International Monetary Fund has commended Iran for achieving an impressive recovery in economic growth after the lifting of nuclear sanctions in 2016, maintaining inflation in single digits and stabilizing the foreign exchange market.
IMF has projected Iran›s economic growth to stabilize at 4.5% over the medium-term, as the country›s recovery broadens. Real GDP growth is expected to reach 6.6% in 2016/17 and to ease to 3.3% in 2017/18, as oil production remains close to the OPEC target.
Thereafter, IMF predicts, higher foreign direct investment and a gradual improvement in domestic financial conditions will drive investment and stronger non-oil sector growth.
The current account is forecast to remain in surplus, as higher exports offset the rise in imports related to investment.
Inflation is expected to temporarily rise to 11.9% year-on-year by end-2017/18, reflecting recent liquidity growth and pass-through from exchange rate depreciation, but to return to single digits on the back of prudent fiscal and monetary policies.
The pace of job creation lags, which needed to absorb the large number of new entrants to the labor market and unemployment, remains high.
In its latest report, which is the concluding statement of Executive Board of the IMF’s Article IV consultation with the Islamic Republic of Iran, it notes that economic growth rebounded over the course of 2016/17 on the back of higher oil production.
Real GDP grew by 7.4% in the first half 2016/17, rebounding from recession in 2015/16. However, growth in the non-oil sector averaged 0.9%, despite the pickup registered in the second quarter, indicating continued difficulties in access to finance and domestic financial sector and structural weaknesses.
It adds that inflation declined to single digits and has hovered in the 9.5% range, year-on-year, since mid-2016.
The foreign exchange market stabilized, although it experienced some volatility toward end-2016 before recovering in January 2017. The spread between the official and the market rate has narrowed to about 15%.
Given the renewed uncertainty, directors of the Executive Board emphasized the importance of maintaining prudent macroeconomic policies and building buffers, strengthening the financial sector and advancing reforms to lessen Iran’s reliance on oil and develop the private sector.
They welcomed the authorities’ commitment in this regard and the thrust of their reform plans.
The IMF report saw an urgent need for financial sector reforms to sustain financial stability and finance growth. They recommended enhanced supervision of distressed banks and an asset quality review to identify viable banks that warrant recapitalization and nonviable banks to be resolved.
The directors encouraged the authorities to support recapitalization of public banks with measures that improve their commercial viability and wind down directed credit schemes.
They looked forward to the approval of the new banking bill that would give the Central Bank of Iran the supervisory powers to implement reforms. Directors also encouraged the bill’s quick passage to modernize the monetary policy framework and provide greater operational independence to CBI for pursuing low and stable inflation.
The report urged the authorities to implement a mediumterm fiscal framework to underpin their commitment to prudent fiscal policy and ensure gradual fiscal adjustment while funding financial sector reform costs.
Higher revenue collections, further fuel price adjustment and better targeting of cash transfers would create space to support growth and equity through higher public investment and cash transfers to the poor.
The directors encouraged the authorities to explore the scope of using oil revenues to fund bank recapitalization and noted the importance of replenishing the Oil Stabilization Fund to provide the budget a buffer.
“The lifting of sanctions and (Iran’s) ambitious reform agenda are yet to produce their full beneficial impact on the Iranian economy,” Jafar Mojarrad, an IMF executive director, wrote in an addendum to the report.
“Regrettably, remaining US sanctions and related uncertainty have hindered the return of global banks to the Iranian market and continue to hamper large-scale investment and trade.”
The directors welcomed recent steps to strengthen the anti-money laundering/countering financing of terrorism framework, the introduction of International Financial Reporting Standards reporting in banks, and the audit and securitization of government arrears, which will help unlock the balance sheets of corporations and banks, and facilitate greater investment.
They urged the authorities to fully implement the Financial Action Task Force action plan, further enhance the AML/CFT framework, and improve the transparency of corporate ownership to facilitate the country’s reintegration into the global financial system and restore correspondent banking relationships.
The directors noted that reducing the role of the state and improving the business climate would foster foreign investment and aid job creation. Labor market reforms, including specific measures to facilitate youth and female employment, would ensure that more people have opportunities to work and make growth more inclusive.
They approved the retention of temporary exchange restriction and multiple currency practices, but underscored the authorities’ commitment to unify the exchange rate and shift to a managed float by early 2018, to provide flexibility for managing shocks.
The IMF report also urged the authorities to improve the quality, timeliness and availability of data by implementing the Enhanced General Data Dissemination System.