© 2011 International Monetary Fund August 2011 IMF Country Report No. 11/241 July 5, 2011 July 20, 2011 July 5, 2011 June 9, 2011 2011 January 29, 2001 Islamic Republic of Iran: 2011 Article IV Consultation—Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Iran Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2011 Article IV consultation with the Islamic Republic of Iran, the following documents have been released and are included in this package: The staff report for the 2011 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on June 9, 2011, with the officials of the Islamic Republic of Iran on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on July 5, 2011. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF. A Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its July 20, 2011 discussion of the staff report that concluded the Article IV consultation. A statement by the Executive Director for the Islamic Republic of Iran. The document listed below has been or will be separately released. Selected Issues Paper The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information. Copies of this report are available to the public from International Monetary Fund Publication Services 700 19th Street, N.W. Washington, D.C. 20431 Telephone: (202) 623-7430 Telefax: (202) 623-7201 E-mail: [email protected] Internet: http://www.imf.org International Monetary Fund Washington, D.C. ©International Monetary Fund. Not for Redistribution INTERNATIONAL MONETARY FUND ISLAMIC REPUBLIC OF IRAN Staff Report for the 2011 Article IV Consultation Prepared by the Staff Representatives for the 2011 Consultation with the Islamic Republic of Iran Approved by Ratna Sahay and David D. Marston July 5, 2011 Discussions: Held in Tehran May 28–June 9, 2011. The mission met with H.E. Seyyed Shamseddin Hosseini, Minister of Economic Affairs and Finance; H.E. Dr. Mahmoud Bahmani, Governor of the Central Bank and other representatives from the public and private sectors and academics. A press release issued at the conclusion of the discussions can be found at: http://www.imf.org/external/np/sec/pr/2011/pr11228.htm Staff Team: The mission comprised Mr. Dominique Guillaume (Head), Messrs. Ozgur Demirkol, Gabriel Sensenbrenner, Roman Zytek, (all MCD) and Ms. Majdeline El Rayess (STA). Mr. Jafar Mojarrad (OED) participated in policy discussions. Exchange Arrangement: The Islamic Republic of Iran maintains a de jure managed floating arrangement against a basket of currencies. With effect from September 6, 2004, the Islamic Republic of Iran accepted the obligations under Article VIII, Sections 2, 3, and 4 of the Fund’s Articles of Agreement. Iran maintains one exchange restriction and one multiple currency practice subject to Fund jurisdiction under Article VIII, Sections 2(a) and 3 (see Informational Annex). Past Surveillance: The 2009 Article IV Consultation was concluded on Feb 3, 2010. The Public Information Notice of the Executive Board’s discussion is available at http://www.imf.org/external/np/sec/pn/2010/pn1024.htm Statistics: Data is broadly adequate for surveillance: The authorities have indicated their interest in participating in the General Data Dissemination Standard (GDDS). ©International Monetary Fund. Not for Redistribution 2 Contents Page Executive Summary ...................................................................................................................3 I. Overview ............................................................................................................................... 4 II. Recent Economic Developments and Outlook..................................................................... 5 A. Recent Economic Developments ..................................................................................... 5 B. Medium-Term Outlook .................................................................................................. 10 III. Policy Discussions ............................................................................................................ 11 A. Preserving Macroeconomic Stability in the Near Term ................................................. 11 B. Ensuring the Transition to a Market-Based Economy to Foster Growth and Employment .......................................................................................................... 12 C. Strengthening the Financial Sector to Sustain Economic Development ........................ 16 IV. Staff Appraisal .................................................................................................................. 18 Text Table Medium-Term Scenario, 2008/09–2016/17 .............................................................................10 Boxes 1. Initial Impact of the Targeted Subsidy Reform .............................................................4 2. Is there a Price Bubble in the Tehran Stock Exchange? ................................................9 Figures 1. Macroeconomic Indicators, 2000/01–2010/11 ..............................................................6 2. Macroeconomic and Price Developments, 2005/06–2010/11 .......................................7 3. Distribution of Oil Revenue for 2011/12 .......................................................................8 4. Exports, Employment and Productivity .......................................................................13 5. Demographics, Labor Market and Business Environment ..........................................14 Tables 1. Selected Macroeconomic Indicators, 2007/08–2011/12 ..............................................21 2. Balance of Payments, 2007/08–2016/17 ......................................................................22 3a. Statement of Government Operations 2007/08–2011/12 (in billions of Rials) ...........23 3b. Financial Balance Sheet 2008/09–2010/11 ..................................................................24 4. Statement of Government Operations 2007/08–2011/12 ............................................25 5. Central Bank Balance Sheet, 2007/08–2011/12 ..........................................................26 6. Monetary Survey, 2007/08–2011/12 ...........................................................................27 7. Vulnerability Indicators, 2007/08–2010/11 .................................................................28 Appendices I. Exchange Rate Assessment ..........................................................................................29 II. Migration of Iran Fiscal Presentation into the GFSM 2001 Presentation ....................31 ©International Monetary Fund. Not for Redistribution 3 Executive Summary Background and outlook: Growth recovered on the strength of international oil prices, strong rebound in agricultural sector and rapid credit expansion. Inflation was contained while fiscal and external positions improved. The launch of the subsidy reform in December 2010 has increased inflation temporarily and is expected to result in a temporary slowdown of economic growth. While high oil prices and efficiency gains resulting from the subsidy reform should support rapid economic recovery, an accommodative policy stance could lead to high inflation and derail reform efforts. Policies priorities: Key priorities are to (i) maintain short term macroeconomic stability to support the reform process; (ii) transition further to a market-based economy to foster growth and support job creation; and, (iii) strengthen the financial sector. Staff Recommendations: Coordinated and tight credit and fiscal policies are essential to maintain macroeconomic stability in the aftermath of the subsidy reform. The authorities should continue to flexibly manage the exchange rate, and maintain a unified exchange rate. Achieving higher growth and creating new jobs will require restructuring the corporate sector, supporting the creation of new enterprises, removing labor market frictions, encouraging foreign investment, and accelerating the ongoing privatization process. Addressing the banking sector’s large NPLs portfolio, and strengthening capital adequacy and profitability are essential to allow the banking sector to support growth. Authorities’ Views: Steadfast implementation of the subsidy reform will continue, while preserving macroeconomic stability in the transition period, including through limiting central bank credit to banks and possible increasing interest rates. Corporate restructuring might require more subsidized loans and financing. Recapitalizing public banks, further reducing NPLs, enhancing central bank supervision, and introducing a deposit guarantee fund are important elements of the banking reform strategy. ©International Monetary Fund. Not for Redistribution 4 I. OVERVIEW 1. Iran is benefitting from the rebound in international oil prices. With the break- even price for the budget and current account in 2010/11 at $75 per barrel and $60 per barrel respectively, the increase in oil price to $80 per barrel on average, has helped improve the current account and budget surplus, and maintain comfortable international