The IMF has predicted that Iran’s economy will expand by 1-2 per cent in the 2014/15 Iranian calendar year after two years of negative growth, but warns that wide-ranging reforms are needed to bring economic stability.

The Washington-based organisation expects Iranian GDP to decline 1-2 per cent for the year to 20 March 2014, saying that weak macroeconomic management over the past several years have had a significant impact on stability and growth.

Positive indicators include a rapid drop in inflation from 45 per cent in July 2013 to below 30 per cent in December, reflecting tighter credit, the appreciation of the rial and global disinflation in some key commodities.

Inflation could drop to 15-20 per cent in 2014/15 excluding the impact of planned higher domestic energy prices, the IMF predicted.

“Iran now stands at a crossroad. With risks that the economy could continue to face a low-growth and high-inflation environment ahead, there is a need to begin advancing reforms to promote stability, investment, and productivity,” says Martin Cerisola, assistant director for the IMF’s Middle East and Central Asia Department, who led a delegation in Tehran from 25 January to 8 February.

“The new authorities should embark on a prompt and vigorous implementation of fundamental reforms to the frameworks supporting product, labour, and credit markets,” Cerisola says. “These reforms would lay the basis for sustained high growth and lower unemployment, especially if the external environment continues to improve.”

Prospects for long-term economic growth in Iran have been improved by the interim nuclear deal signed between Tehran and the P5+1 world powers in November. The deal has provided relief from sanctions against Iran’s petrochemicals, aviation and automotive sectors and the prospect of a permanent deal to drop the remaining sanctions.

In early February, Iran received the first instalment of frozen overseas assets following the implementation of the Geneva nuclear agreement. Iran will have access to $4.2bn of oil revenues frozen by foreign governments, the two sides agreed.

The IMF, which met officials from the Central Bank of Iran and the Ministry of Economy and Finance suggested three measures to combat stagflation – stagnation and inflation – in the Iranian economy: tightening monetary policy; balanced fiscal consolidation; and advancing supply-side reforms.

The organisation says that it supports the Tehran’s plan to reform energy subsidies, but the timing should be “carefully assessed”.

“Increasing domestic energy prices is an important step to continue with the much needed reform to reduce energy consumption, improve the efficiency of the economy and help close an estimated cash deficit of the Targeted Subsidy Organization of about 1 per cent of GDP,” the IMF said in its report.