Iran: Concluding Statement of an IMF Staff Visit
IMF News, October 3, 2016
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- Published: October 3, 2016
Economic conditions and outlook
- Real GDP rebounded strongly over the first half of the year as sanctions eased post-JCPOA implementation.
- Oil production and exports rebounded quickly to pre-sanction levels, cushioning the impact of low global oil prices.
- Increased activity in agriculture, auto production, trade and transport services led the recovery in the non-oil sector.
- Real GDP is projected to grow by at least 4.5 percent in 2016/17.
- CPI inflation: declined to 6.8 percent (y/y, point-to-point) in June 2016; point-to-point inflation rose to 9.5 percent in September; staff estimates inflation is expected to average 9.2 percent in 2016/17.
- The prudent monetary and fiscal policies adopted in recent years, along with favorable international food prices, supported the decline in inflation through mid-2016.
Emerging vulnerabilities and macro policy recommendations
- From the second half of 2015/16, the government stimulated growth by directing bank credit to selected sectors and reducing interest rates.
- On current policies, staff estimate:
- Non-oil fiscal deficit in 2016/17 will increase by 0.5 percent of non-oil GDP to reach 8.9 percent of non-oil GDP (or 7.7 percent of total GDP).
- Overall fiscal deficit is expected to deteriorate to 2.7 percent of GDP in 2016/17 from 1.7 percent of GDP 2015/16.
- This year’s budget requires additional financing to proceed with planned clearance of arrears: R.300,000 bn/2.3 percent of GDP.
- International reserves have fallen by about $7 billion since end-March 2016, reflecting valuation changes, the clearance of FX dues to export credit agencies and increased imports post-JCOPA implementation.
- Recommendations to keep inflation in single digits and preserve exchange rate unification:
- Recalibrate monetary and fiscal policies at the margins.
- Ensure adjustments in administered prices are compatible with single-digit inflation.
- Manage credit growth by slowing or halting expansion in directed credit schemes or implementing differentiated loan-loss provisions.
- Central Bank of Iran (CBI) to assess additional steps to absorb excess liquidity.
- Fiscal policy to avoid excessive pro-cyclical stimulus; step-up revenue collections and contain spending, including by removing high income households from the subsidy beneficiaries list.
Enhancing central bank capacity and governance
- The proposed Central Bank Bill places price stability as the core objective of monetary policy.
- Staff recommendations on governance and instruments:
- Streamline the number of governing bodies and limit membership to senior CBI officials and/or independent experts to strengthen CBI independence.
- Explore greater transparency and alternative reporting mechanisms to ensure accountability for the inflation objective.
- Provide the CBI with instruments to intervene and manage liquidity (e.g., government bonds or central bank paper).
- Allow for the possibility of an emergency liquidity facility at the CBI.
Fiscal policy, arrears, and debt management
- The 2017/18 budget should be guided by the need to gradually reduce the non-oil deficit in line with the permanent income norm to support low inflation and adjust to lower oil prices and higher debt service costs.
- The government intends to increase non-oil revenues to provide non-inflationary resources for higher public investment.
- Adopting a medium-term fiscal framework anchored on the non-oil deficit would improve fiscal planning and allow accumulation of savings from oil revenues as a buffer.
- Provisional estimates suggest public debt could be as high as 40 percent of GDP once government arrears to the private sector are recognized.
- Debt management and arrears clearance:
- Debt Management Office is securitizing part of obligations in a prudent, phased approach; claims are being vetted and audited and can be netted against debt owed to the government.
- Parliament approved issuing new debt instruments to securitize a small part of arrears in a phased manner to help develop local debt markets.
- Parliament also approved using revaluation gains at the CBI to clear government debts held by the financial system, which will reduce the CBI’s capital buffer and its capacity to absorb future losses.
- Going forward, the cost of securitization of remaining arrears is best borne by the government given its fiscal origin.
- Securitization with new debt issuance could deepen local debt markets and provide the CBI with an instrument to manage liquidity; interest costs associated with new debt must be adequately budgeted.
Banking sector reform and supervision
- Fundamental overhaul of the banking system is needed to lift financing constraints to private-sector growth:
- Capital is low and the stock of non-performing loans remains high despite securitization of government arrears and higher provisions.
- Interest rate controls and directed credit constrain banks’ profitability and capacity to build capital.
- Financial sector reform strategy should fully address banking sector problems.
- Staff suggestions and measures:
- Banks should undertake forward-looking tests of commercial viability as part of an asset quality review.
- Where tests identify shortfalls in capital or risk management, banks should present and implement time-bound remedial plans.
- Any bank that is not viable after such a process should be resolved.
- Move the burden of government-mandated credit policies to the budget; meet recapitalization needs via new long-term government bonds.
- Enact a new corporate bankruptcy law to aid reform.
- A comprehensive reform would enable transition to Basel II and III reporting standards, boosting financial transparency.
- Upcoming IMF bank resolution workshop provides an opportunity to discuss NPL options; IMF stands ready to provide further assistance to define and implement a financial sector reform plan.
- Proposed Banking Bill and supervision enhancements:
- CBI has restructured and brought unlicensed financial institutions (UFIs) under supervision.
- Proposed Banking Bill enhances CBI powers to license and oversee UFIs and substantially expands the supervisory tool-kit (consolidated supervision and an array of early intervention measures).
- The draft law needs clarification on the CBI’s powers to revoke a banking license and available resolution options.
Financial integrity, reporting, and data transparency
- Implementation of the FATF plan will bolster Iran’s AML/CFT framework and facilitate re-integration of domestic banks into the global financial system; the IMF is willing to cooperate to provide information.
- CBI has requested banks prepare financial statements using IFRS to support transparency.
- Increased transparency and timeliness in publication of data on key economic variables will facilitate international investor interest in Iran and aid development of debt markets.
Iran: Concluding Statement of an IMF Staff Visit — October 3, 2016