## Iran — Achieving its Potential in the Global Economy

_IMF News, May 17, 2016_

## Source details

**Canonical URL:** [Iran — Achieving its Potential in the Global Economy](https://www.imf.org/en/news/articles/2015/09/28/04/53/sp051716)

## Other formats

- [Markdown version](/en/news/articles/2015/09/28/04/53/sp051716/index.md)
- [Structured JSON version](/en/news/articles/2015/09/28/04/53/sp051716/index.json)
- [Bundle manifest](/en/news/articles/2015/09/28/04/53/sp051716/bundle-manifest.json)

## Bibliographic details
- Published: May 17, 2016

---

### Introduction
- 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.

### Global outlook
- 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.

### Outlook for the Iranian economy (near term)
- 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.

### Short-run macro policy recommendations
- 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.

### Structural reforms and long-run policies
- 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.

### Challenges specific to Iran
- 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.

### Conclusion
- 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.*

---


## References

- [Islamic Republic of Iran and the IMF](http://www.imf.org/external/country/IRN/index.htm)
- [People's Republic of China and the IMF](http://www.imf.org/external/country/CHN/index.htm)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp051716_