Press Release No. 16/569

IMF Staff Completes 2016 Article IV Mission to Islamic Republic of Iran

December 19, 2016

• Higher oil production and exports are allowing economic growth to rebound from recession in 2015/16
• Iran is urged to create the conditions for sustained macroeconomic stability and growth
• The IMF welcomes Iran’s strong commitment to AML/CFT reform that helps facilitate the expansion of correspondent banking relations

A mission from the International Monetary Fund (IMF), led by Ms. Catriona Purfield, visited Tehran, Iran from December 3 to December 14, 2016 to conduct discussions on the annual Article IV review of the Iranian economy. The mission held constructive and candid discussions with senior officials from the government, the Central Bank of Iran, and representatives of the private sector.

At the end of the visit, Ms. Purfield made the following statement:

“Higher oil production and exports, after implementation of the Joint Comprehensive Plan of Action should allow real GDP growth to rebound to 6.6 percent in 2016/17. Growth is projected to ease to 3½ percent in 2017/18 as oil production normalizes and non-oil sector growth remains modest. The prudent policies implemented in recent years should allow inflation to average about 9 percent in 2016/17 before temporarily rising to just over 11 percent in 2017/18 due to the pass-through from recent exchange rate depreciation.

“The challenge now is to create the conditions for sustained macroeconomic stability and growth. Comprehensive and coordinated reforms that seek to defend low and stable inflation, restructure and recapitalize banks, cast fiscal policy in a medium-term framework to support reforms, and prioritize legal and regulatory changes that facilitate investment, aid job creation, and improve governance would achieve these goals. Better data quality, availability, and timeliness would support the reform process.

“Prudent fiscal policy and liquidity management are critical to keep inflation low and stable. The government should sharply reduce its directed credit schemes and adjust regulated prices to curb liquidity pressures. The Central Bank requires greater independence and better tools under the new Central Bank Bill to sustain low and stable inflation. The mission welcomes the authorities’ commitment to unify the exchange rate and return to a managed float, and recommends this proceeds expeditiously to ensure flexibility to manage shocks.

“Banks are in urgent need of restructuring and recapitalization to safeguard financial stability and reduce high lending rates. The mission urges that distressed banks be put under close supervision and an Asset Quality Review be commenced to determine an appropriate plan to recapitalize viable banks and resolve nonviable institutions. Recapitalization of state-owned banks should be linked to measures that improve their commercial viability.

“The mission welcomes the authorities’ strong commitment to AML/CFT reform that should facilitate the expansion of correspondent banking relationships. They have created dedicated AML/CFT units in all banks, adopted a high level action plan with the FATF, and requested a comprehensive AML/CFT assessment by IMF staff in 2018. Staff stresses the importance of fully implementing the FATF action plan and improving AML/CFT effectiveness.

“Fiscal policy has to adapt to the spending pressures while finding space to support growth. Public debt is set to rise on the back of the new debt to clear government liabilities and recapitalize banks. A medium-term fiscal framework that targets a gradual adjustment in the non-oil fiscal deficit can address the substantial spending pressures while keeping debt sustainable. Measures that mobilize domestic revenue and improve expenditure composition would ensure the adjustment is growth-friendly and protects the poor.

“Regulatory reforms are essential to lift Iran’s attractiveness to foreign investors. A registry of corporate beneficial ownership and bolstering the anti-corruption framework would complement AML/CFT reforms. Improving the commercial orientation of state-owned firms, less red tape, and more open competition would create space for the private sector to grow.

“The Sixth Development Plan recognizes the need to create jobs. The education system needs to better match the skills of graduates to employer needs. Higher female participation and employment can boost growth. Women represent over half of university students and the government can further enhance their job opportunities through a non-discrimination law and targeted active labor market policies.

“The mission would like to thank the Central Bank of Iran, Ministry of Finance, the Planning and Budget Organization, the Vice Presidency for Women and Family Affairs, counterparts in the Oil and Labor Ministries, the Majlis Research Center, TSO, NDFI, and the financial and private sectors for their collaboration and candid discussions. The mission will prepare a staff report and present it to the Executive Board of the IMF for discussion in March 2017.”