Iran — Achieving its Potential in the Global Economy

IMF News, May 17, 2016

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Speech by David Lipton, First Deputy Managing Director, IMF, delivered at the Central Bank of Iran, May 17, 2016.
Context: first visit to Iran as IMF official; Iran a founding IMF member; sanctions lifted creating an opportunity to deepen global economic integration.
Dual challenge highlighted: (1) navigating a difficult global economic situation; (2) building a competitive and flexible domestic economy.

Key projection:
- Global growth remaining largely unchanged this year at a subdued 3.2 percent rate, with only a slight increase to 3.5 percent in 2017.
Emerging and developing economies:
- Will account for the lion’s share of world growth but face subdued prospects due to the sharp fall in commodity prices led by oil, and China’s economic rebalancing.
Advanced economies:
- Modest recovery expected to continue amid unresolved crisis legacies (high leverage, high nonperforming loans in some banks).
Increasing downside risks (as enumerated in the speech):
- The global slowdown is hurting bank balance sheets, and financing conditions have tightened considerably.
- Emerging markets face excess capacity in some sectors, capital spending is declining, and private debt—often denominated in foreign currency—is rising.
- Increased financial market volatility; emerging market currencies have weakened and some equity markets have fallen sharply.
- Retrenchment of global capital and trade flows: emerging markets last year experienced about $200 billion in net capital outflows, compared with $125 billion in net inflows in 2014.
- Inflation has fallen to historical lows; headline inflation in advanced economies last year at its lowest level since the financial crisis, and emerging markets’ core inflation well below central bank targets, risking debilitating disinflation.

Opportunities from reintegration:
- Oil sector regaining access to export markets.
- Businesses and banks face lower transaction costs as they reintegrate into global trade and financial systems.
- Both oil and non-oil sectors expected to gain.
Constraints and external challenges:
- Managing the transition to lower oil prices: higher export volumes only partly mitigate lower prices; limited prospects for a large increase in oil revenue because of high global output and weak demand.
- Non-oil exports affected by weak global demand, including slower growth in China.
- Global lenders and investors are more exacting and cautious, differentiating by policy soundness and stability of fiscal, monetary, and financial systems.

Contain liquidity growth to:
- Anchor inflation in single digits.
- Reduce potential pressure on the exchange rate.
- Help maintain competitiveness of the non-oil sector.
Commit to exchange rate unification to entrench economic stability.
Strengthen the banking system so it can effectively channel credit to the private sector by:
- Addressing high levels of nonperforming loans.
- Bolstering bank capital.
- Restructuring weak institutions.
- Dealing with unlicensed financial institutions.
- Strengthening risk management systems and bank supervision.
Fiscal policy:
- Focus on gradual reduction of the non-oil deficit.
- Prefer mobilizing more non-oil tax revenue over cutting spending.
- Create space for increased public investment in infrastructure and human capital.

Reorient economy toward non-oil sector to generate most job creation.
Lessons from other countries’ transitions (as drawn out in the speech):
- Monetary stability is essential; loss of monetary stability can undermine structural reforms.
- Lack of competition limits growth, sustains economic rents, breeds corruption, and prevents job growth.
- Ownership links between companies and banks lead to conflicts of interest, irresponsible borrowing, and weakness in public finances; separating companies and banks and privatizing state enterprises improves governance.
Recommended reform areas:
- Open product and services markets to spur competition and integration with the world economy and create high-quality jobs.
- Labor market reforms to draw people into the workforce, noting fiscal implications for tax cuts and training programs and the need to fit within a broad fiscal framework.
- Policies to foster innovation: remove barriers to competition and foreign investment, reduce monopolies and special interests, cut red tape, increase investment in education and research.
- Advance privatization, financial transparency, and a level playing field for all investors and entrepreneurs.
Reintegration-specific measures:
- Continue progress on a framework to combat money laundering and the financing of terrorism as a critical element for reconnecting Iranian banks with the international financial system; the IMF will continue to support these efforts.

Need to consolidate recent successes in reducing inflation despite prior exchange rate depreciation and limited access to foreign exchange assets.
Structural impediments: monopolies, close ownership links between banks and companies, regulatory barriers, and remaining vulnerabilities in banking and corporate sectors.
Demographic pressures: large numbers of new entrants to the labor market require job-creating reforms.

Opportunity to deepen integration into the global economy is present and timely.
Combining economic stabilization with reforms can unleash entrepreneurship, create jobs (especially for the younger generation), and raise living standards.
Successful reforms require leadership and popular support; there will be costs and dislocations but long-term benefits are expected to outweigh them.
A more prosperous Iran can contribute to global economic stability; IMF looks forward to working with Iran on this endeavor.

Source: Speech by David Lipton, First Deputy Managing Director, IMF, Central Bank of Iran, May 17, 2016.