IMF: Iran’s economy needs to advance reforms

Photo: IMF: Iran’s economy needs to advance reforms / Economy news

Baku, Azerbaijan, Feb. 12
By Dalga Khatinoglu - Trend:

International Monetary Fund (IMF), after its visit to Iran between Jan. 25 and Feb. 8, released a report on Feb.12, saying that large shocks and weak macroeconomic management over the past several years have had a significant impact on Iran's macroeconomic stability and growth.

According to this report, a combination of shocks, associated with the implementation of the first phase of the subsidy reform, ambitious social-programs inadequately funded, and a marked deterioration in the external environment stemming from the intensification of trade and financial sanctions, have weakened the economy.

"Inflation and unemployment are high, while the corporate and banking sectors show signs of weakness. These shocks have exposed structural weaknesses in the economy and in the policy framework," IMF said.

The fund added that Iran now stands at a crossroad. With risks that the economy could continue to face a low-growth and high-inflation environment ahead, there is a need to begin advancing reforms to promote stability, investment, and productivity.

The new authorities should embark on a prompt and vigorous implementation of fundamental reforms to the frameworks supporting product, labor and credit markets.

"These reforms would lay the basis for sustained high growth and lower unemployment, especially if the external environment continues to improve. The new authorities are well aware of these challenges and need to advance reforms, and begin the preparatory work in many of these areas".

IMF went on to say that "the pace of contraction in economic activity is slowing. The economy has continued to shrink in the first half of 2013/14 (the Iranian calendar and fiscal years run from March 21 to March 20), and staff expects further but diminishing contraction in the second half, with real gross domestic product (GDP) declining by 1-2 percent in 2013/14. Twelve-month inflation has dropped rapidly, from about 45 percent in July 2013 to below 30 percent in December 2013. This drop reflects tighter CBI credit, the appreciation of the rial, and global disinflation in some key staples. Inflation could end at 20-25 percent by end-2013/14".

According to the report, prospects for 2014/15 have improved with the interim P5+1 agreement but still remain highly uncertain. Under the current external environment, staff projects economic activity to begin to stabilize in 2014/15, with real GDP growing by 1-2 percent in 2014/15. Inflation would potentially decline to 15-20 percent, excluding the impact of planned higher domestic energy prices.
The international body advised Iran to implement some measures including tightening monetary policy, balanced fiscal consolidation and advancing supply-side reforms.

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