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IMF Proposes Caution in Cutting Interest Rates

IMF Proposes Caution  in Cutting Interest RatesIMF Proposes Caution  in Cutting Interest Rates

The International Monetary Fund and Iran have had "a long and important relationship" says David Lipton, first deputy managing director of the Washington-based lender who was in Tehran recently for a 3-day visit.  

He was the most senior IMF official to visit Iran since 1979. Lipton urged Iranian officials to implement structural reforms and build on the achievements, mainly the lowering of staggering inflation rates.

Lipton sat down for an exclusive interview in Tehran with the Persian-language newspaper Donya-e-Eqtesad, Financial Tribune's sister publication.

He shared his views on ways to improve the Iranian economy. Excerpts:     

IMF in a report has made some reform recommendations to Iran. How do you think Iran has responded?

These kinds of reforms are not the kind of reforms that can be done in a very short time. They need to be implemented over a long period. I think if you look back, Iran deserves much credit and praise for its macroeconomic policies, bringing its inflation down sharply ‌and using monetary policy to make sure that the economy is restored to growth. So, in 2016 the inflation is much lower and growth has resumed. We think growth could be around 4% this year.

Moving forward, Iran is going to not only continue growth, but raise growth to even higher levels. We think that process requires Iran turning from an internal focus to an external focus, deepening the integration into the global economy. To succeed in that, we think Iran needs to make its economy more flexible and more competitive and that requires a set of reforms.

Improvement of the banking system, liberalizing the company sector by reducing regulations, privatization of more productive assets in private hands where the governance would be improved and greater responsiveness of the economy to international demands are needed. This kind of structural reform is needed, if Iran is not going to have just a strong oil economy - which it has - but also a strong non-oil economy. A strong non-oil economy is needed, if there is going to be jobs for all the young people. Many people graduate from school in Iran every year and want job opportunities. And in the global economy, you have to be able to compete to survive and I think it requires a more competitive environment to succeed in the global sector.

 

In its 2014 report the IMF had recommended Iran to raise interest rates in order to cut inflation. We now have an inflation rate of around 10 % and it has been said that inflation will soon be single digits. Under the conditions what policies do you recommend with respect to interest rates?

Rates have come down slower than the inflation and this is a common event in countries that experience a sudden decline in inflation. The reason is that people often are not sure that inflation is down permanently and so they want to decompensate it for the risk that the inflation goes back up again.

I think it is important not to be impatient, not to try to use the bursts of liquidity in order to push the interest rates down further-because I don’t think lack of liquidity is the reason for the high interest rates, in fact liquidity has been  growing fairly rapidly. So I think what is important is that the Central Bank of Iran ensure the public that it intends to keep inflation low. Eventually that will convince the people that interest rates can be lower.

 

Considering all the challenges that the Iranian economy faces and the structural reforms that are needed, how do you see the economic outlook in the coming years?

I think the future is really in the hands of Iran and the outcome will depend on the choices that are made. Iran has an important opportunity now to deepen its integration with the world economy. There are opportunities out there if Iran can find a way to be competitive. Iran needs the global market and all the demand that there is out there. Iran is not a big enough economy to sustain the dynamism that would put everyone to work. It is going to be a much stronger economy if it can find ways to use technology, capital and Iranian labor force to produce goods and sell them across the globe. I think if it can do that effectively, then its prospects can be stronger than it has been in the past.

 

Iran is reconnecting to the world economy at a time when many economies are facing challenges. How can Iran benefit from the situation?

I think the rather weak global growth is a problem for Iran. There is less buoyant demand for all goods including Iranian goods. The slowdown in China has already affected the situation. Because China is buying few raw material from Iran including oil, it could also be a factor. But I think the most important factor for Iran is that the global economy is so large that there are opportunities out there that will allow Iran to expand its industry and commerce to satisfy global demand. So opening up and reintegrating is a new promising avenue, if it can adapt its infrastructure to be competitive in the global economy.

 

Financialtribune.com