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The IMF Article IV report published today called for the Iranian government to continue counter-inflationary policies, fiscal re-balancing and job-creation measures but forecast the Islamic Republic will have the fastest-growing economy in the Gulf region in the years to 2021.
It forecast that Iran’s oil production will 3.7m barrels a day (b/d) in the fiscal year starting March 2016 compared with 3.1m b/d this year. The IMF forecast oil production will rise to 4m b/d in 2017/18, 4.2m b/d in 2018/19, 4.3m b/d in 2019/20 and 4.4m b/d in 2020/21.
Crude oil exports, which fell to just over 1.1m b/d in 2013/14, were forecast to grow by 46 per cent to 1.81m 2016/17 from 1.21m b/d this year. 1.81. They will continue growing annually thereafter to 2.38m b/d in 2020/21.
The IMF forecast that Iranian rial GDP at current prices will grow by 17.1 per cent in 2016/17 as a result of sharply higher oil production and exports. Consumer price inflation was forecast to fall 11.5 per cent. The IMF forecast Iran’s GDP in real terms will quicken to 4-5.5 per cent in 2016/17 and will average 4 per cent or more in the subsequent four years. This will make Iran the fastest-growing economy in the Gulf region.
The IMF said the Iranian economy was continuing to face major challenges.
“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 economic activity since the fourth quarter of 2014/15,” it said in a press statement following the release of its Article IV report. “Real GDP growth is projected to decline from 3 per cent in 2014/15 to somewhere between 0.5 to -0.5 per cent in 2015/16.”
It said year-on-year inflation has declined to around 10 per cent in recent months, largely reflecting lower food and beverage inflation. The inflation rate is expected to remain close to 14 percent by year-end.
“Prospects for 2016/17 are brighter, owing to the prospective lifting of economic sanctions,” the IMF said. “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 per cent next year. Much of the acceleration in growth will also depend on the spill-overs from increased oil production to the rest of the economy.”
Higher oil revenue and terms of trade, and renewed access to foreign assets and capital could lead to appreciation pressures on the real exchange rate, the IMF said. Continued gradual fiscal consolidation 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, the IMF said.
“With reforms to the policy framework, bank balance sheets, and taxation, real GDP growth would stabilise at around 4 percent over the medium term,” the IMF said. “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 IMF called for comprehensive reforms to the policy framework and the economy to sustain progress on macroeconomic stability and to improve growth prospects. It urged the Iranian government to implement the October 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.
Other policy priorities cited by the IMF include:
- a new money and banking law to strengthen the central bank’s legal mandate on price stability
- prompt and comprehensive reforms to address financial sector challenges
- legislation to strengthen the prudential supervision framework
- restructuring of non-performing loans and banks and addressing unlicensed financial institutions, which would also help lower the high levels of real interest rates
- decisive action to address government arrear. This will help strengthen banks’ balance sheets
- measures to bolster the AML/CFT framework to facilitate the re-integration of the domestic financial system into the global economy
- fiscal consolidation, including mobilising domestic revenue and advancing the subsidy reform agenda
- public finance management reform including a medium-term perspective to fiscal policy formulation, targeting the non-oil balance, rebuilding buffers, and enhancing transparency
- action to bring the non-oil fiscal deficit closer to its long-run sustainable level including further adjustment in domestic fuel prices to help contain the deficit of the Targeted Subsidy Organisation
- a structural reform agenda, including fostering conditions for more inclusive growth, particularly for youth and female employment
- further development of the private sector, reforms to unlock productivity, including by lifting price and administrative controls, and greater transparency and accountability
- unification of the foreign exchange market which the Iranian government says will happen by the end of September 2016 and the prompt removal of the foreign exchange restriction and multiple currency practices.