IMF Executive Board Concludes 2016 Article IV Consultation with the Islamic Republic of Iran

February 27, 2017

On February 24, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with the Islamic Republic of Iran.

Economic growth rebounded over the course of 2016/17 on the back of higher oil production. Real GDP grew by 7.4 percent in the first half 2016/17, rebounding from recession in 2015/16. However, growth in the non-oil sector averaged 0.9 percent, despite the pick-up registered in the second quarter, reflecting continued difficulties in access to finance and domestic financial sector and structural weaknesses. Inflation declined to single digits and has hovered in the 9.5 percent range, year-on-year, since mid-2016. The foreign exchange market stabilized although it experienced some volatility towards end-2016 before recovering in January 2017. The spread between the official and the market rate has narrowed to about 15 percent.

Growth is projected to stabilize at 4.5 percent over the medium-term as the recovery broadens. Real GDP growth is expected to reach 6.6 percent in 2016/17 and to ease to 3.3 percent in 2017/18 as oil production remains at the OPEC target. Thereafter, higher FDI and a gradual improvement in domestic financial conditions drive investment and stronger non-oil sector growth. The current account is forecast to remain in surplus as higher exports offset the pick-up in imports related to investment. Inflation is expected to temporarily rise to 11.9 percent (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 that needed to absorb the large number of new entrants to the labor market and unemployment remains high.

Executive Board Assessment[2]

Directors commended the authorities 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. Given the renewed uncertainty, Directors 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.

Directors 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. They 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 (CBI) the supervisory powers to implement reforms. Directors also encouraged quick passage of the central bank bill to modernize the monetary policy framework and provide greater operational independence to the CBI to pursue low and stable inflation.

Directors urged the authorities to implement a medium‑term 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. Directors encouraged the authorities to explore the scope to use oil revenues to fund bank recapitalization, and noted the importance of replenishing the Oil Stabilization Fund to provide the budget a buffer.

Directors welcomed recent steps to strengthen the AML/CFT framework, the introduction of IFRS reporting in banks, and the audit and securitization of government arrears, which will help unlock corporates’ and banks’ balance sheets and facilitate greater investment. They urged the authorities to fully implement the FATF action plan, further enhance the AML/CFT framework, and improve the transparency of corporate ownership to facilitate re‑integration into the global financial system and restore correspondent banking relationships. They 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.

Directors approved retention of the 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, in order to provide flexibility for managing shocks. Directors urged the authorities to improve the quality, timeliness, and availability of data, including by implementing the Enhanced General Data Dissemination System (e‑GDDS).

Islamic Republic of Iran: Selected Macroeconomic Indicators, 2014/15–2021/221/

Quota: SDR 3,567.10 million

Population: 78 million, 2014/15

Per capita GDP: current US$5,288, PPP current US$17,366, 2014/15

Poverty rate: 9 percent, $5.5 2011 PPP

Main exports: oil, gas, chemical and petrochemical products, pistachios

Projections

2014/15

2015/16

2016/17

2017/18

2018/19

2019/20

2020/21

2021/22

(Annual percentage change, unless otherwise indicated)

National accounts

Nominal GDP at market prices (trillions of Iranian rials)

11,036

11,096

13,045

15,146

17,379

19,884

22,624

25,639

Nominal GDP (billions of US$)

415

374

377

368

386

412

441

472

Real GDP at factor cost

4.0

-1.8

6.6

3.3

4.3

4.4

4.5

4.4

Real oil GDP

7.3

6.4

52.2

2.6

6.7

6.7

6.7

5.8

Real non-oil GDP

3.7

-2.7

0.8

3.4

3.8

4.0

4.0

4.1

CPI inflation (average)

15.6

11.9

8.9

11.2

11.0

10.2

9.5

9.0

CPI inflation (end of period)

16.2

8.3

10.5

11.9

10.7

9.8

9.2

8.8

GDP deflator at factor cost

12.6

2.2

10.3

12.4

10.1

9.5

8.9

8.5

Unemployment rate (percent of labor force)

10.6

11.0

12.5

12.5

12.5

12.3

12.2

12.2

(Percent of GDP)

Saving investment balance 2/

Current account balance

3.8

2.4

6.3

5.3

5.3

4.3

4.3

3.3

Investment

37.7

32.1

31.2

31.1

31.4

32.1

32.9

33.7

Change in stocks

12.2

8.6

8.0

7.8

7.5

7.2

6.8

6.6

Total fixed capital investment

25.5

23.5

23.1

23.3

23.9

25.0

26.0

27.2

Public

2.7

2.5

2.2

2.0

2.4

2.4

2.4

2.4

Private

22.8

21.1

21.0

21.3

21.5

22.5

23.7

24.8

Gross national savings

41.5

34.5

37.5

36.4

36.7

36.4

37.2

37.1

Public

1.1

1.0

0.0

3.5

2.4

2.6

3.0

2.9

Private

40.4

33.5

37.5

33.0

34.4

33.8

34.1

34.1

Central government operations

Revenue

14.6

16.2

15.1

18.5

17.5

17.8

18.1

18.1

Tax revenue

6.4

7.1

6.9

7.0

7.7

8.4

9.1

9.3

Nontax revenue

8.1

9.0

8.2

11.5

9.8

9.4

9.0

8.8

Of which : oil revenue

5.7

6.0

5.4

8.7

7.1

6.8

6.5

6.3

Expenditure

15.7

17.9

17.9

17.9

17.9

18.0

17.9

18.0

Net lending/borrowing (budget)

-1.2

-1.8

-2.8

0.7

-0.4

-0.2

0.3

0.2

Balance of Targeted Subsidy Organization

0.0

0.0

-0.3

0.0

0.0

0.0

0.0

0.0

Net lending/borrowing (including TSO)

-1.2

-1.8

-3.1

0.7

-0.4

-0.2

0.3

0.2

Non-oil net lending/borrowing (percent of non-oil GDP)

-8.2

-9.0

-10.6

-10.4

-9.7

-8.9

-8.0

-7.9

(Annual percentage change, unless otherwise indicated)

Monetary sector

Net foreign assets

1.2

14.4

32.1

24.3

21.4

15.9

16.7

13.7

Net domestic assets

35.9

41.5

28.0

21.0

13.6

14.4

11.8

12.2

Credit to the private sector in rials

16.7

16.7

30.3

19.7

15.5

15.0

13.0

12.8

Base money

14.6

16.4

23.0

17.1

13.4

12.0

11.6

10.7

Narrow money (M1)

0.9

13.2

23.1

18.3

11.9

12.6

12.2

11.5

Broad money (M2)

22.3

30.0

29.5

22.3

16.6

15.0

13.8

12.8

(Billions of US$, unless otherwise indicated)

External sector

Current account balance

15.9

9.0

23.8

19.6

20.6

17.7

18.8

15.7

Exports of goods and services

96.4

74.9

102.2

114.3

118.6

122.5

127.5

132.7

Imports of goods and services

-82.1

-67.2

-79.4

-96.0

-100.6

-107.6

-111.6

-120.1

External and publicly guaranteed debt

5.1

10.0

8.2

7.5

8.1

8.7

9.4

10.1

Of which: short-term debt

0.4

2.0

2.2

2.4

2.6

2.9

3.1

3.4

Gross official assets/reserves

126.2

128.4

132.3

148.0

166.4

182.5

200.3

215.2

Oil and gas sector

Total oil and gas exports

55.4

33.6

57.4

65.3

67.7

69.8

72.2

74.9

Average oil export price (US$ per barrel)

79.1

45.6

48.1

55.4

55.7

55.7

56.0

56.5

Crude oil exports (millions of barrels/day)

1.2

1.4

2.4

2.5

2.6

2.7

2.8

2.9

Crude oil production (millions of barrels/day)

3.2

3.3

4.1

4.2

4.5

4.8

5.1

5.4

Memorandum items:

Average exchange rate (Iranian rials per US$)

26,594

29,645

…

…

…

…

…

…

End-of-period exchange rate (Iranian rials per US$)

28,085

30,260

…

…

…

…

…

…

Sources: Iran authorities; and IMF staff estimates and projections.

1/ The Iranian fiscal year ends March 20.

2/ Based on central government operations.


[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm

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