Domestic Economy

Accelerate Reforms If US Quits JCPOA

The possibility that the US walks out of the nuclear deal would increase uncertainty that, in turn, requires reform measures to stabilize the market
Iranian authorities last month said they were unifying official and free market exchange rates for the rial in favor of a single rate of 42,000 against the US dollar.Iranian authorities last month said they were unifying official and free market exchange rates for the rial in favor of a single rate of 42,000 against the US dollar.

Iran’s government will need to accelerate economic reforms, including plans to overhaul its banking system, should US President Donald Trump decide to quit the 2015 nuclear accord with the Islamic Republic, better known as the Joint Comprehensive Plan of Action, according to a senior International Monetary Fund official.

“The possibility that the US walks out of the nuclear deal would increase uncertainty that, in turn, would require some measures to stabilize the market,” Jihad Azour, head of the IMF’s Middle East and Central Asia Department, said in an interview in Dubai on Monday, as reported by Bloomberg.

Trump will decide whether to leave the deal, which curbed Iran’s nuclear program in return for sanctions relief, by May 12. Speculation that he will pull out has added pressure on the Iranian economy, sending the rial down to a record low.

Asked about the potential impact of this on Iran’s economy and currency, Azour said “any step in this direction will increase vulnerability because of the uncertainty that will come with those kinds of changes”.

“Additional vigilance in terms of macroeconomic management is needed in order to weather any negative impact of those policies, and the best way to do it is to accelerate some of the reforms that need to be introduced,” he added.

  Move to Unify Exchange

Rates Backed

Iranian authorities responded with an attempt to unify its two-tier exchange rate, with police also detaining traders who sold dollars illegally.

The central bank then halted its supply of foreign currency “for the time being”, while banning exchange houses from carrying out cash transfers abroad through the popular hawala system, state-run media reported on April 14.

The unification “helps to eliminate distortion and improves competitiveness for the economy”, Azour was quoted as saying by Reuters.

“This should be coupled with maintaining the fiscal adjustment to reduce the level of budget deficit, reforming the banking system, especially banks who are facing difficulties, and allow the private sector to grow.”

Azour said gradually shrinking the budget deficit, which the IMF estimates may widen to 2.7% of gross domestic product next year, would also help the economy adjust.

The deficit stood at 1.9% in 2017.

The rial lost almost half its value since September, partly due to fears of a return of economic sanctions if Trump carries out his threat to exit the nuclear deal.

Iranian authorities last month said they were unifying official and free market exchange rates for the rial in favor of a single rate of 42,000 against the US dollar.

The CBI governor then said the rate would have some flexibility, within a 5-6% range.

Azour said Iranian policymakers need to address problems within the country’s banking system, which currently makes it hard for small- and medium-sized companies to borrow.

The IMF has repeatedly urged the government to urgently recapitalize and restructure lenders.

“If you want to increase the level of growth, you need to improve access to finance and this requires good banking system,” Azour said.

“You need to have a certain level of stability on prices and you need to allow the private sector to be interested in investing.”

  2018 Article IV Consultation With Iran

The International Monetary Fund’s Executive Board concluded the 2018 Article IV consultation with Iran on March 20.

Under Article IV of its Articles of Agreement, 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.

Following their return, the staff prepares a report, which forms the basis for discussion by the Executive Board.

At the conclusion of the discussion, the managing director, as chairman of the board, summarizes the views of executive directors and forwards them to the country’s authorities.

According to IMF’s latest report, real GDP growth is expected to ease to 4% in 2018-19, as oil production stabilizes in line with Iran’s OPEC cap, and is forecast to average 4.5% 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. Ongoing uncertainty is expected to keep FDI subdued and hamper the further expansion of correspondent banking relations.

The pace of job creation lags what is needed to absorb the large number of new entrants joining the labor market, implying that unemployment could remain above 11%.

The executive directors welcomed macroeconomic progress made by Iran, particularly in broadening the recovery of the non-oil sector, following the lifting of sanctions. However, they 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.

The 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, as they await the initiation of the planned Asset Quality Review.

The 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 and provide full autonomy to CBI. They also agreed that the new Central Bank Law should enhance CBI’s autonomy and make price stability the core objective of monetary policy.

The IMF directors recognized the Iranian authorities’ efforts to contain the cash-based fiscal deficit. Going forward, they saw the need for broad-based, growth-friendly measures to contain fiscal deficits and debt as well as to create space for higher social and investment spending.

They 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. They also encouraged the authorities to develop a medium-term debt management strategy.

The 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.

The IMF directors also underscored the importance of improving the quality, timeliness and availability of data.

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