Iran Presses Ahead with Economic Reforms

Iran has taken important steps to lower inflation

Near-term outlook remains uncertain

Structural reforms to support non-oil growth are needed to sustain long-term economic recovery

In their annual health check of the economy, the first in 2½ years, IMF economists say that Iran’s near-term economic outlook remains uncertain. Facing continued constrained prospects for oil revenues and international transactions, Iran is expected to see its real GDP growth begin to stabilize in the current fiscal year after two consecutive years of sharp contraction. The still-weak recovery is expected to benefit from potential improvements in the external environment and some early signs of modest revival in growth in domestic demand.

The new Iranian administration that took office in August 2013 has made some headway in improving the external environment and confidence in the outlook, the report notes. The authorities have reached an interim agreement with the P5+1 group of countries (the five permanent members of the United Nations Security Council plus Germany). This agreement (which took effect in January 2014 and provides for a limited, temporary easing of sanctions) allows Iran to stabilize oil exports, grants some access to Iran’s funds held abroad, and temporarily waives sanctions on petrochemical exports and the automobile industry.

Iran now needs to focus on the domestic reform agenda to fully benefit from the country’s economic potential. “This window of opportunity to advance comprehensive reforms should not be missed,” said Martin Cerisola, Assistant Director of the IMF’s Middle East and Central Asia Department.

Addressing weaknesses

Large shocks and weak macroeconomic management have had a significant impact on economic stability and growth in the past several years, despite Iran’s considerable progress in raising per capita income and living standards in the preceding decades. A combination of shocks—associated with the implementation of the first phase of energy subsidy reform, ambitious and inadequately funded social programs, and a marked deterioration in the external environment stemming from the intensification of trade and financial sanctions—have weakened the economy in the past several years.

The authorities now need to focus on how to address some of the longstanding challenges in the structure of the economy to achieve growth, the IMF report says, noting that the government has begun taking important steps in this direction.

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