The International Monetary Fund has forecasted bright prospects for Iranian economy for 2016-17, as economic sanctions against the country are expected to be lifted.
"Higher oil production, lower costs for trade and financial transactions, and restored access to foreign assets, are expected to lift real GDP to about 4–5.5 % next year," IMF Article IV Consultation announced in its 2015 concluding report released on Monday.
Much of the acceleration in growth will depend on the spillovers from increased oil production to the rest of the economy, the report suggests.
Higher oil revenue and terms of trade, and renewed access to foreign assets and capital can lead to appreciation pressures on the real exchange rate. But continued gradual fiscal consolidation—including sustaining tax revenue mobilization and subsidy reform efforts—and prudent monetary policy, anchored by the authorities’ goal of achieving single-digit inflation by the end of 2016-17, can mitigate these upward pressures.
IMF predicts that with reforms to the policy framework, bank balance sheets, and taxation, real GDP growth would stabilize at around 4% over the medium term in the period.
The report mentions however, that comprehensive reforms to the business environment are needed over the medium term to ensure that the expected lifting of economic sanctions has a significant impact on confidence and investment and places the economy on a higher and more inclusive growth trajectory.
The sharp decline in global oil prices, tight corporate and bank balance sheets, and postponed consumption and investment decisions ahead of the expected lifting of economic sanctions, have significantly slowed down Iran's economic activity since the fourth quarter of 2014-15.
Real GDP growth is projected to decline from 3% in 2014-15 to somewhere between 0.5 to -0.5% in 2015-16. Twelve-month (point-to-point) inflation has declined to around 10% in recent months, largely reflecting lower food and beverage inflation, and the inflation rate is expected to remain close to 14% by yearend.
Hard Time Achievements
IMF Executive Board directors commended the authorities for the progress in improving macroeconomic conditions in a difficult economic environment. Notwithstanding the sharp drop in global oil prices, the directors noted that economic conditions should improve in 2016 and beyond, with the expected lifting of economic sanctions. However, they stressed the need to advance comprehensive reforms to the policy framework and the economy to sustain progress on macroeconomic stability and to improve growth prospects.
The directors encouraged the authorities to maintain their focus on disinflation. While acknowledging the current weaknesses in the economy, they urged the authorities to implement the recent stimulus package cautiously and to support it by announcing broad money and inflation objectives for 2016-17 to better anchor inflation expectations and the exchange rate.
Need for Prompt Reforms
They looked forward to the enactment of the new Money and Banking Law to strengthen the central bank’s legal mandate on price stability, and encouraged efforts to improve communication and transparency.
The directors underlined the importance of prompt and comprehensive reforms to address financial sector challenges. They welcomed the steps taken to assess the financial health of banks and the draft bill to strengthen the prudential supervision framework.
Directors also stressed the need for a steadfast restructuring of nonperforming loans and banks and addressing unlicensed financial institutions, which would also help lower the high levels of real interest rates. Decisive action on addressing government arrears would also help strengthen banks’ balance sheets.
Directors urged the authorities to bolster the AML/CFT framework (Anti-Money Laundering/Combating the Financing of Terrorism) to facilitate the reintegration of the domestic financial system into the global economy.
They underlined that bringing the non-oil fiscal deficit closer to its long-run sustainable level would also support the disinflation objective. To achieve this goal, continued efforts to mobilize domestic revenue will be needed, as well as further adjustment in domestic fuel prices to help contain the deficit of the Targeted Subsidy Organization.
Directors encouraged the authorities to press ahead with an ambitious structural reform agenda, including by fostering conditions for more inclusive growth, particularly for youth and female employment. These efforts will require further development of the private sector, reforms to unlock productivity, including by lifting price and administrative controls, and greater transparency and accountability. With comprehensive reforms, the expected lifting of sanctions should help place the economy on a higher growth trajectory.
Directors welcomed the authorities’ commitment to unify the foreign exchange market by end-September 2016, and encouraged the prompt removal of the foreign exchange restriction and multiple currency practices.
