There has been a marked improvement in macroeconomic conditions in Iran over the past year, according to the IMF, with a rebound in economic activity and a decline in inflation.

However, the Washington-based organisation warned that the sharp drop in global oil prices and an uncertain external environment will bring significant challenges to the outlook.

“The authorities recognise these challenges and remain determined to sustain the improvements in macroeconomic conditions,” said Martin Cerisola, assistant director for the Middle East and Central Asia Department at the IMF, who led a two-week mission to Tehran ending 5 February.

“The discussions focused on the policies needed for preserving disinflation gains and for supporting the economy in its adjustment to lower oil prices,” he added.

The IMF recommended that Tehran should aim to limit the national budget deficit to about 2.5 per cent of GDP and monetary policy should aim to keep inflation expectations anchored by targeting liquidity growth at prudent levels.

Inflation fell from 40 per cent to 21 per cent in the 12 months to September 2014, and the economy should post annual growth, Economic Affairs & Finance Minister Ali Tayyebnia said in late 2014.

“This policy mix would help absorb shocks and provide more room for credit to flow to the economy. Maintaining exchange rate flexibility will also help smooth the transition to an environment with lower oil prices,” Cerisola said.

Iran’s economy has been impacted by international sanctions against its banks and energy sector, while the collapse in oil prices in the second half of 2014 will lower its government revenues.

Tehran is aiming to reach a deal with world powers to end sanctions in return for limits on its controversial nuclear programme.  The deadline for a political agreement is 31 March.