The First Deputy Managing Director of the IMF David Lipton said in Tehran Tuesday that the opportunity for Iran to deepen integration into the global economy is coming. He added that development that builds on the economic stabilization already achieved, combined with new reforms, can unleash creativity and entrepreneurship that hold great promise.
"By continuing to strengthen its economy, Iran can change the lives of its own people, particularly the younger generation, and build a legacy for the future. That is a challenge befitting a country with a heritage like Iran’s," he said in an address to the Central Bank of Iran.
"I suggest that while Iran will gain from pursuing integration with the global economy, your ultimate success depends on what you do at home: strengthening macroeconomic policies in the short run and forging ahead now with deep structural reforms for the long run. It is time for a plan of action on the economy."
He noted Iran has already taken important measures to secure macroeconomic stability, including an important decline in the rate of inflation. "That was done despite an episode of increased costs of trade and financial transactions, and limited access to foreign exchange assets that caused inflation to jump and the rial to depreciate significantly. That achievement will serve Iran well as it implements the Joint Comprehensive Plan of Action continues."
With the oil sector regaining access to export markets, with businesses and banks facing lower transaction costs as they reintegrate into global trade and financial systems, both the oil and non-oil economy will gain, said the IMF's second-in-command.
Issue of Liquidity Growth
He said that like other oil exporters, Iran has to manage the transition to lower oil prices. Although the impact of lower prices will be partly mitigated by higher oil export volumes, there are limited prospects for a large increase in Iran’s oil revenue because of high global output and weak demand.
"To sustain the recent success in the battle against inflation, liquidity growth needs to be contained. This can anchor inflation in single digits, reduce potential pressure on the exchange rate, and help maintain the competitiveness of the non-oil sector. In addition, Iran’s commitment to exchange rate unification will be critical to entrenching economic stability," he told the audience.
He said the banking system needs to be able to effectively channel credit to the private sector. This will require addressing the high levels of nonperforming loans, bolstering bank capital, restructuring weak institutions, dealing with unlicensed financial institutions, and strengthening risk management systems and bank supervision.
"And fiscal policy also has an important role to play. Iran’s fiscal policy would be most effective by focusing on a gradual reduction of the non-oil deficit. But instead of cutting spending, it might be better to mobilize more non-oil tax revenue. That would create space for increased public investment in infrastructure and human capital."
