Press Release: IMF Executive Board Concludes Article IV Consultation with the Islamic Republic of Iran
IMF News, April 3, 2014
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- Published: April 3, 2014
Summary of recent developments
- On March 28, 2014 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Islamic Republic of Iran.
- Iran had achieved considerable progress in raising per capita income and living standards in previous decades, but progress stalled in recent years as domestic policies and the external environment deteriorated.
- Macroeconomic performance worsened markedly following the subsidy reform in late 2010 and the intensification of sanctions in 2012.
Macroeconomic performance and policy developments
- Economy and inflation
- The economy contracted by almost 6 percent in 2012/13.
- 12-month inflation rose from about 12 percent in late 2010 to around 45 percent in July 2013.
- 12-month inflation declined to about 29 percent in January 2014.
- Exchange rate and external sector
- With the deterioration in the external environment in 2012, the authorities abandoned their unified and managed exchange rate regime until they eventually unified the official exchange rates again in June 2013.
- The balance of payments remained in surplus, but the current account surplus declined to 6½ percent of GDP in 2012/13, almost halving from the year before.
- The overall balance of payments was in a surplus of 3½ percent of GDP in 2012/13.
- Gross foreign assets of the Central Bank of Iran (CBI) rose to about $105 billion by end-2012/13.
- Fiscal sector and subsidies
- Total revenues declined by about 10 percentage points of GDP since 2010/11.
- The overall budget balance shifted from a surplus of 3 percent of GDP in 2010/11 to an estimated deficit of 1 percent of GDP in 2013/14.
- The deficit of the Targeted Subsidy Organization remained high, bringing the expanded overall deficit to about 2¼ percent of GDP in 2013/14.
- Monetary and financial sectors
- Monetary conditions were relatively accommodative, with domestic interest rates increasingly negative in real terms.
- The financial system was adversely affected, particularly banks’ asset quality and profitability.
- The CBI has kept a lid on base money growth thanks to tighter credit to the banking system and some fiscal consolidation.
Near-term outlook and risks
- Near-term projection
- The economy is envisaged to remain stagnant in 2013/14, with real GDP estimated to decline by 1¾ percent.
- Economic activity is projected to begin to stabilize in 2014/15, with real GDP projected to increase by 1–2 percent.
- Risk factors and upside possibilities
- The outlook remains highly uncertain and subject to downside risks.
- Upside risks emanate from the interim agreement with the P5+1.
- Authorities are taking steps to make the regulatory framework for foreign investment in the oil sector more attractive.
Executive Board assessment and policy recommendations
- General assessment
- Executive Directors acknowledged the difficult economic environment, noted incipient signs of stabilization and declining inflation, but emphasized uncertainty and downside risks.
- Directors encouraged continued implementation of prudent macroeconomic policies and structural reforms to support sustained high growth and employment.
- Monetary and fiscal policy recommendations
- Emphasized tight monetary policy, balanced fiscal consolidation, and supply-side reforms to deal with stagflation.
- Recommended increasing interest rates gradually to bring inflation down and anchor expectations.
- Welcomed removal of the financing of the Mehr housing program from the CBI’s balance sheet and encouraged seeking long-term noninflationary financing for the program.
- Welcomed measures to broaden the revenue base away from oil, and steps to strengthen tax administration and reduce exemptions.
- Recommended reforms to the fiscal policy framework to strengthen its countercyclical role, limit risks, and enhance macroeconomic policy coordination.
- Exchange rate and subsidies
- Took note of staff assessment that the official exchange rate in real effective terms appears to be somewhat overvalued relative to the level implied by medium-term fundamentals, while recognizing uncertainty.
- Welcomed authorities’ intention to unify the foreign exchange market and remove restrictions, and encouraged flexible exchange rate management in light of external risks and still high inflation.
- Agreed that subsidy reform should proceed with the right supporting framework and macroeconomic policies; supported plans to increase domestic energy prices gradually while improving targeted cash transfers.
- Financial sector and structural reforms
- Urged strengthening the central bank’s supervisory powers and enforcement capacity.
- Encouraged leveling the field of competition through further privatization and reforms to government-mandated credit policies.
- Supported plans to deal with nonperforming loans and recapitalize public banks, conditioned on restructuring, enhanced risk management and accountability, a strengthened bank resolution framework, and a financially-sound deposit guarantee fund.
- Viewed improvements to the business environment as potentially boosting productivity and growth; encouraged reviewing labor regulations to ease rigidity of contracts and nonwage costs.
- Strengthening the regime against money laundering and the financing of terrorism would help reinsert the domestic financial system into the global economy, lower transaction costs, and increase productivity.
- Data and statistics
- Welcomed recent steps to improve the timeliness of official statistics and noted scope for further improvements.
Selected macroeconomic indicators (2011/12–2013/14)
- National accounts (Annual change, in percent, unless otherwise indicated)
- Nominal GDP at market prices (in billions of Iranian rials): 6,121,004; 6,793,170; 9,068,975
- Real GDP at factor cost: 3.0; -5.8; -1.7
- Real oil and gas GDP: 1.3; -34.1; -5.7
- Real non-oil GDP: 3.2; -3.1; -1.4
- CPI inflation (average): 21.5; 30.5; 35.2
- CPI inflation (end of period): 20.5; 41.2; 22.0
- Unemployment rate (in percent of labor force): 12.3; 12.2; 12.9
- Budgetary operations (In percent of GDP)
- Revenue: 19.7; 15.0; 13.9
- Of which: oil revenue: 10.8; 6.6; 6.2
- Expenditure: 19.5; 15.3; 14.8
- Expense: 13.1; 13.6;
- Net acquisition of nonfinancial assets: 4.7; 2.2; 1.2
- Net lending/borrowing (overall balance): -2.0; -2.2;
- Net lending/borrowing (budget): 0.2; -0.3; -0.9
- Balance of Targeted Subsidy Organization: -1.6; -1.3;
- Monetary sector (Annual change in percent, unless otherwise indicated)
- Narrow money (M1): 15.8; 29.1;
- Broad money (M2): 19.6; 30.6; 24.9
- External sector (In billions of U.S. dollars, unless otherwise indicated)
- Current account balance: 59.4; 26.3; 29.2
- In percent of GDP at market prices: 11.0; 8.0;
- Gross official reserves: 92.2; 104.4; 107.7
- Oil and gas sector (In U.S. dollars, unless otherwise indicated)
- Total oil and gas exports (billions): 118.2; 62.9; 56.3
- Liquid fuels production (in millions of barrels/day): 4.0; 2.8
- Memorandum items
- Average exchange rate (Iranian rials per U.S. dollar): 11,312; 12,260; 24,770
Press Release: IMF Executive Board Concludes Article IV Consultation with the Islamic Republic of Iran