to benefit from potential improvements in the external environment and some early signs of modest revival in growth in domestic demand.
- The new Iranian administration took office in August 2013.
- The interim agreement with the P5+1 took effect in January 2014 and provides for a limited, temporary easing of sanctions that:
- allows Iran to stabilize oil exports,
- grants some access to Iran’s funds held abroad,
- temporarily waives sanctions on petrochemical exports and the automobile industry.
Addressing weaknesses
- Large shocks and weak macroeconomic management have significantly impacted economic stability and growth in recent years, despite earlier progress in raising per capita income and living standards.
- Contributing shocks identified:
- implementation of the first phase of energy subsidy reform,
- ambitious and inadequately funded social programs,
- marked deterioration in the external environment stemming from the intensification of trade and financial sanctions.
- Monetary actions and inflation outcomes:
- The central bank has kept tighter control over base money in the past seven months.
- Agreement reached to remove the financing of the Mehr Housing Project—an ambitious affordable housing project launched in 2007—from the central bank’s balance sheet.
- These measures, along with favorable global food prices and the appreciation of the currency, have allowed the country to lower the 12-month inflation rate to about 23 percent in early 2014, sharply down from 45 percent last June.
Getting back on track — policy strategy and priorities
- The IMF stresses that more reforms are needed and warns the authorities should avoid postponing reforms and “muddling through” in the hope of an improved external environment.
- Recommended three-pronged strategy to address low growth and high inflation:
- tightening monetary policy,
- balanced fiscal consolidation,
- structural reforms.
- Fiscal policy and revenue measures:
- The 2014 budget is described as providing a good balance between disinflation and supporting the economy.
- Measures to broaden the revenue base away from oil include the authorities’ decision to bring forward and increase the scheduled value-added tax (VAT) rate, and reforms to strengthen tax administration and reduce exemptions.
- Reforms to the fiscal policy framework should strengthen its countercyclical role, limit fiscal risks, and enhance macroeconomic coordination.
- Monetary and exchange rate reforms:
- Reforms to the monetary policy framework are essential to fully establish economic stability.
- Intended move to unify the foreign exchange market by mid-2015.
- Progress in simplifying and refocusing the central bank’s mandate toward price stability and steps to restructure institutional decision making are key.
- Structural and labor market reforms:
- Reforms to boost productivity are needed to unleash entrepreneurial and human capital potential and create jobs.
- High youth unemployment of about 24 percent requires labor market reforms.
- Large scope to improve the business environment to boost productivity and growth.
- Subsidy reform:
- Implementation of Iran’s subsidy reforms remains a priority.
- Design of the reforms—replacing price subsidies with universal cash transfers to households—has been exemplary, though the first phase faced significant difficulties.
- It will be key to ensure that the second phase proceeds with the right supporting framework and macroeconomic policies.
Scenarios and outlook
- The report discusses two illustrative medium-term scenarios for the Iranian economy.
- These scenarios indicate that, in the absence of a sharp increase in oil prices or production and without solid progress on structural reforms, Iran will continue to face significant constraints in achieving sustainable growth and lower inflation.
International Monetary Fund