IMF Staff Completes 2016 Article IV Mission to Islamic Republic of Iran

IMF News, December 19, 2016

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Real GDP is expected to grow by 6.6 percent in 2016/17.
Growth is projected to ease to 3½ percent in 2017/18 as oil production normalizes and non-oil sector growth remains modest.
Higher oil production and exports, after implementation of the Joint Comprehensive Plan of Action, are allowing economic growth to rebound from recession in 2015/16.

Inflation is expected to average about 9 percent in 2016/17.
Inflation is projected to temporarily rise to just over 11 percent in 2017/18 due to the pass-through from recent exchange rate depreciation.
The mission welcomes the authorities’ commitment to unify the exchange rate and return to a managed float, and recommends this proceeds expeditiously to ensure flexibility to manage shocks.
The Central Bank requires greater independence and better tools under the new Central Bank Bill to sustain low and stable inflation.

Public debt is set to rise on the back of the new debt to clear government liabilities and recapitalize banks.
Fiscal policy should be cast in a medium-term framework to support reforms.
A medium-term fiscal framework that targets a gradual adjustment in the non-oil fiscal deficit can address substantial spending pressures while keeping debt sustainable.
Measures recommended:
- Sharply reduce directed credit schemes.
- Adjust regulated prices to curb liquidity pressures.
- Mobilize domestic revenue and improve expenditure composition to ensure the adjustment is growth-friendly and protects the poor.
Fiscal policy has to adapt to spending pressures while finding space to support growth.

Banks are in urgent need of restructuring and recapitalization to safeguard financial stability and reduce high lending rates.
The mission urges:
- Distressed banks be put under close supervision.
- An Asset Quality Review be commenced to determine an appropriate plan to recapitalize viable banks and resolve nonviable institutions.
- Recapitalization of state-owned banks be linked to measures that improve their commercial viability.
Prudent liquidity management is critical to keep inflation low and stable.

The IMF welcomes Iran’s strong commitment to AML/CFT reform that should facilitate the expansion of correspondent banking relationships.
Authorities have:
- Created dedicated AML/CFT units in all banks.
- Adopted a high level action plan with the FATF.
- Requested a comprehensive AML/CFT assessment by IMF staff in 2018.
Staff stresses the importance of fully implementing the FATF action plan and improving AML/CFT effectiveness.
Recommended governance and regulatory actions:
- Establish a registry of corporate beneficial ownership.
- Bolster the anti-corruption framework.
- Improve the commercial orientation of state-owned firms, reduce red tape, and promote more open competition to create space for private sector growth.

The Sixth Development Plan recognizes the need to create jobs.
Education needs to better match graduates’ skills to employer needs.
Higher female participation and employment can boost growth.
- Women represent over half of university students.
- The government can enhance women’s job opportunities through a non-discrimination law and targeted active labor market policies.

Mission led by Ms. Catriona Purfield visited Tehran from December 3 to December 14, 2016 to conduct the Article IV review.
The mission will prepare a staff report and present it to the Executive Board of the IMF for discussion in March 2017.
The mission welcomes authorities’ cooperation and thanks Central Bank of Iran, Ministry of Finance, the Planning and Budget Organization, the Vice Presidency for Women and Family Affairs, counterparts in the Oil and Labor Ministries, the Majlis Research Center, TSO, NDFI, and the financial and private sectors for their collaboration and candid discussions.

Press Release No. 16/569, December 19, 2016.