Economy on track, challenges ahead, says IMF

23 August 2002

The Iranian economy fared well in 2001/02 and is set for another year of positive economic performance in view of high growth rates, positive external accounts and reduced foreign debt, the IMF concluded following Article IV consultations with the Islamic republic between 26 June and 11 July. The IMF welcomed Iran's successful exchange rate unification and the launch of the country's first Eurobond, but warned that economic reform efforts would need to be strengthened to tackle fundamental structural problems and high unemployment.

The report says that real gross domestic product (GDP) grew by 4.8 per cent in 2001/02 despite lower oil production levels. Non-oil sector growth was bolstered by increased manufacturing, trade and construction activity, and reached 6 per cent due to strong domestic demand and rising confidence following some progress in trade reforms and the removal of foreign exchange constraints.

Job creation has lagged behind economic growth. Total employment rose by 3 per cent in 2001/02. According to the IMF, last year's official unemployment rate stood at 16 per cent. Inflation dropped to 10.3 per cent in 2001/02, down from 11.7 per cent in the previous year.

The current account recorded a surplus of 4.8 per cent of GDP, down from 13.4 per cent in the previous year but at $5,432 million it was well above levels of much of the 1990s. The IMF says the drop was largely due to lower oil and gas exports, as well as a 20 per cent increase in imports. The overall balance of payments surplus stood at $4,941 million, while gross official reserves reached $17,468 million incorporating $7,400 million allocated in the oil stabilisation fund.

On the reform front, the IMF report commends the Iranian authorities for 'the exchange rate unification and the smooth transition to a new exchange rate regime, which has enhanced business confidence and the credibility of the reform process'. The report says that the launch of the Islamic republic's debut Eurobond 'attests to the confidence of the international markets in Iran's economic prospects and the authorities' commitment to economic reforms'.

However, the positive performance is overshadowed by the pressing need to tackle fundamental issues including privatisation, the reduction of the public sector workforce and cutting subsidies. The IMF report says that both 'the mission and the authorities agree that the reform effort must be deepened to yield tangible results in terms of sustained growth and employment creation. In particular, the reform process must now focus on achieving greater openness of the economy by further liberalising trade, eliminating the remaining exchange restrictions, attracting foreign direct investment and preparing the groundwork for opening up the capital account. In parallel, fiscal management would need to be enhanced to allow for the build up of financial savings. and government state enterprises restructured or privatised.'

The outlook until the end of the third five-year development plan in 2004 remains favourable based on present oil price projections and an expected correction of the fiscal position, according to the IMF mission. However, the report says that the targeted GDP growth rate of 5 per cent for the remaining period of the development plan will depend 'on uncertainties, including oil prices, weather conditions, the pace of structural reforms and the prospect of regional stability'. The report warns that unemployment will continue to be the most serious challenge facing the government. The labour force grew by about 3.5 per cent a year over the past three years, equivalent to nearly 600,000 people joining the job market each year. However, employment was created for an average of only 450,000 newcomers a year.

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