IMF Executive Board Concludes 2018 Article IV Consultation with the Islamic Republic of Iran

March 29, 2018

On March 21, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the 2018 Article IV consultation[1] with the Islamic Republic of Iran.

Following a strong rebound in the aftermath of the 2016 nuclear agreement, real GDP growth is expected to reach 4.3 percent in 2017/18. In the first half of 2017/18, recovery broadened to the non-oil sector, aided by supportive fiscal and monetary policies and a recovery in construction and services activity. The unemployment rate declined to 11.7 percent in the first half of 2017/18, but remained particularly high for youth and women. Inflation averaged 9.9 percent during the first 11 months of 2017/18 aided by moderation in food prices and stable administered prices. The foreign exchange market experienced volatility in early 2018; following the increase in interest rates in February, the spread between the official and the market rate narrowed to under 20 percent.

Real GDP growth is expected to ease to 4 percent in 2018/19, as oil production stabilizes in line with Iran’s OPEC cap, and is forecast to average 4½ percent over the medium-term. The current account is expected to remain in surplus as improved oil prices and higher gas exports allow international reserve buffers to rise gradually. On-going uncertainty is expected to keep FDI subdued and hamper the further expansion of Correspondent Bank Relations (CBRs). Inflation is expected to be contained around 12 percent in 2018/19 as liquidity growth is curbed to limit the second-round effects of the recent depreciation in the exchange rate. The pace of job creation lags that needed to absorb the large number of new entrants joining the labor market, implying that unemployment could remain above 11 percent.

Executive Board Assessment [2]

Directors welcomed the macroeconomic progress made by Iran, particularly in broadening the recovery of the non-oil sector following the lifting of sanctions. However, Directors noted that a weak banking sector, structural bottlenecks, and heightened uncertainty pose risks. To create jobs for the highly educated youth, improve living standards, and achieve higher growth rates, they encouraged the authorities to persevere with prudent policies and pursue deep multifaceted reforms despite the challenging domestic and geopolitical environment.

Directors underscored that financial sector reform should be a priority, in particular recapitalization and restructuring of viable banks, and resolution of non-viable ones. They highlighted that state-controlled banks should start preparing and implementing recovery plans as soon as possible even as they await the initiation of the planned Asset Quality Review. Directors welcomed the progress in strengthening the AML/CFT framework. They encouraged timely passage and implementation of the AML and CFT amendments in line with the FATF action plan. This would help restore confidence in the system and facilitate correspondent banking relationships.

Directors emphasized that continued efforts to unify the dual exchange rate, together with a clear communication strategy and tighter monetary conditions, would support the transition to a market-based monetary policy framework. They also highlighted the need to securitize government’s debt to the Central Bank of Iran (CBI) and provide the CBI full autonomy. Directors agreed that the new Central Bank Law should enhance the CBI’s autonomy and make price stability the core objective of monetary policy.

Directors recognized the authorities’ efforts to contain the cash-based fiscal deficit. Going forward, they saw need for broad-based, growth-friendly measures to contain fiscal deficits and debt as well as create space for higher social and investment spending. Directors underscored that adjustment efforts should be gradual and continue to focus on mobilizing tax revenue, removing exemptions, reducing fuel subsidies, and reforming the pension system. They emphasized that targeting cash transfers to the poor will be important to create space and make the adjustment more equitable. Directors also encouraged the authorities to develop a medium-term debt management strategy.

Directors emphasized that deeper reforms are needed to close the infrastructure gap, create more jobs, and further reduce poverty. They highlighted that reform efforts should focus on diversifying the economy, improving the business climate (especially reducing red tape), modernizing regulations, strengthening the bankruptcy framework, and easing market entry. They encouraged the authorities to facilitate greater female labor force participation by reducing barriers, subsidizing child care to low income women, and tackling informality.

Directors also underscored the importance of improving the quality, timeliness, and availability of data.


[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.


Islamic Republic of Iran: Selected Macroeconomic Indicators, 2015/16–2022/23 1/

Quota: SDR 3,567.10 million

Population: 80 million, 2016/17

Per capita GDP: current US$5,027, PPP current US$17,366, 2016/17

Poverty headcount ratio at $5.50 a day (2011 PPP): 10.5 percent, 2014/15

Main exports: oil, gas, chemical and petrochemical products

Projections

2015/16

2016/17

2017/18

2018/19

2019/20

2020/21

2021/22

2022/23

(Annual percentage change, unless otherwise indicated)

National accounts

Nominal GDP at market prices (trillions of Iranian rials)

11,129

12,723

14,772

17,926

20,742

23,811

27,365

31,464

Real GDP at factor cost

-1.6

12.5

4.3

4.0

4.0

4.1

4.2

4.4

Real oil GDP

7.2

61.6

5.2

4.6

3.7

3.8

4.0

4.0

Real non-oil GDP

-3.1

3.3

4.0

3.8

4.1

4.2

4.2

4.5

CPI inflation (average)

11.9

9.1

9.9

12.1

11.5

11.7

11.3

10.8

CPI inflation (end of period)

8.4

11.8

10.2

11.2

13.4

11.6

11.0

10.5

GDP deflator at factor cost

0.4

1.6

11.3

16.7

11.3

10.2

10.3

10.1

Unemployment rate (percent of labor force)

11.0

12.4

11.8

11.7

11.6

11.4

11.4

11.2

(Percent of GDP)

Saving investment balance 2/

Current account balance

0.3

4.0

4.3

7.0

6.3

5.8

5.8

5.9

Investment

34.9

33.5

36.2

36.2

36.7

37.2

37.7

38.2

Change in stocks

11.6

12.6

15.3

14.7

14.2

13.6

13.0

12.5

Total fixed capital investment

23.3

20.9

20.9

21.5

22.5

23.6

24.7

25.7

Public

2.5

3.3

2.3

3.7

2.5

2.5

2.5

2.6

Private

20.8

17.7

18.6

17.8

20.0

21.1

22.2

23.1

Gross national savings

35.2

37.6

40.4

43.2

43.0

42.9

43.5

44.2

Public

0.6

0.2

0.1

1.1

0.3

0.3

0.2

0.1

Private

34.6

37.3

40.4

42.0

42.6

42.6

43.3

44.1

Central government operations

Revenue

16.1

17.3

15.7

18.7

19.5

19.5

19.5

19.5

Tax revenue

7.1

8.0

7.3

7.2

7.2

7.3

7.3

7.4

Nontax revenue

9.0

9.3

8.3

11.4

12.3

12.2

12.2

12.1

Of which : oil revenue

6.0

5.8

5.4

9.0

9.5

9.4

9.4

9.3

Expenditure

17.9

19.5

18.0

20.0

22.2

22.2

22.4

22.4

Net lending/borrowing (budget)

-1.8

-2.3

-2.3

-1.4

-2.7

-2.7

-2.8

-2.9

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

-8.6

-9.2

-8.7

-12.9

-15.3

-15.0

-14.9

-14.8

Gross Public Debt

42.3

49.1

40.9

53.9

49.2

45.6

42.6

40.0

(Annual percentage change, unless otherwise indicated)

Monetary sector

Net foreign assets

14.4

-3.9

-0.1

36.4

50.5

21.5

25.7

22.8

Net domestic assets

41.5

39.3

33.2

20.0

9.7

19.0

15.4

13.8

Credit to the private sector in rials

16.7

24.7

21.0

19.4

15.7

15.3

15.8

14.0

Base money

16.4

17.2

20.7

20.9

18.9

18.2

17.2

15.4

Narrow money (M1)

13.2

19.3

19.2

18.9

16.8

17.5

16.9

15.5

Broad money (M2)

30.0

23.2

23.5

23.8

20.2

19.9

18.8

16.9

(Billions of US$, unless otherwise indicated)

External sector

Current account balance

1.2

16.3

18.4

29.2

26.0

23.0

24.5

26.5

Exports of goods and services

74.4

94.4

109.5

130.3

127.5

126.1

129.7

134.0

Imports of goods and services

-74.0

-79.5

-91.5

-103.3

-103.7

-105.4

-107.5

-110.0

External and publicly guaranteed debt

10.0

9.3

8.7

9.1

9.6

10.2

10.7

11.3

Of which: short-term debt

2.0

3.3

3.4

3.5

3.6

3.8

3.9

4.1

Gross official assets/reserves

128.4

120.7

111.7

124.9

143.5

158.5

181.4

204.2

Oil and gas sector

Total oil and gas exports

26.9

49.8

63.7

78.3

73.6

69.2

70.3

72.3

Crude oil exports (millions of barrels/day)

1.4

2.1

2.5

2.7

2.8

2.9

3.0

3.1

Crude oil production (millions of barrels/day)

2.9

3.7

3.8

3.8

3.9

4.1

4.3

4.4

Memorandum items:

Average exchange rate, Official (Iranian rials per US$)

29,645

31,457

…

…

…

…

…

…

Average exchange rate, Market (Iranian rials per US$)

34,359

36,328

…

…

…

…

…

…

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

1/ The Iranian fiscal year ends March 20.

2/ Based on central government operations.

IMF Communications Department
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