IMF Assesses Iran’s Economy

          The mission reviewed recent economic developments and revised its macroeconomic estimates and projections in light of new data and discussions with the authorities. Real GDP growth recovered to an estimated 3.5 percent in 2009/10 despite the drop in oil prices, reflecting strong non-oil growth and an exceptional agriculture crop. The positive growth momentum continued in 2010/11. The authorities’ monetary policy successfully brought down annual average inflation from 25.4 percent in 2008/09 to 12.4 percent in 2010/11. Gross external reserves also remain comfortable with improved prospects for the external sector on the back of higher oil prices.

 

           The mission commended the authorities for the early success in the implementation of their ambitious subsidy reform program. The increases in prices of energy products, public transport, wheat, and bread adopted on December 19, 2010, are estimated to have removed close to US$60 billion (about 15 percent of GDP) in annual implicit subsidies to products. At the same time, the redistribution of the revenues arising from the price increases to households as cash transfers has been effective in reducing inequalities, improving living standards, and supporting domestic demand in the economy. The energy price increases are already leading to a decline in excessive domestic energy consumption and related energy waste. While the subsidy reform is expected to result in a transitory slowdown in economic growth and temporary increase in the inflation rate, it should considerably improve Iran’s medium term outlook by rationalizing domestic energy use, increasing export revenues, strengthening overall competitiveness, and bringing economic activity in Iran closer to its full potential.

 

           The authorities have been successful in containing the initial impact of the energy price increases on inflation. Despite the very large price increases of up to 20 times, consumer price inflation has only increased from 10.1 percent in December to 14.2 percent at end-May 2011. Maintaining macroeconomic stability in the near term through coordinated and adequately tightened monetary and fiscal policies is essential to preserve the benefits of the subsidy reform. Equally challenging will be the restructuring of enterprises through the adoption of more energy-efficient technologies, and the broader reorientation of the economy towards less energy-intensive products and services, and production technologies. The authorities should actively pursue their efforts to improve the business environment to support the creation of new enterprises and jobs.