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Islamic Republic of Iran: Staff Report for the 2018 Article IV Consultation

Author(s):
International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
March 2018
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Context

1. The authorities face a challenging domestic and geopolitical environment. President Rouhani was elected for a second term in May 2017 amid growing pressure to address high unemployment and raise incomes. In late-2017, street protests occurred in several cities. Externally, risks surrounding Iran’s foreign relations have increased. The U.S. administration waived the application of nuclear sanctions for 120 days on January 12, 2018 but is seeking substantial changes to the JCPOA.

GDP Per Capita and Unemployment Rate 1/

(US dollars, Percent)

Source: Statistical Center of Iran; and IMF Staff Estimates.

1/ GDP per capita excludes oil.

2. The recovery broadened to the non-oil sector in 2017 following the rebound in oil production and growth in 2016 after the lifting of nuclear-related sanctions. However, to realize Iran’s considerable potential and generate the jobs necessary to tackle unemployment and lift incomes, the authorities need to implement a holistic reform package that entrenches macroeconomic stability, develops the private sector, and ensures its resources benefit all its citizens (Table 1).

Table 1.Islamic Republic of Iran: Status of Staff Recommendations from the 2016 Article IV Consultation
RecommendationsStatus
Fiscal Policy
Improve tax collections and public financial management systems.Tax revenues increased in 2016/17 through administrative measures and authorities have taken steps moving towards accrual accounting and improvement in the quality of financial statements.
Better target cash transfersThe 2018/19 budget clarified that the government can adjust in fuel prices and reform subsidies and the cash transfer system over the course of the Sixth National Development Plan.
Introduce a medium-term fiscal framework that targets a gradual adjustment in the non-oil fiscal deficit.The CG non-oil fiscal deficit increased to 9.2 percent of GDP in 2016/17. A medium-term fiscal framework has not been introduced.
Direct a higher portion of oil revenues to budget and replenish Oil Stabilization Fund to build fiscal buffersThe share of oil revenue to NDFI was effectively reduced to 22.7 percent in 2018/19 budget to allow the CG budget’s share of oil proceeds to rise.
Monetary Policy
Clearly define a lender of last resort framework, provide tools to CBI to manage liquidityAuthorities requested technical assistance to develop a market based monetary policy framework, including establishment of a lender of last resort framework.
Unify the exchange rate shift to a managed floatWhile the authorities committed to unify the exchange rate by February 2018, difficulties in transferring oil proceed due to lack of correspondent bank relations remain unsolved.
Financial Sector Reform
Strengthening the AML/CFT frameworkŦThe United Nations Convention Against Transnational Organized Crime have been approved by parliament. Amendments to the AML and CFT laws were approved by cabinet and submitted to parliament. The requirements to monitor remittances and the transportation of cash have also been upgraded. The National Risk Assessment was initiated with the World Bank, the CBI is bolstering its supervision and the Financial Intelligence Unit (FIU) is enhancing the quality of its financial intelligence.
Continue securitization of government arrearsThe on-going audit of government arrears has revealed additional debts. The debt stock is now estimated to have reached 50 percent of GDP by end-2016/17. The authorities securitized 9 percent of arrears in 2016/17.
Adopt new banking and central bank lawsAmendments to the existing banking law to strengthen the CBI’s supervisory, disciplinary and resolution powers and to create a Deposit Insurance Fund were submitted to the parliament. Parliament has since proposed its own amendments to the existing banking law and central bank laws aimed at further strengthening the CBI’s supervisory and resolution powers and its independence. Formal consideration of these proposals by Parliament have yet to begin.
Recapitalize state owned banks linked to measure to improve their commercial viabilityThe government used part of CBI’s FX revaluation gains to recapitalize some public banks.
Place distressed banks under administration or intensified supervisionDistressed banks continue to have access to CBI liquidity, but are required to submit liquidity management or recovery plans. UFIs were merged, acquired, or closed.
Conduct an asset quality reviewAn asset quality review has not been initiated yet.
Reforms to Promote Jobs and Growth
Improve business environmentIran improved its global ranking by seven notches in one year to the 69th place in the Global Competitiveness Index due to improved inflation and exchange rate stability in 2016 and 2017. Amendments to the Custom Law submitted to Parliament could combat corruption, smuggling, and lower trade costs if approved.
Improve labor market regulations with specific measures to facilitate youth and female employmentA pilot internship program for university graduates have been completed and should be rolled-out nationally and completed by a two-year waiver of employer social security contributions for firms retaining interns in 2018/19. Gender caps in recruitment rounds at most ministries have been removed.
Source: IMF staff.
Source: IMF staff.

GDP Per Capita Growth Index

(PPP 2011 international dollars, 2006=100)

Source: Iranian authorities, and IMF staff calculations.

Economic Developments, Outlook, and Risks

A. Recent Developments

3. Following the strong rebound in growth in the aftermath of the 2016 nuclear agreement, growth is expected to reach 4.3 percent in 2017/18 as oil production stabilized at Iran’s OPEC cap (Figure 1). The recovery begun to broaden to the non-oil sector in 2017/18 aided by supportive fiscal and monetary policies and the recovery in the construction—where growth returned to positive territory in Q2 2017/18 for the first time in six years—and services sectors. Unemployment declined from 12.7 percent in H1 2016/17 to 11.7 percent in H1 2017/18 but remains high amongst youth and women.

Figure 1.Islamic Republic of Iran: Macroeconomic Indicators, 2012/13–2017/18

Source: Iranian authorities, and IMF staff calculations.

4. CPI inflation moderated (Figure 2). After finishing 2016/17 at 11.8 percent, average inflation declined to 9.9 percent during the first 11 months of 2017/18 aided by moderation in food prices and stable administered prices. The depreciation of the Rial since November 2017 will keep inflation in double digits during the remainder of 2017/18.

Figure 2.Islamic Republic of Iran: Price Developments, 2014/15–2017/18

Source: Iranian authorities and IMF staff calculations.

5. Measures were taken to address liquidity and interest rate pressures. Liquidity growth remains robust (Figure 3) reflecting CBI support to pay depositors of former Unlicensed Financial Institutions (UFIs) and on-going assistance to distressed banks. To encourage banks to improve their finances, the CBI has required banks to submit liquidity management plans to continue access to the CBI’s emergency lending facilities (ELA). Moreover, to generate income relief for banks, ELA was converted to credit lines for several banks with the interest rate reduced from 34 to 16 percent if collateralized, and 18 percent if not. The authorities took measures to alleviate pressures from high real interest rates, enforcing the short-term deposit rate cap (10 percent) set by the Money and Credit Council (MCC). This helped to reduce the interbank rates from 27 percent in 2015 to 18 percent by end-2017. In line with the 2017/18 budget, the government drew on the CBI’s unrealized FX revaluation gains (2.5 percent of GDP) to partially recapitalize some state-owned banks (SBs) and clear some of its arrears to banks. Amendments to the banking law to strengthen the CBI’s supervisory and resolution powers and define the role of Deposit Insurance Fund (DIF) in bank resolution were submitted to Parliament.

Figure 3.Islamic Republic of Iran: Money and Credit Developments, 1995/96–2017/18

Source: Iranian authorities, and IMF staff calculations.

6. Iran sustained a sizable current account surplus but reserves have fallen. Reflecting higher oil prices, the current account surplus is estimated to have reached 4.3 percent of GDP in 2017/18. FDI is materializing albeit more slowly than anticipated reflecting heightened uncertainty. Trade credits have risen because of difficulties in transferring export earnings from some trading partners. In the face of high import demand, capital outflows and the problems in accessing export earnings, reserves declined by US$8.7 billion between end-March 2017 and early 20181 (Figure 4). Amid heightened uncertainty, aggravated by street protests, the gap between the official and market exchange rates widened to near 30 percent in mid-February. In response, the CBI allowed banks to temporarily issue Rial Certificate of Deposits (CDs) at 20 percent and foreign-exchange indexed CDs at 4 percent and the gap narrowed to about 20 percent.

Figure 4.Islamic Republic of Iran: External Sector Developments, 2011/12–2017/18

Source: IEA, fDi Markets, Iranian authorities, and IMF staff calculations.

7. The fiscal deficit was contained in 2017/18. The central government (CG) cash-based fiscal deficit is estimated at 2.3 percent of GDP in 2017/18 while the non-oil CG deficit improved to 8.7 percent of non-oil GDP. Shortfalls in oil and tax revenues were off-set by cuts in investment and other spending. Staff’s estimate of the non-oil augmented central government (ACG) deficit—including the Targeted Subsidy Organization (TSO) and National Development Fund of Iran (NDFI)—widened to 12.6 percent of non-oil GDP reflecting the non-adjustment of fuel prices. The on-going audit of arrears improved transparency about historical off-budget debts but pushed public debt to near 50 percent of GDP at end-2016/17. The authorities securitized 9 percent of these arrears through bonds bearing marketable profit rates (Figure 5).

Figure 5.Islamic Republic of Iran: Fiscal Developments and Prospects, 2015/16–2022/23

Sources: Iran authorities, and IMF staff estimates and projections.

8. The 2018/19 CG budget envisages a more accommodative fiscal stance as higher oil revenues fund additional spending to address infrastructure and social needs. CG spending increases to 20 percent of GDP largely reflecting higher investment spending. Revenue is also estimated to rise owing to higher global oil prices, as well as the increase in the share of oil proceeds ear-marked to fund CG investment spending and the one percentage point increase in the customs tax rate. This should allow the CG deficit to narrow to 1.4 percent of GDP in 2018/19. The underlying fiscal stance measured by the CG non-oil deficit widens to 12.9 percent of non-oil GDP as the increase in spending is largely funded by higher oil revenues. Moreover, the non-oil ACG deficit widens to 17.8 percent of non-oil GDP reflecting higher outlays by the NDFI for subsidized on-lending to the manufacturing sector and PPP investments in unfinished infrastructure projects (backed by NDFI guarantees). Finally, to tackle payment arrears to private contractors, the budget authorized an offsetting operation of 7.4 percent of GDP where government debt to contractors is offset against their debt to banks who in turn have reduced their CBI overdraft by an equal amount. The budget also clarified that the government is authorized to adjust fuel prices and reform the cash transfer system during the Sixth National Development Plan (NDP) which ends 2020/21.

9. The authorities have made progress in strengthening the AML/CFT legislative and institutional framework. The United Nations (UN) Convention Against Transnational Organized Crime have been approved by parliament. Amendments to the AML and CFT laws to bring them fully in line with international standards were approved by Cabinet and submitted to parliament. The requirements to monitor remittances and the transportation of cash have also been upgraded. The National Risk Assessment (NRA) was initiated, the CBI is bolstering its supervision and the Financial Intelligence Unit (FIU) is enhancing the quality of its financial intelligence. The CBI has requested an IMF assessment of the AML/CFT framework, due to commence late-2018 and finalize in late 2019, and Iran gained observer status in the Eurasian AML/CFT group.

B. Outlook and Risks

10. Real GDP growth is projected at 4.0 percent in 2018/19 and to remain in that range in the medium-term (Tables 212). Oil production is expected to remain flat through 2018, in line with OPEC commitments. The rise in gas and condensate exports following recent investments compensates for declining oil production from older fields allowing the oil sector to sustain growth at 4 percent (Box 1). Non-oil sector growth improves gradually towards 4½ percent over the medium-term reflecting completion of bank recapitalization in 2019/20. On-going uncertainty keeps FDI subdued and hampers further expansion of Correspondent Bank Relations (CBRs). The current account is expected to remain in surplus as improved oil prices and higher gas exports allow international reserve buffers to rise gradually.

Table 2.Islamic Republic of Iran: Selected Macroeconomic Indicators, 2015/16–2022/23 1/
Quota: SDR 3,567.10 million
Population: 80 million, 2016/17
Per capita GDP: current US$5,027, PPP current US$17,366, 2016/17
Poverty headcount ratio at $5.50 a day (2011 PPP): 10.5 percent, 2014/15
Main exports: oil, gas, chemical and petrochemical products
Projections
2015/162016/172017/182018/192019/202020/212021/222022/23
(Annual percentage change, unless otherwise indicated)
National accounts
Nominal GDP at market prices (trillions of Iranian rials)11,12912,72314,77217,92620,74223,81127,36531,464
Real GDP at factor cost−1.612.54.34.04.04.14.24.4
Real oil GDP7.261.65.24.63.73.84.04.0
Real non-oil GDP−3.13.34.03.84.14.24.24.5
CPI inflation (average)11.99.19.912.111.511.711.310.8
CPI inflation (end of period)8.411.810.211.213.411.611.010.5
GDP deflator at factor cost0.41.611.316.711.310.210.310.1
Unemployment rate (percent of labor force)11.012.411.811.711.611.411.411.2
(Percent of GDP)
Saving investment balance 2/
Current account balance0.34.04.37.06.35.85.85.9
Investment34.933.536.236.236.737.237.738.2
Change in stocks11.612.615.314.714.213.613.012.5
Total fixed capital investment23.320.920.921.522.523.624.725.7
Public2.53.32.33.72.52.52.52.6
Private20.817.718.617.820.021.122.223.1
Gross national savings35.237.640.443.243.042.943.544.2
Public0.60.20.11.10.30.30.20.1
Private34.637.340.442.042.642.643.344.1
Central government operations
Revenue16.117.315.718.719.519.519.519.5
Tax revenue7.18.07.37.27.27.37.37.4
Nontax revenue9.09.38.311.412.312.212.212.1
Of which : oil revenue6.05.85.49.09.59.49.49.3
Expenditure17.919.518.020.022.222.222.422.4
Net lending/borrowing (budget)−1.8−2.3−2.3−1.4−2.7−2.7−2.8−2.9
Non-oil net lending/borrowing (percent of non-oil GDP)−8.6−9.2−8.7−12.9−15.3−15.0−14.9−14.8
Gross Public Debt42.349.140.953.949.245.642.640.0
(Annual percentage change, unless otherwise indicated)
Monetary sector
Net foreign assets14.4−3.9−0.136.450.521.525.722.8
Net domestic assets41.539.333.220.09.719.015.413.8
Credit to the private sector in rials16.724.721.019.415.715.315.814.0
Base money16.417.220.720.918.918.217.215.4
Narrow money (M1)13.219.319.218.916.817.516.915.5
Broad money (M2)30.023.223.523.820.219.918.816.9
(Billions of US$, unless otherwise indicated)
External sector
Current account balance1.216.318.429.226.023.024.526.5
Exports of goods and services74.494.4109.5130.3127.5126.1129.7134.0
Imports of goods and services−74.0−79.5−91.5−103.3−103.7−105.4−107.5−110.0
External and publicly guaranteed debt10.09.38.79.19.610.210.711.3
Of which: short-term debt2.03.33.43.53.63.83.94.1
Gross official assets/reserves128.4120.7111.7124.9143.5158.5181.4204.2
Oil and gas sector
Total oil and gas exports26.949.863.778.373.669.270.372.3
Crude oil exports (millions of barrels/day)1.42.12.52.72.82.93.03.1
Crude oil production (millions of barrels/day)2.93.73.83.83.94.14.34.4
Memorandum items:
Average exchange rate, Official (Iranian rials per US$)29,64531,457
Average exchange rate, Market (Iranian rials per US$)34,35936,328
Sources: Iran authorities; and IMF staff estimates and projections.

The Iranian fiscal year ends March 20.

Based on central government operations.

Sources: Iran authorities; and IMF staff estimates and projections.

The Iranian fiscal year ends March 20.

Based on central government operations.

Table 3.Islamic Republic of Iran: Augmented Central Government Operations, 2015/16–2022/23 1/
Projections
2015/162016/172017/182018/192019/202020/212021/222022/23
(Billions of rials)
Revenue2,278,3642,786,0253,085,6594,269,3005,022,9895,739,5406,572,7307,517,593
Tax revenue791,9801,014,6001,085,1181,295,7991,497,4771,735,5652,007,6332,319,378
Budget791,9801,014,6001,085,1181,295,7991,497,4771,735,5652,007,6332,319,378
Nontax revenue1,486,3841,771,4252,000,5422,973,5023,525,5124,003,9754,565,0965,198,215
Budget (excluding oil revenue)331,855445,200424,067436,723575,575666,656770,825890,237
TSO (excluding transfer from budget)334,016313,565339,763339,763373,740411,113452,225497,447
Oil revenue820,5131,012,6601,236,7122,197,0162,576,1982,926,2063,342,0463,810,531
Expenditure2,606,8523,125,8323,424,1224,637,8215,646,7146,479,1187,465,1068,585,595
Expense2,050,6102,385,2292,602,3583,276,0714,470,3645,109,7115,889,7306,726,216
Budget (excluding transfer to TSO)1,615,1111,958,4782,109,2322,782,9453,978,4074,618,9245,400,1146,228,566
TSO435,499426,751493,126493,126491,956490,786489,616497,650
Net acquisition of nonfinancial assets556,242740,603821,7631,361,7501,176,3501,369,4071,575,3761,859,379
Budget273,766417,000335,799657,478512,335596,456678,641821,202
NDFI (onlending)282,477323,603485,965704,272664,015772,951896,7351,038,177
Overall balance−328,488−339,807−338,462−368,520−623,725−739,577−892,376−1,068,002
Net acquisition of financial assets−354,002−230,142−174,0914,904,103−143,083−107,471−126,377−158,232
Budget−221,685−180,399−122,0605,025,073−81,687−19,012−11,407−11,407
NDFI−132,318−49,743−52,031−120,970−61,395−88,459−114,970−146,825
Net acquisition of financial liabilities−25,514109,665164,3725,272,623480,642632,106765,999909,770
Budget−25,514109,665164,3725,272,623480,642632,106765,999909,770
(percent of GDP, unless otherwise indicated)
Revenue20.521.920.923.824.224.124.023.9
Tax revenue7.18.07.37.27.27.37.37.4
Budget7.18.07.37.27.27.37.37.4
Nontax revenue13.413.913.516.617.016.816.716.5
Budget (excluding oil revenue)3.03.52.92.42.82.82.82.8
TSO (excluding transfer from budget)3.02.52.31.91.81.71.71.6
Oil revenue7.48.08.412.312.412.312.212.1
Expenditure23.424.623.225.927.227.227.327.3
Expense18.418.717.618.321.621.521.521.4
Budget (excluding transfer to TSO)14.515.414.315.519.219.419.719.8
TSO3.93.43.32.82.42.11.81.6
Net acquisition of nonfinancial assets5.05.85.67.65.75.85.85.9
Budget2.53.32.33.72.52.52.52.6
NDFI (onlending)2.52.53.33.93.23.23.33.3
Overall balance−3.0−2.7−2.3−2.1−3.0−3.1−3.3−3.4
Net acquisition of financial assets−3.2−1.8−1.227.4−0.7−0.5−0.5−0.5
Budget−2.0−1.4−0.828.0−0.4−0.10.00.0
NDFI−1.2−0.4−0.4−0.7−0.3−0.4−0.4−0.5
Net acquisition of financial liabilities−0.20.91.129.42.32.72.82.9
Budget−0.20.91.129.42.32.72.82.9
Memorandum item:
Non-oil balance (percent of nonoil GDP)−11.4−12.1−12.6−17.8−19.3−19.0−18.9−18.8
Non-oil primary balance (percent of nonoil GDP)−11.3−12.0−12.5−17.4−13.3−13.0−12.6−12.5
Nominal GDP (billions of rials)11,129,03312,722,84914,772,31417,926,28520,742,32723,810,61327,364,55931,463,666
Sources: Iran authorities, and IMF staff estimates and projections.

The Iranian fiscal year ends March 20.

Sources: Iran authorities, and IMF staff estimates and projections.

The Iranian fiscal year ends March 20.

Table 4.Islamic Republic of Iran: Central Government Operations, 2015/16–2022/23 1/2/(In percent of GDP)
Projections
2015/162016/172017/182018/192019/202020/212021/222022/23
Revenue16.117.315.718.719.519.519.519.5
Tax revenue7.18.07.37.27.27.37.37.4
Taxes on income, profits and capital gains3.63.73.33.13.13.13.23.2
Taxes on property0.20.20.20.20.20.20.20.2
Taxes on goods and services2.22.72.32.32.32.32.32.3
Of which : value added tax1.81.81.71.71.71.71.71.7
Taxes on international trade and transactions1.01.41.51.71.71.71.71.7
Other revenue, of which9.09.38.311.412.312.212.212.1
Property Income7.37.46.410.010.510.410.410.3
Of which : rents (oil revenue)6.05.85.49.09.59.49.49.3
Other1.71.91.91.41.81.81.81.8
Expenditure17.919.518.020.022.222.222.422.4
Expense15.416.315.716.419.819.719.919.8
Of which : Interest payments0.10.10.20.44.84.95.15.2
Net acquisition of nonfinancial assets2.53.32.33.72.52.52.52.6
Gross operating balance0.71.0−0.12.3−0.2−0.2−0.4−0.3
Net lending/borrowing (including TSO)−1.8−2.3−1.9−1.4−2.7−2.7−2.8−2.9
Net lending/borrowing (budget, excluding TSO)−1.8−2.3−2.3−1.4−2.7−2.7−2.8−2.9
Balance of Targeted Subsidy Organization0.00.00.40.00.00.00.00.0
Financial assets−2.0−1.4−0.828.0−0.4−0.10.00.0
Financial liabilities−0.20.91.129.42.32.72.82.9
Memorandum items:(Percent of non-oil GDP)
Tax revenue7.99.18.79.09.09.09.08.9
Income tax4.04.23.93.93.93.93.93.9
VAT2.02.02.12.12.12.12.12.1
Non-oil net lending/borrowing−8.6−9.2−8.7−12.9−15.3−15.0−14.9−14.8
Change in nonoil net lending (+ = tightening)−0.8−0.60.5−4.2−2.30.30.10.1
Non-oil primary balance−8.5−9.1−8.6−12.5−9.3−9.0−8.6−8.5
Sources: Iranian authorities; and Fund staff estimates and projections.

The Iranian fiscal year ends March 20.

The statement of government operations covers budgetary central government and balance of the Targeted Subsidy Organization but excludes the NDFI.

Sources: Iranian authorities; and Fund staff estimates and projections.

The Iranian fiscal year ends March 20.

The statement of government operations covers budgetary central government and balance of the Targeted Subsidy Organization but excludes the NDFI.

Table 5.Islamic Republic of Iran: Central Government Operations, 2015/16–2022/23 1/2/(In billions of rials, unless otherwise indicated)
Projections
2015/162016/172017/182018/192019/202020/212021/222022/23
Revenue1,794,1892,198,6002,311,9623,346,2364,046,6304,643,9345,338,7406,128,793
Tax revenue791,9801,014,6001,085,1181,295,7991,497,4771,735,5652,007,6332,319,378
Taxes on income, profits and capital gains405,537467,100482,547556,601642,861748,327868,1681,005,104
Taxes on property24,15326,70029,81534,39139,72046,23753,64262,102
Taxes on goods and services246,747337,900345,621405,874469,002543,942629,500727,492
Of which : value added tax197,416224,900257,370298,592344,867401,444465,734539,194
Taxes on international trade and transactions115,542182,900227,135298,934345,893397,059456,323524,679
Other revenue1,002,2091,184,0001,226,8452,050,4372,549,1542,908,3693,331,1063,809,415
Property income817,743936,529950,5011,792,9772,181,0022,479,8192,833,9263,233,815
Of which : rents (oil revenue)670,354738,800802,7781,613,7141,973,5782,241,7132,560,2812,919,179
Other184,466247,471276,344257,460368,152428,550497,180575,600
Expenditure1,990,4032,487,2002,656,4313,593,7864,608,9605,295,0536,116,1467,049,970
Expense1,716,6372,070,2002,320,6322,936,3084,096,6244,698,5975,437,5056,228,769
Of which : Interest payments11,84514,28422,63270,000988,1971,158,2081,407,8791,645,315
Net acquisition of nonfinancial assets273,766417,000335,799657,478512,335596,456678,641821,202
Gross operating balance77,552128,400−8,670409,928−49,994−54,663−98,765−99,976
Net lending/borrowing (including TSO)−196,171−290,064−286,432−247,550−562,329−651,119−777,406−921,177
Net lending/borrowing (budget, excluding TSO)−196,214−288,600−344,469−247,550−562,329−651,119−777,406−921,177
Balance of Targeted Subsidy Organization43−1,46458,03700000
Financial assets−221,685−180,399−122,0605,025,073−81,687−19,012−11,407−11,407
Financial liabilities−25,514109,665164,3725,272,623480,642632,106765,999909,770
Memorandum items:
Non-oil net lending/borrowing−866,525−1,028,864−1,089,210−1,861,264−2,535,908−2,892,832−3,337,687−3,840,356
Sources: Iranian authorities; and Fund staff estimates and projections.

The Iranian fiscal year ends March 20.

The statement of government operations covers budgetary central government and balance of the Targeted Subsidy Organization but excludes the NDFI.

Sources: Iranian authorities; and Fund staff estimates and projections.

The Iranian fiscal year ends March 20.

The statement of government operations covers budgetary central government and balance of the Targeted Subsidy Organization but excludes the NDFI.

Table 6.Islamic Republic of Iran: Government Oil Revenue and Funds, 2015/16–2022/23 1/
Projections
2015/162016/172017/182018/192019/202020/212021/222022/23
(Billions of rials, unless otherwise indicated)
Oil revenue750,7951,452,2101,446,4472,569,6093,013,0973,422,4633,908,8264,456,762
Crude oil exports, total702,3411,369,2991,446,4472,569,6093,013,0973,422,4633,908,8264,456,762
Oil exports (millions of barrels per day)1.452.152.462.662.752.862.973.09
Average oil exports price (US$ per barrel)32.642.047.159.155.853.552.354.2
Exchange rate (rial per US$)29,64531,457
Allocation of oil revenue
Total929,3791,211,2081,446,4472,569,6093,013,0973,422,4633,908,8264,456,762
Budget 2/670,354738,800802,7781,613,7141,973,5782,241,7132,560,2812,919,179
Revenue according to budget share491,771896,891802,7781,613,7141,973,5782,241,7132,560,2812,919,179
Oil revenue advances and repayments 2/178,583−158,091000000
National Development Fund (NDFI)150,159273,860433,934583,301602,619684,493781,765891,352
NIOC108,865198,548209,735372,593436,899496,257566,780646,230
Shares of annual oil revenue proceeds
Budget65.565.555.562.865.565.565.565.5
NDFI20.020.030.022.720.020.020.020.0
NIOC14.514.514.514.514.514.514.514.5
(Billions of US$, unless otherwise indicated)
NDFI
Flows
Oil revenue5.18.712.713.612.011.412.012.6
Expenditure (disbursed) 3/9.510.314.216.513.212.913.814.7
Balance−4.5−1.6−1.5−2.8−1.2−1.5−1.8−2.1
Assets
Disbursments, cumulative12.622.937.153.666.879.793.5108.2
Assets48.857.570.283.895.8107.3119.3131.9
Balance at the CBI 4/36.234.633.130.329.027.525.823.7
Memorandum items
NDFI expenditure (percent of nonoil GDP)2.82.93.94.94.04.04.04.0
NDFI deposits (percent of GDP)9.68.67.77.27.06.96.15.3
Central government deposits at the CBI 5/52.845.042.832.133.829.327.425.1
Source: Iran authorities, and IMF staff estimates and projections.

The Iranian fiscal year ends March 20.

Budget allocation includes, in 2015/16, advances of rials 180,000 billions, and repayment of advances of 280,000 in 2016/17. This does not impact the annual budget share.

The NDFI extends 50 percent of its resources to finance the private sector (including companies whose state ownership is below 20 percent) and 20 percent to promote foreign investment. The remaining 32 percent is invested in capital markets abroad. The NDFI deposits its funds in domestic banks, who are responsible for approving the loans. It can also be used for foreign direct investment in Iran, if those foreign companies provide 30 percent of the investment needs.

Including currency adjustments and government bonus payback.

NDFI deposits are kept at the central bank as foreign exchange deposits of the government.

Source: Iran authorities, and IMF staff estimates and projections.

The Iranian fiscal year ends March 20.

Budget allocation includes, in 2015/16, advances of rials 180,000 billions, and repayment of advances of 280,000 in 2016/17. This does not impact the annual budget share.

The NDFI extends 50 percent of its resources to finance the private sector (including companies whose state ownership is below 20 percent) and 20 percent to promote foreign investment. The remaining 32 percent is invested in capital markets abroad. The NDFI deposits its funds in domestic banks, who are responsible for approving the loans. It can also be used for foreign direct investment in Iran, if those foreign companies provide 30 percent of the investment needs.

Including currency adjustments and government bonus payback.

NDFI deposits are kept at the central bank as foreign exchange deposits of the government.

Table 7.Islamic Republic of Iran: Targeted Subsidy Organization Accounts, 2015/16–2022/23 1/
Projections
2015/162016/172017/182018/192019/202020/212021/222022/23
(Billions of rials)
Revenue435,542425,287551,163493,126491,956490,786489,616497,650
Price Adjustments334,016313,565339,763339,763373,740411,113452,225497,447
Budget Appropriations101,526111,722211,400153,363118,21779,67337,391203
Expense435,499426,751493,126493,126491,956490,786489,616497,650
Cash Transfers412,906410,249414,456414,456413,286412,116410,946418,980
Social Security/health8,7255,00044,37544,37544,37544,37544,37544,375
Enterprises (Cash and noncash)5,7706,4397,4837,4837,4837,4837,4837,483
Other8,0985,06326,81226,81226,81226,81226,81226,812
Operating balance43−1,46458,03700000
Debt59,80059,80059,80059,80059,80059,80059,80059,800
CBI57,00057,00057,00057,00057,00057,00057,00057,000
Treasury2,8002,8002,8002,8002,8002,8002,8002,800
(Percent of GDP)
Revenue3.93.33.72.82.42.11.81.6
Pr ice Adjustments3.02.52.31.91.81.71.71.6
Budget Appropriations0.90.91.40.90.60.30.10.0
Expense3.93.43.32.82.42.11.81.6
Cash Transfers3.73.22.82.32.01.71.51.3
Social Security/health0.10.00.30.20.20.20.20.1
Enterprises (Cash and noncash)0.10.10.10.00.00.00.00.0
Other0.10.00.20.10.10.10.10.1
Operating balance0.00.00.40.00.00.00.00.0
Sources: Iran authorities and IMF staff estimates and projections.

The Iranian fiscal year ends March 20.

Sources: Iran authorities and IMF staff estimates and projections.

The Iranian fiscal year ends March 20.

Table 8.Islamic Republic of Iran: Balance of Payments, 2015/16–2021/22 1/(In percent of GDP)
Projections
2015/162016/172017/182018/192019/202020/212021/222022/23
Current account balance0.34.04.37.06.35.85.85.9
Trade balance1.45.25.78.17.57.17.17.2
Exports16.820.822.727.927.628.427.626.9
Oil and gas7.212.314.718.717.817.416.716.2
Crude oil4.68.19.813.713.614.013.513.1
Petroleum products and natural gas2.64.24.95.04.33.43.23.1
Non-oil and gas9.68.58.09.29.811.010.910.7
Imports−15.4−15.6−17.0−19.8−20.1−21.2−20.5−19.8
Services and Income (net)−1.2−1.3−1.6−1.3−1.4−1.6−1.5−1.4
Credits3.53.13.24.03.94.03.93.8
Debits−4.7−4.4−4.8−5.2−5.3−5.6−5.4−5.2
Transfers (net)0.10.10.10.20.20.20.20.2
Capital and financial account balance0.6−4.1−6.4−3.8−1.8−2.0−0.4−0.8
Foreign direct investment and portfolio equity0.10.50.20.20.20.21.41.3
Medium- and long-term debt0.1−0.5−0.20.10.10.10.10.1
Trade credit1.4−3.5−6.3−3.4−2.1−2.4−2.0−2.4
Other capital 2/−1.0−0.7−0.1−0.70.00.10.10.1
Errors and omissions−0.4−1.80.00.00.00.00.00.0
Overall balance0.6−1.9−2.13.24.53.85.45.1
Change in gross official assets/reserves (– = increase)−0.61.92.1−3.2−4.5−3.8−5.4−5.1
Memorandum items:
Net official reserves32.127.422.626.330.535.438.941.8
Gross official assets/reserves34.229.925.929.834.739.843.145.7
Gross foreign liabilities of the Central Bank of Iran2.12.53.23.54.34.44.23.9
External debt2.72.32.02.22.32.62.52.5
Sources: Iranian authorities; and Fund staff estimates and projections.

The Iranian fiscal year ends March 20.

Includes Asian Clearence Union (ACU) and commercial banks.

Sources: Iranian authorities; and Fund staff estimates and projections.

The Iranian fiscal year ends March 20.

Includes Asian Clearence Union (ACU) and commercial banks.

Table 9.Islamic Republic of Iran: Balance of Payments, 2015/16–2022/23 1/(In millions of US$, unless otherwise indicated)
Projections
2015/162016/172017/182018/192019/202020/212021/222022/23
Current account balance1,23716,28318,39529,23826,01322,97624,50726,514
(in percent of GDP at market prices)0.34.04.37.06.35.85.85.9
Trade balance5,35420,84324,59633,85030,97728,39029,86231,947
Exports62,99583,97898,062116,714114,206112,957116,145120,204
Oil and gas26,94949,78163,66278,33173,55469,18470,27272,305
Crude oil17,25932,91042,29257,24055,98955,73256,67958,463
Petroleum products and natural gas9,69016,87121,37021,09017,56513,45213,59213,842
Non-oil and gas36,04734,19834,40038,38340,65243,77245,87347,899
Imports−57,641−63,135−73,466−82,864−83,229−84,567−86,283−88,257
Services and Income (net)−4,544−5,118−6,809−5,274−5,686−6,201−6,213−6,368
Credits13,03112,59613,92816,56316,21416,04416,49416,868
Debits−17,575−17,714−20,737−21,837−21,900−22,244−22,707−23,235
Transfers (net)427558608662722787858935
Capital and financial account balance2,346−16,658−27,435−16,000−7,402−8,024−1,600−3,757
Foreign direct investment and portfolio equity4072,1771,0009709569225,9535,953
Medium- and long-term debt253−2,095−860300400400400400
Bilateral project financing90132307300400400400400
Disbursements901242500500500500500500
Repayments0−210−193−200−100−100−100−100
Repayments of rescheduled debt4381,6941,16700000
Other official financing and portfolio investment−210−433000000
Oil prefinancing00000000
Trade credit5,308−14,102−27,243−14,138−8,826−9,613−8,421−10,778
Other capital 2/−3,622−2,637−332−3,13268268468668
Errors and omissions−1,350−7,292000000
Overall balance2,233−7,666−9,03913,23818,61114,95322,90722,757
Change in gross official assets/reserves (– = increase)−2,2337,6669,039−13,238−18,611−14,953−22,907−22,757
Memorandum items:
Net official reserves120,379110,75897,729110,269125,948140,900163,807186,564
Gross official assets/reserves128,399120,733111,694124,932143,543158,495181,402204,159
(in months of the following year’s imports)19.415.813.014.514.514.514.514.5
Gross foreign liabilities of the Central Bank of Iran8,0209,97513,96514,66317,59517,59517,59517,595
External debt service (percent of exports)0.02.11.30.80.80.80.80.8
External debt (percent of GDP)2.72.32.02.22.32.62.52.5
Sources: Iranian authorities; and Fund staff estimates and projections.

The Iranian fiscal year ends March 20.

Includes Asian Clearence Union (ACU) and commercial banks

Sources: Iranian authorities; and Fund staff estimates and projections.

The Iranian fiscal year ends March 20.

Includes Asian Clearence Union (ACU) and commercial banks

Table 10.Islamic Republic of Iran: Labor and Population Data, 2015/16–2022/23 1/
Projections
2015/162016/172017/182018/192019/202020/212021/222022/23
(Millions of people, unless otherwise indicated))
Population79.580.581.482.483.384.185.085.8
Working age population64.665.465.966.567.067.568.168.8
Labor force24.725.826.226.526.927.327.728.1
Employment22.022.623.123.423.824.224.625.0
Unemployment2.73.23.13.13.13.13.13.2
Nominal GDP per capita (US$)4,7235,0275,3055,0864,9614,7324,9495,202
(Percent)
Participation rate38.239.439.739.940.240.440.740.9
Male63.264.164.9
Female13.314.916.5
Unemployment rate11.012.411.811.711.611.411.411.2
Male9.310.510.1
Female19.420.720.4
Youth26.129.128.1
(Annual percentage change)
Nominal GDP per capita−2.412.914.720.014.413.613.813.9
Real GDP per capita−2.811.13.02.82.83.03.23.4
Population1.31.21.21.21.11.11.01.0
Labor force3.64.51.41.41.41.41.61.6
Employment3.12.82.11.51.61.61.61.7
Unemployment7.518.0−3.60.90.2−0.31.10.2
Sources: Iran authorities, and IMF staff estimates and projections.

The Iranian fiscal year ends March 20.

Sources: Iran authorities, and IMF staff estimates and projections.

The Iranian fiscal year ends March 20.

Table 11.Islamic Republic of Iran: Central Bank Balance Sheet, 2015/16–2022/23 1/
Projections
2015/162016/172017/182018/192019/202020/212021/222022/23
(Billions of rials, unless otherwise indicated)
Net foreign assets (NFA)3,259,7003,053,7002,973,1874,047,5016,258,6327,755,8389,970,63712,453,911
Foreign assets3,502,4003,377,1003,484,7794,680,9027,265,4688,853,47611,162,18613,742,981
Foreign liabilities 2/242,700323,400511,593633,4011,006,8361,097,6381,191,5491,289,070
Net domestic assets (NDA)−1,673,600−1,190,400−1,648,985−1,855,278−3,260,738−2,753,291−3,090,372−3,389,180
Net domestic credit−276,300147,600372,052564,178297,524302,017342,990482,049
Central government, net−1,388,800−1,318,400−1,240,548−29,052−332,248−369,778−377,131−347,431
Claims175,40098,600223,6001,343,6001,363,6001,383,6001,403,6001,423,600
Deposits1,564,2001,417,0001,464,1481,372,6521,695,8481,753,3781,780,7311,771,031
Claims on banks836,3001,163,3001,279,630243,612280,153322,176370,503426,078
Claims on nonfinancial public enterprises (NFPEs)276,200302,700332,970349,619349,619349,619349,619403,402
Other items net, excluding central bank participation papers (CPPs)−1,397,300−1,338,000−2,021,038−2,419,457−3,558,262−3,055,308−3,433,362−3,871,228
Base money1,575,1001,845,8002,228,0012,692,7663,200,9763,783,9074,433,9495,116,043
Currency457,000485,000509,250534,713561,448589,521618,997649,946
Currency in circulation371,900393,300407,400449,159466,002489,302513,767539,456
Cash in vaults85,10091,700101,85085,55495,446100,218105,229110,491
Reserves1,076,0001,313,1001,671,0512,110,3542,591,8283,146,6863,767,2524,418,397
Required reserves1,019,0001,253,9001,567,5781,946,6662,347,7502,821,0423,357,9683,933,277
Excess reserves57,00059,200103,473163,688244,078325,644409,285485,120
Deposits of NFPE and municipalities42,10047,70047,70047,70047,70047,70047,70047,700
Other liabilities10,40017,500−903,800−500,544−203,0831,218,6412,446,3163,948,688
Memorandum items:
End-period change (in percent of base money)
Base money16.417.220.720.918.918.217.215.4
NFA29.0−13.1−4.448.282.146.858.556.0
NDA (net of other liabilities)−12.530.225.1−27.4−63.2−28.6−41.4−40.6
Sources: Central Bank of Iran; and Fund staff estimates and projections.

The Iranian fiscal year ends March 20.

Includes liabilities in foreign currency to residents.

Sources: Central Bank of Iran; and Fund staff estimates and projections.

The Iranian fiscal year ends March 20.

Includes liabilities in foreign currency to residents.

Table 12.Islamic Republic of Iran: Monetary Survey, 2015/16–2022/23 1/
Projections
2015/162016/172017/182018/192019/202020/212021/222022/23
(Billions of rials, unless otherwise indicated)
Net foreign assets (NFA)3,787,6003,641,7003,637,5934,960,5227,468,0589,074,33711,401,94314,002,361
Foreign assets5,807,9005,806,5006,229,8628,047,33211,724,78213,714,95416,439,59819,452,320
Foreign liabilities 2/2,020,3002,164,8002,592,2693,086,8104,256,7244,640,6175,037,6555,449,959
Net domestic assets (NDA)6,396,2008,909,70011,866,78714,235,29115,609,85718,581,85521,445,83124,407,506
Net domestic credit7,170,5009,542,00011,616,78713,535,29115,409,85717,581,85520,445,83123,407,506
Net credit to government 3/−494,90024,800131,338−129,832−343,681−527,781−475,389−457,378
Claims on nonfinancial public enterprises (NFPEs)303,200340,000379,046406,664418,201431,807447,235517,548
Claims on the private sector7,362,2009,177,20011,106,40313,258,45915,335,33717,677,82920,473,98523,347,336
Other items, net, excluding CPPs−774,300−632,300250,000700,000200,0001,000,0001,000,0001,000,000
Broad money (M3)10,183,20012,551,40015,504,38019,195,81323,077,91527,656,19232,847,77338,409,867
M210,172,80012,533,90015,484,60619,172,49723,047,03027,622,52132,811,22138,370,324
Cash371,900393,300407,400449,159466,002489,302513,767539,456
Deposits9,800,90012,140,60015,077,20618,723,33922,581,02827,133,21932,297,45437,830,868
Demand deposits995,1001,237,0001,536,2091,860,9042,233,0272,683,1913,193,8803,741,077
Time deposits8,805,80010,903,60013,540,99616,862,43520,348,00124,450,02729,103,57434,089,792
CPPs held by nonbanks00000000
Foreign currency deposits10,40017,50019,77423,31630,88633,67136,55239,544
Memorandum items:
Net credit to government (without valuation effect) 3/−494,90024,800131,338−129,832−343,681−527,781−475,389−457,378
Base money1,575,1001,845,8002,228,0012,692,7663,200,9763,783,9074,433,9495,116,043
M11,367,0001,630,3001,943,6092,310,0622,699,0293,172,4933,707,6474,280,532
Multiplier (M2/base money)6.56.87.07.17.27.37.47.5
Velocity of M21.11.01.00.90.90.90.80.8
GDP11,129,03312,722,84914,772,31417,926,28520,742,32723,810,61327,364,55931,463,666
(Annual change, in percent)
NFA14.4−3.9−0.136.450.521.525.722.8
NDA41.539.333.220.09.719.015.413.8
Base money16.417.220.720.918.918.217.215.4
M113.219.319.218.916.817.516.915.5
M230.023.223.523.820.219.918.816.9
Credit to private sector in rials16.724.721.019.415.715.315.814.0
Sources: Central Bank of Iran; and Fund staff estimates and projections.

The Iranian fiscal year ends March 20.

Includes liabilities in foreign currency to residents.

Includes foreign exchange deposits of the NDFI.

Sources: Central Bank of Iran; and Fund staff estimates and projections.

The Iranian fiscal year ends March 20.

Includes liabilities in foreign currency to residents.

Includes foreign exchange deposits of the NDFI.

11. CPI inflation remains in low double digits in the medium-term. Average inflation rises to 12 percent in 2018/19 reflecting recent depreciation pressures. The forecast reflects full unification of the exchange rate in 2019/20. Liquidity growth is curbed to limit second-round effects of exchange rate pass-through on inflation and the gradual increase in fuel prices. Credit to the private sector strengthens after banks’ recapitalization, in turn supporting the gradual strengthening of non-oil economic growth.

12. The fiscal deficit is set to rise driven by higher interest outlays and rising pension system deficits but debt declines. Assuming the NDFI’s share of oil proceeds is lowered to 20 percent and the gradual implementation of fuel subsidy reform under the NDP, the CG fiscal deficit is projected to average 3 percent of GDP in the medium-term reflecting higher interest outlays associated with the bonds for arrears securitization and bank recapitalization. High nominal GDP growth will reduce the debt-to-GDP ratio to 40 percent of GDP by 2022/23 (Appendix II).

13. Risks are tilted to the downside (Box 2). A rise in social or external tensions could delay the reform process. Delays or failure to decisively address problem banks, implement fiscal measures or unify the exchange rate risks a return to high inflation and further pressures on the exchange rate. With little improvement in banks’ balance sheets, credit to the private sector would continue to be devoted to the evergreening of NPLs and ultimately reduce private sector growth. On the other hand, faster implementation of reforms in a manner that underpins confidence and shares the burden equitably could see growth surprise on the upside. A more difficult external environment or lower oil prices could increase pressure on the external and fiscal accounts. Failure to secure FATF approval of the measures taken under the action plan or to effectively implement AML/CFT international standards could reverse the improvement in CBRs and stall prospective FDI inflows. Thus, it is paramount the authorities implement a comprehensive reform plan to safeguard stability and build FX and fiscal buffers in order to preserve space for policy maneuver if needed, while taking measures to reduce unemployment, inequality and to protect the poor.

14. The authorities concurred with staff’s assessment noting that the growth trajectory is likely to be higher reflecting the impact of planned financial sector and business climate reforms. While acknowledging the risks and underscoring how external uncertainty is hampering investment, they expect most JCPOA signatories will adhere to the agreement.

Policy Discussions

A. Advancing Reforms in the Financial Sector

15. In the past year, the CBI merged or closed several UFIs that threatened financial stability and contributed to excessive interest rate pressures. The legal framework was revised to make the CBI the sole authority to license and regulate financial institutions. UFI assets and liabilities were transferred to existing Credit Institutions (CIs). However, a deposit run in two UFIs prior to the transfer triggered a shift of deposits to public commercial banks necessitating CBI ELA to stem liquidity pressures (Figure 6). While 98 percent of depositors in those UFIs have now been paid, deposits over $25,000 are frozen pending a court decision on the CBI’s asset review of these entities. It is essential to ensure that the CIs’ balance sheets are not weakened from the clean-up of UFIs so they remain sound and viable and that their ownership and management meet fit and proper standards. Moreover, the owners and unsecured debt holders of the UFIs should have their claims/rights fully written-off before any depositor face losses.

Figure 6.Islamic Republic of Iran: Financial Indicators, 2009/10–2016/17

Source: Iranian authorities, S&P Global Market Inteligence, and IMF staff calculations.

16. Notwithstanding the use of CBI FX revaluation gains and the securitization of some government arrears to banks in the past year, the average Capital Adequacy Ratio (CAR) had fallen to 4.9 percent by end-June 2017 from 5.2 percent a year earlier and the nonperforming loans (NPLs) ratio had risen to 11.4 percent. The provisioning rate on these NPLs fell to 43.6 percent (from 48.5 percent in March 2016). The banking system continues to operate at a loss as the margin between mandated lending and deposit rates is insufficient to cover high operating costs and increasing provision expenses related to nonperforming assets. The correlation between the credit impulse and non-oil activity is diminishing as banks’ NPLs grow.

Credit Impulse and Non-Oil GDP Growth

(Percent, YoY)

Source: Iranian authorities, and IMF staff calculations.

17. The CBI plans to undertake an independent Asset Quality Review (AQR), including related-party lending assessment to identify the financial system’s recapitalization needs. An AQR will help identify the true extent of non-performing assets, the value of associated collateral, provisions adequacy and credit risk management weaknesses. Staff urged the CBI to move expeditiously with the AQR to contain financial stability risks and be prepared to take additional actions following its conclusion, including requiring banks to raise capital, resolve NPLs, improve credit risk management, tackle related-party lending and demonstrate their commercial viability on a forward-looking basis. Non-viable banks should be rapidly and orderly resolved under a least-cost principle.

18. The restructuring of state-owned banks (SBs) should proceed now—since the AQR will take time—to ensure that CBI and government support provided is linked to measures to promote financial soundness. Recovery plans should be prepared by SBs and other government-controlled banks while the AQR proceeds. The government must tackle elevated operating costs, refrain from directed credit, cover interest subsidies, adjust regulated prices so firms can start to meet their obligations to banks, and ensure that the SBs’ governance, internal procedures, and credit risk management support a profitable business model. The issuance of recapitalization bonds—to cover government’s arrears to banks and the capital required to meet prudential requirements—would make SBs solvent and provide them a cash-flow from interest and should be linked to the implementation of the recovery plans. Private banks accessing CBI ELA should also be required to prepare and implement recovery plans.

19. Stronger supervisory and resolution powers would aid bank restructuring. Early passage of the new CBI Law and amendments to banking law to grant it the requisite supervisory and resolution powers is critical, and should be supported by strengthening of resources and capacity for risk-based supervision. The CBI should then move quickly to use those powers to place unviable banks in resolution and restructure assets and liabilities. The DIF should be adequately funded and have access to funding facilities if it is to have the capacity to repay depositors in a timely manner. The proposal to tighten provisioning and loss recognition standards is a welcome step towards Basel II. The impact of the tighter standards on banks’ capital positions must be quantified and provided for under the recapitalization plan to ensure banks are adequately capitalized.

20. The authorities acknowledged the complexity and scope of banks’ problems and agreed on the need for action. They noted that NPLs and other frozen assets comprised 28 percent of banks’ total assets but that the exact recapitalization need will only be finalized once the AQR is completed. In a fiscally constrained environment, they acknowledged need to forge consensus on how to restructure and fund the recapitalization.

B. Modernizing the Monetary Policy Framework

21. The CBI kept inflation close to single digits since end-2015 by curbing liquidity growth while managing carefully its support to distressed banks. Still, the CBI is obliged to provide liquidity to all banks, including insolvent ones, and to accommodate credit support to specific sectors and the funding needs of the budget and SOEs. Moreover, the absence of a regular funding facility for banks, together with banks’ unrestricted access to ELA without collateral, undermines control over monetary aggregates.

Consumer Inflation

(Percent, YoY)

Source: Iranian authorities.

22. The government arrears netting operation can be improved to preserve the CBI’s balance sheet and enhance its ability to maintain price stability. If the government securitizes its debt to the CBI with bonds bearing a market interest rate, the CBI could use these bonds in open market operations to manage banking system liquidity and thereby enhance monetary policy effectiveness. To protect the CBI’s balance sheet from further erosion and preserve its ability to manage liquidity and control inflation, the authorities should avoid any further use of CBI revaluation gains to recapitalize banks.

23. Bank recapitalization should be accompanied by an overhaul of the central bank’s lending facilities. To smooth the transition to a market-based monetary policy framework, the CBI should ensure interest rates support its single digit inflation target.2 An emergency lending facility, restricted to viable banks and providing temporary liquidity against high-quality collateral at the CBI’s discretion with pre-established limits for all banks, would preserve the CBI’s capacity to absorb losses that may arise from future sterilization operations.

24. Greater CBI independence, successful financial sector reform, and fiscal discipline is necessary to sustain low and stable inflation. The new Central Bank Law should enshrine price stability as the core objective of monetary policy, replace government representatives with independent experts, streamline the CBI’s governing bodies and prohibit CBI financing of the government. Clear communication and better coordination between monetary, fiscal and capital market policies would facilitate the transition.

25. The level of the official exchange rate and the gap between the official and market exchange rates are eroding reserves, creating distortions and undermining competitiveness. Uncertainty and incomplete access to reserves have also put pressure on the market exchange rate. To address this, the authorities have increased import tariffs, moved more goods off the priority list and recently raised interest rates. Nevertheless, the gap between the official and market rate constituted a subsidy to importers of priority list goods of 1.4 percent of GDP in 2017/18 and continues to stimulate imports. Staff’s calculations show the official exchange rate was overvalued by 13–16 percent and the market exchange rate was broadly in line with fundamentals at end-2016/17 (Appendix I).

26. Faster progress toward exchange rate unification would help counter FX pressures. If pressures reemerge, the CBI should extend the rate increase and allow lending rates to adjust commensurately to protect banks’ net interest income. This combined with the re-start of the interbank FX market could prepare the ground for unification and transition to a more flexible exchange rate regime in the context of a carefully crafted communication plan. Unification would afford the CBI greater space to use its reserves to smooth market pressures; eliminate the economic distortions and potential rent-seeking associated with the subsidy; allow fair and equal access to FX for all; and promote non-oil export competitiveness.

27. The authorities still plan to unify the exchange rate by end-March 2019 but issues surrounding the transfer of export earnings and CBRs complicate the timing. They will continue to gradually remove all but pharmaceutical goods from the priority list and would consider sustaining the interest rate increase and closing the gap between the official and market rate more quickly should FX pressures persist. The authorities acknowledged the need for a new monetary framework and see the new central bank bill as key to this transition. They broadly agreed with the assessment that the market exchange rate was in line with macro-fundamentals at end-2016/17.

C. Safeguarding Fiscal Sustainability

28. Reflecting expenditure constraint, the authorities contained the cash-based fiscal deficit notwithstanding the impact of sanctions and lower oil prices. Progress has been made through the on-going audit to regularize historical arrears, while the introduction of performance based budgeting in one-third of ministries and the publication of detailed budget data improved transparency. The authorities have also strengthened tax administration and tax collections have exceeded oil revenues as the main source of budget revenue since 2015/16.

29. Looking ahead, fiscal policy will need to gradually tighten to contain emerging debt pressures. Notwithstanding the implementation of fuel and subsidy reform during the NDP, the projected non-oil fiscal deficit of the ACG would average 19 percent of non-oil GDP in the medium-term, well above the level that ensures adequate savings for future generations at a time when the budget faces large contingent liabilities from growing pension system deficits (Box 3). Staff estimate that the issuance of bonds for bank recapitalization will push debt to almost 54 percent of GDP in 2018/19 which, with the securitization of arrears, will see the budgeted interest bill rise to 4.8 percent of GDP in 2019/20. Fiscal policy needs to consolidate to reduce the governments’ borrowing requirement and contain debt given the increased risk of shocks (Appendix II) in the context of a nascent domestic debt market and no external finance.

30. A medium-term general government fiscal framework (MTFF) targeting a gradual adjustment over 10 years would contain debt and minimize the growth impact of adjustment. Iran’s oil and NDFI assets imply that it has some fiscal space to allow for a gradual adjustment over a decade to the estimated PIH norm of 5.4 percent of non-oil GDP by 2029. Gradually lowering the non-oil deficit to about 13.4 percent of non-oil GDP by 2022/23 would create fiscal space, reduce the ACG and CG deficits, and contain gross financing needs. This would allow the debt burden to fall well below the authorities’ 40 percent of GDP debt ceiling by 2022/23 and would give some headroom relative to the debt target to address shocks. To attain this path, additional fiscal measures of 5.4 percent of non-oil GDP are needed over the next four years.

Fiscal Measures

(Percent of non-oil GDP, fiscal balance in percent of GDP)

Source: IMF staff estimates

Staff’s Assessment of Fiscal Space, 2014/15–2022/23
Projections
2014/152015/162016/172017/182018/192019/202020/212021/222022/23
(percent of non-oil GDP, unless otherwise indicated)
Non-oil Augmented CG balance with the authorities’ identified measures (current policy) 1/−10.8−11.4−12.1−12.6−17.8−19.3−19.0−18.9−18.8
Overall CG balance (% of GDP)−1.1−1.8−2.3−1.9−1.4−2.7−2.7−2.8−2.9
Overall Augmented CG balance (% of GDP)−0.7−3.0−2.7−2.3−2.1−3.0−3.1−3.3−3.4
Non-oil CG primary balance−7.7−8.5−9.1−8.6−12.5−9.3−9.0−8.6−8.5
Non-oil Augmented CG primary balance−10.7−11.3−12.0−12.5−17.4−13.3−13.0−12.6−12.5
Debt-to-GDP ratio11.842.349.140.953.949.245.642.640.0
Non-oil Augmented CG balance with additional measures 1/−10.8−11.4−12.1−12.6−17.8−18.3−16.8−15.3−13.4
Overall CG balance (% of GDP)−1.1−1.8−2.3−1.9−1.4−1.9−1.8−1.7−1.4
Overall Augmented CG balance (% of GDP)−0.7−3.0−2.7−2.3−2.1−2.2−2.1−2.1−1.9
Debt-to-GDP ratio11.842.349.140.953.948.343.939.936.1
Source: Iran authorities, and IMF staff projections.

Staff estimates of permanent cumulative measures to be taken every year.

Source: Iran authorities, and IMF staff projections.

Staff estimates of permanent cumulative measures to be taken every year.

31. The adjustment effort should rely mainly on domestic revenue mobilization given the low tax-to-GDP ratio (8 percent in 2016/17) and the need to protect social and investment spending. Eliminating tax exemptions, especially to companies owned by foundations and other exempt entities, and improving tax compliance should take priority over rate increases and would spread the burden of adjustment more equitably. Introducing a VAT registration threshold with a simplified tax regime for small businesses would improve VAT compliance. Enhancing tax administration by organizing INTA by taxpayer groups, the introduction of e-tax processes and a shift to risk-based auditing would strengthen administration and combat evasion.

VAT Rates Across Resource-Rich Countries

(Percent)

Sources: International Bureau of Fiscal Documentation, IBFD, 2013 (www.ibfd.org).

Options to Create Fiscal Space 1/(Percent of non-oil GDP)
Reducing NDFI’s spending 2/3.4
Increase revenue base by removing exemptions and taking administrative measures to reduce tax evasion1.9
Pension reform0.1
Cumulative impact5.4

Cumulative effect 2019/20 – 2022/23

Oil proceeds are currently shared across the National Iranian Oil Company (14.5 percent), the central government budget (62.8 percent), and the NDFI (22.7 percent). NDFI spending is assumed to decline in tandem with the reduction in its share in oil revenues.

Cumulative effect 2019/20 – 2022/23

Oil proceeds are currently shared across the National Iranian Oil Company (14.5 percent), the central government budget (62.8 percent), and the NDFI (22.7 percent). NDFI spending is assumed to decline in tandem with the reduction in its share in oil revenues.

32. Staff supports the planned gradual reduction of general fuel subsidies and the better targeting of cash transfers to the poor as this creates space for higher social safety net spending to compensate vulnerable households. Fuel subsidies cost 1.6 percent of GDP in 2017/18. Adopting an automatic price adjustment mechanism would support a gradual increase in pump prices and phasing-out of fuel subsidies. Better targeting of cash transfers by removing the richest 20 percent of households from the beneficiary list could create space to raise the cash transfer to the poorest households by 1 percent of GDP. It would be important to ensure that targeting be based on a thorough review of individuals’ assets and disposable income.

Fuel Prices

(US$ per liter)

Source: WDI and IMF staff calculations

33. Iran’s pension system faces a growing deficit. Unification of pension schemes, a clear definition of general government pension obligations, and rationalizing asset management would increase transparency about pension finances. Gradually increasing the retirement age to 65, reducing accrual rates to 2 percent per year and expanding the pension benefit calculation period, gradually, to 20 years, would lower the pension deficit to 0.5 percent of GDP by 2030.

Pension Deficit

(Percent of GDP)

Sources: IMF staff calculations.

34. Public financial management reforms are essential to improve the efficiency and effectiveness of public spending. Expanding the rollout of performance-based budgeting could identify cost savings. The transition to accrual-based accounting in the medium-term needs to be complemented by expanding the coverage of fiscal accounts to the sub-national governments, social security schemes, TSO and the NDFI. This would ensure all spending commitments and PPP-related risks are adequately captured and provided for.

35. Rising debt calls for a debt management strategy and annual borrowing program.3 To ensure the orderly development of the primary bond market, a new public debt law should give the Ministry of Economy and Finance (MOEF) the sole authority to borrow and issue guarantees on behalf of the CG, set rules to determine whether local governments can borrow, and strengthen MOEF oversight of State-Owned Enterprises (SOEs) and subnational debt. An issuance calendar would also facilitate market development and monetary policy coordination.

36. The authorities underscored their commitment to fiscal discipline. The conservative oil price assumption of $55 per barrel in the 2018/19 budget limits risks of deficit overruns. They acknowledged the rise in social and spending pressures and aim to eliminate absolute poverty by developing a universal social safety net that merges all social support programs and eliminates untargeted subsidies. They have prepared a draft bill on debt management, are developing a debt management strategy and a parametric pension reform. They noted that addressing tax exemptions will require political consensus.

D. Enhancing Growth and Job Creation Potential

37. The business environment improved in 2017 reflecting macroeconomic stability. Iran’s rank on the 2017–18 Global Competitiveness Index (GCI) rose seven notches to sixty-ninth. Between January–November 2017, exports to the Euro Area doubled y/y and are up nine-fold since their sanctions low. Some 1.3 million jobs were created in the last two years. The AML/CFT legal framework was also strengthened.

38. Nonetheless, Iran face challenges of high youth unemployment and falling productivity stemming from its continued reliance on oil and the public sector to drive growth (Figure 7). Labor force participation is below 40 percent largely due to the very low rate of female participation and the high degree of informality and underreporting of employment. Unemployment is high and rising for youth and job creation was insufficient to absorb new entrants and the rise in labor force participation. Most jobs were created in lower skilled services and agriculture that do not match Iran’s skilled youth and employ few women. Productivity has been in decline, growth remains too capital intensive and the private sector has significant room to grow to create jobs. Non-oil exports are small (8½ percent of GDP) and dominated by petrochemicals which benefit from free natural gas.

Figure 7.Islamic Republic of Iran: Structural Indicators, 2005/06–2027/28

Source: Iranian authorities, WDI, and IMF staff calculations.

Job Creation and Gender, 2015

Source: Iranian authorities.

39. Further improvements in the business environment would spur faster development of the private non-oil sector. Across most surveys, access to finance remains the main obstacle to business, followed by bureaucracy and policy instability. Less red-tape, modern regulations, a reformed bankruptcy framework, liberalized prices and fewer barriers to entry could help the private sector operate on a more level playing field with SOEs.

Most Problematic Factors for Doing Business

(Lower score is better)

Source: World Bank.

40. Reducing trade barriers would stimulate exports. Lack of bilateral and multilateral trade agreements reduce market access for Iranian firms.4 The tariffs applied to Iran’s exports by its trading partners averaged 8.9 percent in 2014 (compared to a global average of 2.9 percent). Domestic import tariffs averaged 20.9 percent in 2017/18 and restrictions on service trade (the fourth highest in the world) work to protect inefficient enterprises. It takes 25 days to clear exports. Proposed Customs Law amendments tackle these constraints by introducing e-processes, supply chain management and restricting the release of goods from bonded warehouses to licensed brokers to counter smuggling.

Time to Export, 2014

(Days)

Source: World Bank.

41. As the economy recovers, restrictive labor regulations are emerging as a concern. Government approval is required to dismiss workers and may deter more permanent hiring as employers rely increasingly on fixed-term contracts. Legal restrictions against women (e.g., with respect to foreign travel by married women), and the tax code (e.g., the income tax deduction) limit female labor force participation (FLFP) although the official rate is likely understated due to social reasons and the underreporting of part-time work. Measures to overcome obstacles to employing women in the formal sector, expand access to child care facilities, and reduce the gender wage gap over time would increase FLFP. Staff estimates suggest closing the gender wage gap by half could boost GDP by 26 percent. Moreover, the rise in tax revenues would more than offset the fiscal cost of a child-care subsidy to lower income mothers.5 Additionally, to improve incentives for employees to work and stay in the labor force, a pension reform could reconsider retirement incentives and eliminate the minimum service time criteria to provide greater income security to workers with short employment histories.

Severance Pay for Redundancy Dismissal for a Worker With 10 Years of Tenure, 2016

(In Weeks of Salary)

Source: World Bank.

42. Bolstering the anti-corruption framework would deter financial crimes, enhance accountability, improve the business climate and help attract foreign investment. Areas of priority are to enhance transparency of corporate beneficial ownership, establishing an independent anti-corruption agency, continuing to actively pursue corruption cases, and enhancing the system of declaration of assets of senior public officials and measures to identify domestic politically exposed persons in line with international standards.6

43. The authorities acknowledged the need for wide ranging reforms to increase non-oil growth and job creation. They saw the Customs Law amendments in parliament as necessary to combat smuggling and lower trade costs. They noted that their WTO membership process is stalled but are hopeful that with international support it could restart. To increase youth employment, they plan to roll-out nationally a pilot internship program for university graduates and offer a two-year waiver of employer social security contributions for firms retaining interns. They noted this would assist women in finding work given half of tertiary-level graduates are female. They have removed gender caps in recruitment rounds at most ministries and have evaluated the contribution of household work to GDP but stressed that greater efforts are needed to bring women into formal sector employment.

E. Other Issues

44. More timely and comprehensive data would enhance transparency, inform policy design and support the reform program. Publishing data per a pre-announced schedule would aid policy design. Developing general government and public-sector debt statistics is key to improving fiscal statistics. The errors and omissions in the balance of payments are a concern. The authorities acknowledged the deficiencies and noted that they plan to implement the recommendations of the 2017 Multisector Statistics TA mission.

45. The exchange rate regime gives rise to several multiple currency practices (MCPs) and an exchange restriction subject to Fund approval under Article VIII, Sections 2(a) and 3. A MCP and exchange restriction arise from the establishment of an official exchange rate for use in some exchange transactions, which differs by more than two percent from the rate used by foreign exchange bureaus. Two other MCPs arise from the differences of more than two percent between the current official and bureau market rates, and the preferential rates for certain imports for which foreign exchange payment commitments were made through letters of credits or bank drafts prior to March 21, 2002 and July 24, 2012.

Staff Appraisal

46. The recovery in headline growth following the lifting of nuclear-related sanctions has begun to broaden to the non-oil sector. Holistic, carefully sequenced, reform is required to preserve and build on these gains so that growth leads to higher job creation and improved living standards.

47. The authorities need to move expeditiously to restore banks to a sound financial footing so they can finance an expansion in private sector economic activity. A banking system that is substantially restructured, with viable banks recapitalized and non-viable ones resolved, along with stronger supervisory and resolution powers and improvements in the effectiveness of supervision would help safeguard financial stability and sustain the recovery. Staff welcomes the planned AQR as this would crystalize banks’ recapitalization needs and inform the financial sector reform plan. The restructuring of SBs should proceed quickly alongside the AQR to ensure their ongoing recapitalization is accompanied by measures to make them commercially viable. Private banks should also prepare and implement recovery plans. Securitizing the government’s debt to the CBI would provide it a tool to conduct open market operations and enhance its ability to contain inflation.

48. A comprehensive package of fiscal measures must accompany the financial sector reform if deficits and debt are to remain contained. The adjustment can be spread over 10 years to minimize the impact on growth. A package that sees a higher share of oil revenue dedicated to cover interest costs arising from bank recapitalization bonds, along with measures to expand tax revenue and reform the pension system would gradually lower deficits and debt while creating space for higher social and investment spending. Eliminating tax exemptions, especially to companies owned by foundations and other exempt entities and improving taxpayer compliance should take priority over tax rate increases. A formula-based, gradual phase-out of untargeted domestic fuel price subsidies combined with targeted income support to compensate the vulnerable would make the reform more sustainable and equitable. Developing a debt management strategy and making the MOEF the sole authority to borrow and issue government guarantees would contain debt and reduce borrowing costs.

49. Staff assesses the external position to be weaker than warranted by fundamentals and desirable policy settings. Unifying the exchange rate and allowing more exchange rate flexibility would reduce economic distortions, promote fairness and export competitiveness, and create greater space to use reserves to smooth market pressures. Recognizing, however, the potentially greater market volatility in the run-up to the unification, confidence in the exchange rate would be enhanced by a clear communication strategy and tightening of the monetary policy stance. This would support the transition to a market-based monetary policy framework, complemented by full autonomy for the CBI to pursue low and stable inflation. A new Central Bank Law that enhances the CBI’s autonomy and makes price stability the core objective of monetary policy should be complemented by steps to reduce quasi-fiscal activities arising from directed credit initiatives and administered price controls.

50. Strengthening the AML/CFT legislative and institutional framework in line with the FATF action plan and its effective implementation remain essential. The UN Convention Against Transnational Organized Crime was approved by parliament. Staff urges timely passage of the AML and CFT amendments to bring them fully in line with international standards and ratification of the UN Convention for the suppression of the financing of terrorism. Beyond the action plan, enhancing the effectiveness of the AML/CFT system, including by completing the NRA, improving transparency of corporate beneficial ownership, enhancing the system of asset declaration for senior public officials and measures to identify domestic politically exposed persons and moving to risk-based AML/CFT supervision of financial institutions is necessary to counter corruption, tax evasion, and terrorism financing, and facilitate improved CBRs and re-integration into the global financial system.

51. Faster implementation of business climate reforms would allow the private sector to develop, lifting growth and job creation. Reducing red tape, modernizing regulations, strengthening the bankruptcy framework and easing market entry will help private firms grow and create jobs. An effective anti-corruption framework in line with international standards would also bolster accountability, improve the business climate, and help attract foreign investment. A review of labor regulation could improve incentives for firms to hire and address informality. Development of non-oil exports will require lowering the costs to trade, better infrastructure, and pursuing non-preferential trade agreements.

52. FLFP should be further facilitated. Iran’s highly educated women are an untapped source of growth and productivity. Reducing legal and social barriers, pay gaps, subsidizing child care to low income women, and tackling informality would create job opportunities for women and could substantially boost economic growth.

53. Staff encourage the authorities to improve the quality, timeliness and availability of data, including by participating in E-GDDS.

54. Staff recommend Executive Board approval of the retention of the MCP and exchange restriction arising from the greater than the two percent deviation between the official and bureau exchange rates, since they are maintained for balance of payments reasons, are non-discriminatory, and are temporary considering the authorities’ commitment to unify the exchange rate by March 20, 2019. Staff also recommend Executive Board approval of the retention of the two MCPs referred to above (¶45) through March 20, 2019. These measures are not maintained for balance of payment reasons and do not impede its adjustment, and are non-discriminatory among members.

55. It is recommended that the next Article IV consultation takes place on the standard 12-month cycle.

Box 1.Energy Sector in Iran

Increasing oil and gas production requires significant investment. Absent new investment, oil production is set to decline by about 240,000 bpd annually as oil fields age. In November 2016, Iran signed a 5-year $4.8 billion deal with China and Total to develop South Pars. The government hopes to attract $100 billion in foreign investment in the oil and gas sector and has introduced a new contract to allow partial foreign ownership in projects.

Crude Oil, Iran, 1972–2022

(Million barrels a day)

Source: Central Bank of Iran, OPEC, BP, EIA, and IMF staff calculations.

There is potential to expand natural gas and condensate exports. Iran holds the world’s largest gas reserves but only 5 percent of production is exported. Natural gas is generating almost 90 percent of Iran’s power. Larger gas exports will become feasible as production increases. One major challenge, however, is lack of LNG facilities and limited capacity of gas pipelines. The authorities expect gas exports to increase to about 10 percent of total gas production by 2022. Condensate production is 650,000 bpd and is expected to increase by 100,000 bpd annually to 2022.

Natural Gas, Iran, 1972–2022 1/

(Billion Cubic Meters)

Source: Central Bank of Iran, OPEC, BP, EIA, and IMF staff calculations.

Note: 1/ Excludes gas flared or recycled.

Box 2.Risk Assessment Matrix 1/

Source of RisksRelative LikelihoodTime HorizonPotential ImpactPolicy Response
Spillover Risks
HighSpeed up structural reforms. Continue efforts to focus on domestic reforms to increase Iran’s attractiveness to foreign investors. Increase fiscal revenues by increasing the share of central government budget in oil revenues. Build fiscal and external buffers.
Intensification of the risks of fragmentation/security dislocation in part of the Middle East, Africa, Asia, and EuropeHighShort to Medium TermRegional conflicts could weigh negatively on Iran’s trade development and regional integration.
Medium
Tighter global financial conditions. Against the backdrop of continued monetary policy normalization and increasingly stretched valuations across asset classes, an abrupt change in global risk appetite could lead to sudden, sharp increases in interest rates and associated tightening of financial conditions.HighShort to Medium TermIran faces challenges in fully connecting to the global financial system and its external debt remains low.Speed up financial sector reform. Continued improvements in Iran’s AML/CFT framework and the health of its banking system remain essential to facilitate fuller reintegration into the global financial system.
High
Structurally weak growth in key advanced economies.HighMedium TermWeak growth in euro area and Japan would negatively impact Iran’s oil exports and growth.Continue domestic reforms that diversify the economy, strengthen domestic productive capacity and enhance resilience to shocks.
HighContinued efforts to diversify Iran’s trade and to attract foreign investors. Speed up structural reform to foster broader based growth.
Significant China slowdown and its spillovers.Low/MediumShort to Medium TermChina has become one of Iran’s key trade partners in the recent past. China accounts for 45 percent of Iran’s total exports.
High
Lower energy prices driven by weakening OPEC/Russia cartel cohesion and/or recovery of oil production in the African continent.LowShort to Medium TermNegative impact on oil revenue, thus reducing scope for increasing growth-enhancing spending.Improve fiscal planning by articulating fiscal priorities within a medium-term framework and build fiscal buffers. Continue to reduce oil dependency by increasing domestic tax revenue.
Domestic Risks
High
Uncertainties related to the implementation of the JCPOA.HighShort to Medium TermGrowth and exports would be negatively affected by the re-imposition of sanctions or counter-measures that would lower direct investment and capital inflows, and disconnect Iran from the global financial system.Continue reforms to strengthen domestic productive capacity, build external and domestic buffers and improve the AML/CFT framework.
High
Financial strains from inadequate progress on banking sector recapitalization and restructuring.HighShort to Medium TermContinued banking system stress would see liquidity growth and inflation accelerate, real interest rates remain high, and growth slow.Build broad-based consensus on a comprehensive restructuring and recapitalization strategy and how it is to be financed.
HighImprove transparency and outreach to public and key stakeholders to build support for reforms. Strengthen administrative capacity through technical assistance.
Weakening of political or social support for reform.HighShort to Medium TermDifficulties in advancing reforms could hamper growth and job prospects, especially for the youth and women.
High
FATF introducing counter-measures against Iran.MediumShort to Medium termIran could lose access SWIFT, existing CBRs with European banks could be terminated.Improve the AML/CFT framework, tighten policies to avoid pressure on the exchange rate and inflation.
MediumReduce non-oil fiscal deficit to support disinflation, while mobilizing tax revenue to create space for growth-enhancing spending. Develop buffers to protect the economy against the consequences of adverse shocks. Develop a medium-term fiscal framework to anchor annual fiscal deficits.
Limited progress in strengthening the monetary and fiscal policy frameworks.MediumShort to Medium TermWithout fiscal and monetary policy reform there is a risk of higher inflation, real exchange rate appreciation, and eroding competitiveness.
Source: IMF staff.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term” and “medium term” are meant to indicate that the risk could materialize within one year and three years, respectively.

Source: IMF staff.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term” and “medium term” are meant to indicate that the risk could materialize within one year and three years, respectively.

Box 3.The Pension System in Iran

Iran’s pension system is facing financial pressures. High rates of economic inactivity and unemployment imply only 29 percent of the working age population contribute to any pension scheme. A demographic transition will take place over the next 20 years and worsen the demographic support ratio and increase financial pressures.

The three largest pension schemes (90 percent of the system) are insolvent. Accrued-to-date benefit obligations exceed reserves. Two schemes are illiquid and require budget transfers of 1.6 percent of GDP per year. The largest scheme, the Social Security Organization (SSO) is liquid but is borrowing from banks to meet its obligations and will deplete reserves by 2027.

Pension schemes’ financial difficulties reflect unsustainable eligibility and benefit rules. The low effective retirement age (60 percent of pensioners are under 60 years and only 25 percent of those over 60 receive a contributory pension) are influenced by the policy to use early retirement to control unemployment. Benefit calculations put replacement rates close to 100 percent of final salaries.

The regulatory and institutional pension framework created uncertainty concerning the government’s explicit liabilities. SSO’s financial statements are not included in fiscal data or the budget. Assets (often in SOEs and real sector) are managed as businesses, without regard to the schemes’ finances.

Appendix I. External Sector Assessment

Iran’s external position is characterized by low external debt, a sizable reserves cushion, and a current account surplus. Still, the CBI has been losing reserves since the beginning of 2016/17 and the authorities face difficulties in transferring their oil proceeds from their trading partners. The official rate was 15.5 percent stronger than the market rate in 2016/17 and it subsidized a significant share of imports and undermined exports competitiveness. Staff assesses the external position to be weaker than warranted by fundamentals and desirable policy settings. The unification of the exchange rate is expected to result in the exchange rate settling at the market rate, which in turn, would likely make the unified rate more closely in line with fundamentals.

A. Overview of Iran’s External Sector

1. The current account position has remained in surplus, supported by oil exports, following the lifting of nuclear sanctions (Table 1). Imports picked up reflecting pent-up demand and an overvalued official exchange rate. The current account surplus is expected to stabilize near 5.5 percent of GDP in tandem with the rise in oil and gas exports. The financial account is poised to improve moderately, reflecting improving access to oil export receipts as CBRs improve over time, FDI commitments materialize gradually, and errors and omissions normalize.

Table 1.Islamic Republic of Iran: External Sector Vulnerabilities
Overall assessment: Iran’s external position in 2017 is weaker than warranted by fundamentals and desirable policy settings. If the JCPOA remains in place, progress is made on AML/CFT issues, CBRs improve, and fiscal adjustment is as planned, the current account and access to foreign reserves should gradually improve, strengthening the external position. Lower oil prices and external uncertainty pose risks, including to exchange rate stability.Background. Despite a current account surplus, Iran has lost foreign exchange reserves in 2016/17 due to difficulties in repatriation of oil receipts. The CBI has also been intervening in the foreign exchange market to fend-off depreciation pressures. The overvaluation in the official exchange rate stimulated imports and weakened the current account relative to the estimated norm.
Potential policy responses. Fiscal consolidation and a tighter monetary policy stance will help to protect macroeconomic stability and strengthen the external position. The (official) real exchange appears overvalued whereas market exchange rate is broadly in line with fundamentals; exchange rate unification could correct the estimated overvaluation. The rise in uncertainties over Iran’s external environment cloud the assessment.
Current account: increasing graduallyBackground. Current account surpluses have increased from 0.3 percent in 2015/16 to 4 percent in 2016/17 due to the removal of nuclear sanctions. In 2017/18, the pick-up in imports and stagnation of non-oil exports offset the increase in oil exports and allowed the current account surplus to increase slightly.
Assessment. The current account remains in surplus. Unifying the exchange rate at the market rate would help contain imports and stimulate non-oil exports and reduce Iran’s dependency on oil revenue over time.
Real exchange rate: overvaluation amid large uncertaintiesBackground. Iran has a dual exchange rate system: an official appreciated rate for imports of select priority goods, and a market rate for other imports. Oil proceeds are converted at the official rate for fiscal revenues. Uncertainty over Iran’s external environment has led to bouts of volatility in the parallel rate.
Assessment. Staff’s analysis suggest that the market exchange rate is broadly in line with fundamentals whereas the official exchange rate appears overvalued.
Capital and financial account: rising outflowsBackground. Iran’s economy was cut off from international financial markets due to international sanctions. External debt is less than 2 percent of GDP. FDI and portfolio inflows are insignificant. Nevertheless, errors and omissions turned negative in 2016/17 and difficulties in collection of export receivables led to a significant rise in export credits.
Assessment. The authorities need to tighten macroeconomic policies and improve CBRs to reduce outflows and thereby strengthen the external position
FX assets/reserves: large but not fully accessibleBackground. Iran’s foreign exchange assets/reserves stood at $120.7 billion at end-2016/17, equivalent to almost 16 months of imports. Some of the stock of reserve remains inaccessible due to limited CBRs. Large trade credit accumulation has emerged because of Iran’s difficulty in receiving payments.
Assessment. The level of gross foreign exchange assets appears comfortable but rise in external uncertainties and difficulties in accessing reserves require tightening of policies to strengthen external position.
Foreign assets and liabilities position: no detailed information availableBackground. Gross external debt is low at below 2 percent of GDP. Foreign assets of the banking system, including the CBI, are equivalent to about 50 percent of GDP. However, a non-negligible share of foreign assets is encumbered and therefore not available for payment purposes, even after sanctions relief.
Assessment. Iran appears to have a large positive IIP, but the lack of information on corporate and households net foreign asset holdings adds uncertainty to this assessment.
Source: IMF staff.
Source: IMF staff.

2. External buffers have weakened considering continued constraints in CBRs that hamper access to international reserves. The lack of correspondent banking relationships hampers the repatriation of export proceeds, mainly oil, from some key trading partners, which translates into large trade credit accumulation and delays in the repatriation of export proceeds. To address the latter, Iran has reached agreements with some countries to convert its dollar reserves and export earnings into other currencies and is increasingly denominating its oil sales contracts in euros. The uncertain outlook for oil prices, the impact of remaining sanctions, and heightened risk of snap-back of nuclear sanctions pose risks to Iran’s external position.

B. Exchange Rate Assessment

3. The exchange rate assessment at end 2016/17 pointed to an overvaluation in the official exchange rate of about 13–16 percent. The market rate was 15.5 percent more depreciated than the official rate in 2016/17 and analysis suggest that it was broadly in line with fundamentals at end 2016/17. The unification of the exchange rate at the market rate would likely make the REER in line with fundamentals.

  • Current account approach: the REER was overvalued by 12.9 percent. The current account balance (CA) in 2016/17 of 4 percent of GDP was below the norm of 5.8 percent of GDP. The main drivers of the CA norm in Iran were private credit, demographic trends, institutional and political environment, change in reserves, and a large policy gap. A widening fiscal deficit and foreign reserves loss left the CA surplus weaker than the norm. Over the medium-term, planned fiscal consolidation to reach the PIH norm by 2028, the improvement of CBRs and exchange rate unification should help close the current account gap. Prudent fiscal and monetary policies would contain inflation and support competitiveness. Reforms to improve the business climate and labor market would address Iran’s productivity gap.

  • EBA-Oil current account approach: the current account assessment for commodity exporters confirms the overvaluation of the official REER by 12.4 percent at end 2016/17. The methodology emphasizes the characteristics of oil dependent economies where the government tends to play a larger-than-typical role and the current account may be particularly sensitive to fiscal policy. A widening fiscal deficit and foreign reserves loss has left the CA surplus weaker than the norm in 2016/17 and explains the current account gap. The desirable level of cyclically adjusted fiscal balance reflects the fiscal adjustment need to create fiscal space to address banking reform costs and the increase in reserves in the medium term required to build external buffers. As such, the fiscal deficit was a structural contributor to the CA underperformance and in recent years also the terms-of-trade shock. However, the methodology does not capture the structural reforms required to improve the productivity and competitiveness of the Iranian economy and the deviation of fiscal policy from the long-term PIH norm.

  • Real effective exchange rate approach. The official REER was overvalued by 16 percent and the market REER by 1 percent at end-2016/17. The overvaluation was mostly driven by the financial home bias and lack of trade openness. Exchange rate unification and transition to a more flexible exchange rate would allow the economy to better manage terms of trade shocks, and greater trade openness would improve growth prospects.

Current Account: Contributions of Fitted Values

Source: IMF staff.

CA: Actual, Fitted, and Norm

EBA-Oil – CA: Actual, Fitted, and Norm

Current Account: Contributions of Fitted Values

Source: IMF staff.

CA Model
EBA-LiteEBA-Oil
CA-Actual4.0%4.0%
Cyclical Contributions (from model)−0.8%−1.8%
Cyclically adjusted CA4.8%5.8%
CA-Norm5.5%5.5%
Cyclically adjusted CA Norm6.3%7.3%
CA-Gap−1.5%−1.5%
o/w Policy gap−1.8%−3.1%
Elasticity−0.12−0.12
REER Gap12.9%12.4%

Ln(REER): Actual, Fitted, and Norm

REER: Contributions of Fitted Values

Source: IMF staff.

REER Model
Official REERMarket REER
ln(REER)-Actual4.704.55
ln(REER)-Norm4.534.53
REER-Gap16.1%1.4%
ln(REER)-Fitted4.584.58
Residual0.12−0.03
Policy gap0.040.04

4. The premium between the parallel rate and the official rate averaged about 16.4 percent in calendar year 2017, and widened further since start-2018 amid heightened uncertainty, but higher interest rate helped narrow the gap. The authorities have moved additional categories of goods imports from the priority list of imports that are valued at the official exchange rate to the market rate. As of September 2017, 78 percent of goods categories (52 percent at end-2016/17) and 44.5 percent of imports by value (44 percent at end-2016/17) were at market rate. Since September 2017, tourism-related goods, rice, airline fuels and airplanes have also been removed from the priority list.

5. In conclusion, the exchange rate assessment suggests Iran’s external position in 2016/17 was weaker than warranted by fundamentals and desirable policy settings.

C. External Sustainability

6. Iran’s external position suggests no significant sustainability risk. External debt is low and forecast to remain stable at around 2 percent of GDP. Gross official reserves are ample but the authorities continue to encounter difficulties in accessing some of their reserves due to limited CBRs. Data on the international investment position are not available reflecting shortcomings in compilation of private sector external assets (see Statistical Annex).

Iran: Reserve adequacy measures
201420152016201720182019202020212022
Gross official reserves (billions of U.S. dollars)126.2128.4120.7111.7124.9143.5158.5181.4204.2
Month of current imports of good and services17.120.818.214.614.516.618.020.222.3
Percent of short-term debt at remaining maturity plus current account balance883.53475.5561.6482.1379.0482.4590.2635.8665.1
Percent of the IMF composite measure (fixed) 1/324.0296.6239.8201.8209.5259.2267.0283.4298.1
Percent of the IMF composite measure (flexible) 1/638.2574.6464.9392.6407.9503.1518.6550.9579.7

The IMF composite measures are calculated as a weighted sum of short-term debt, other portfolio liabilities, broad money, and exports in percent of GDP. Official reserves are recommended to be in the range of 100–150 percent

The IMF composite measures are calculated as a weighted sum of short-term debt, other portfolio liabilities, broad money, and exports in percent of GDP. Official reserves are recommended to be in the range of 100–150 percent

Appendix II. Public DSA

The on-going arrears audit has revealed government arrears of about 30 percent of GDP and brought the debt-to-GDP ratio to near 50 percent in 2016/17. The anticipated recapitalization of the banking system is expected to further raise the debt-to-GDP ratio to 54 percent of GDP in 2018/19. Debt gradually converges to authorities’ Sixth National Development Plan debt ceiling of 40 percent GDP in the medium-term aided by the increase in oil prices. Iran’s debt dynamics remain susceptible to growth and interest rate shocks.

1. The recapitalization of the banking system in 2018/19 is expected to increase the public debt burden to about 54 percent of GDP, but Iran’s debt dynamics would improve in the medium term. The interest associated with prospective banking sector recapitalization bonds is expected to push the CG interest bill to 4.8 percent of GDP by 2019/20. Iran’s gross financing need rises from 4.5 percent of GDP in 2017/18 to about 15 percent in 2019/20. However, because the stock of government payment arrears is being securitized gradually through 2023/24 and higher oil prices boost revenues, the deficit is contained, which combined with the impact of inflation, helps the debt burden to decline to 40 percent of GDP by 2022/23.

2. Fiscal vulnerabilities have increased. In a scenario where real GDP growth declines by 5.5 percentage points from the baseline in 2018 and 2019, a one standard deviation shock, the debt-to-GDP ratio peaks at 84.4 percent of GDP before stabilizing at 82 percent of GDP over the medium-term. The gross financing need of the government would rise to 22.5 percent of GDP in 2019/20. Alternatively, a scenario based on historical averages that sees a deterioration of the primary balance of about 1.3 percent of GDP in 2018/19 combined with an increase in effective interest payments by 1.2 percentage points relative to baseline,1 would see the debt-to-GDP ratio peak above 70 percent of GDP in 2019/20 before declining. Under a severe global downturn scenario, which combines a real GDP shock, higher effective interest rates, and deterioration in the primary balance in the medium term, debt and financing needs would reach 88 and 24 percent of GDP, respectively, in 2019/2020, and will increase in the medium term. The recognition of additional arrears and a higher cost of bank recapitalization would push the debt and financing needs even higher in the medium-term under a severe shock scenario.

3. Measures are also needed to bring the non-oil fiscal balance in line with long-term intergenerational equity. The 2017/18 augmented non-oil primary deficit of 12.6 percent of non-oil GDP is substantially above the Permanent Income Hypothesis (PIH) norm (5.4 percent of non-oil GDP) that ensures exhaustible oil revenue is sufficiently transformed into financial assets for future generations. Measures of about 7 percent of non-oil GDP would need to be identified over the next decade to bring the non-oil primary deficit to 5.4 percent of non-oil GDP by 2027/28.

Table 1.Islamic Republic of Iran: Public Sector Debt Sustainability Analysis (DSA)—Baseline Scenario(In percent of GDP unless otherwise indicated)
Debt, Economic and Market Indicators1/
ActualProjectionsAs of February 08, 2018
2006–2014 2/20152016201720182019202020212022Sovereign Spreads
Nominal gross public debt11.142.349.140.853.949.245.642.640.0EMBIG (bp) 3/n.a.
Public gross financing needs−1.21.84.74.513.514.76.85.75.75Y CDS (bp)n.a.
Real GDP growth (in percent)1.8−1.612.54.34.04.04.14.24.4RatingsForeignLocal
Inflation (GDP deflator, in percent)19.10.41.611.316.711.310.210.310.1Moody’sn.a.n.a.
Nominal GDP growth (in percent)21.1−1.214.316.121.415.714.814.915.0S&Psn.a.n.a.
Effective interest rate (in percent)4/1.50.90.30.41.311.312.714.415.6Fitchn.a.n.a.
Contribution to Changes in Public Debt
ActualProjections
2006–201420152016201720182019202020212022cumulativedebt-stabilizing primary balance10/
Change in gross public sector debt−0.130.56.8−8.313.0−4.6−3.6−3.0−2.5−9.1
Identified debt-creating flows−3.81.0−3.6−5.024.03.7−3.1−2.6−2.115.0
Primary deficit−1.21.72.22.21.0−2.1−2.1−2.3−2.3−5.60.2
Primary (noninterest) revenue and grants19.316.117.315.718.719.519.519.519.5112.3
Primary (noninterest) expenditure18.017.819.417.819.717.517.417.217.2106.7
Automatic debt dynamics 5/−1.60.3−5.1−6.7−6.7−2.0−0.9−0.20.2−16.3
Interest rate/growth differential 6/−1.80.2−5.2−6.7−6.7−2.0−0.9−0.20.2−16.3
Of which: real interest rate−1.70.1−0.6−4.8−5.4−0.20.91.51.9−6.2
Of which: real GDP growth−0.20.2−4.6−1.8−1.3−1.9−1.8−1.7−1.6−10.1
Exchange rate depreciation7/0.30.10.1
Other identified debt-creating flows−1.0−0.9−0.7−0.529.77.8−0.10.00.036.9
Privatization (negative)−1.0−0.9−0.7−0.529.7−0.2−0.10.00.028.9
Contingent liabilities8/0.00.00.00.00.08.00.00.00.08.0
Please specify (2) (e.g., ESM and Euroarea loans)0.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes9/3.729.510.4−3.3−10.9−8.4−0.5−0.5−0.4−24.0
Source: IMF staff.

Public sector is defined as general government.

Based on available data.

Long-term bond spread over German bonds.

Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year. It increases rapidly in the projection period, as Iran is projected to continue to securitize its debt with interest-bearing instrument

Derived as [(r – π(1+g) – g + ae(1 + r)]/(1 + g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the numerator in footnote 5 as r -π(1 + g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 5 as ae(1 + r).

Contingent liabilities account for banking recapitalization and securitization of government debt to CBL

Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period. The large residual in 2015 corresponds to the recognition of government arrears.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Source: IMF staff.

Public sector is defined as general government.

Based on available data.

Long-term bond spread over German bonds.

Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year. It increases rapidly in the projection period, as Iran is projected to continue to securitize its debt with interest-bearing instrument

Derived as [(r – π(1+g) – g + ae(1 + r)]/(1 + g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the numerator in footnote 5 as r -π(1 + g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 5 as ae(1 + r).

Contingent liabilities account for banking recapitalization and securitization of government debt to CBL

Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period. The large residual in 2015 corresponds to the recognition of government arrears.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Figure 1.Islamic Republic of Iran: Public DSA—Composition of Public Debt and Alternative Scenarios

Source: IMF staff.

Figure 2.Islamic Republic of Iran: Public DSA—Realism of Baseline Assumptions

Source: IMF staff.

1/ Plotted distribution includes surveillance countries, percentile rank refers to all countries

2/ Projections made in the spring WEO vintage of the preceding year

3/ Iran, Islamic Republic of has had a cumulative increase in private sector credit of 17 percent of GDP, 2013–2016. For Iran, Islamic Republic of, t corresponds t 2017; for the distribution, t corresponds to the first year of the crisis.

4/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis. Iran’s CAPB is structurally low reflecting the large share of oil receipts in total government revenue.

Figure 3.Islamic Republic of Iran: Public DSA—Stress Tests

Source: IMF staff.

1/ The primary balance shock assumes a total primary balance lowered by 1.3 percent over the projection period, with interest rate increased by 0.25 percent. The real GDP growth shock assumes growth lower by 1 percentage point in 2017 and 2018, while inflation and interest rates increase by 0.25 percent. The real effective exchange rate assumes a real depreciation of 100 percent, with a passthrough of 25 percent. The interest rate shock assumes a real interest higher by 2 percent. The combined shock takes the worse impact on each variables of the shocks mentioned above.

Figure 4.Islamic Republic of Iran: Public DSA—Risk Assessment

Source: IMF staff.

1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.

4/ Long-term bond spread over German bonds, an average over the last 3 months, 10-Nov-17 through 08-Feb-18.

5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.

Appendix III. External DSA
Table 1.Islamic Republic of Iran: External Debt Sustainability Framework, 2012–22(In percent of GDP, unless otherwise indicated)
ActualProjections
20122013201420152016201720182019202020212022Debt-stabilizing non-interest current account 6/
1Baseline: External debt2.01.71.22.72.32.02.22.32.62.52.5−1.2
2Change in external debt−1.3−0.3−0.51.5−0.4−0.30.20.20.20.00.0
3Identified external debt-creating flows (4+8+9)−4.2−7.4−3.3−0.3−4.8−4.6−7.3−6.6−6.1−7.3−7.4
4Current account deficit, excluding interest payments−6.3−6.9−3.4−0.8−4.3−4.9−7.3−6.6−6.1−6.2−6.3
5Deficit in balance of goods and services−5.6−6.3−2.7−0.1−3.7−4.2−6.5−5.8−5.2−5.3−5.4
6Exports26.825.223.619.823.425.431.130.931.730.830.0
7Imports21.219.020.919.719.721.224.625.126.525.624.6
8Net non-debt creating capital inflows (negative)0.2−0.70.0−0.1−0.6−0.2−0.2−0.2−0.2−1.4−1.3
9Automatic debt dynamics 1/1.90.20.10.60.10.50.30.30.30.30.2
10Contribution from nominal interest rate0.30.20.20.50.30.60.30.30.40.40.3
11Contribution from real GDP growth0.40.0−0.10.0−0.3−0.1−0.1−0.1−0.1−0.1−0.1
12Contribution from price and exchange rate changes 2/1.20.0−0.10.10.1
13Residual, incl. change in gross foreign assets (2–3) 3/2.87.12.81.84.54.37.56.86.37.37.4
External debt-to-exports ratio (in percent)7.46.75.113.49.87.97.07.58.08.38.4
Gross external financing need (in billions of US dollars) 4/−9.8−23.3−12.5−0.4−12.4−13.7−25.6−22.4−19.2−20.6−22.5
in percent of GDP−2.5−5.9−3.0−0.1−3.110-Year10-Year−3.2−6.1−5.4−4.8−4.9−5.0
Scenario with key variables at their historical averages 5/2.03.43.83.44.04.60.2
Key Macroeconomic Assumptions Underlying BaselineHistorical AverageStandard Deviation
Real GDP growth (in percent)−7.7−0.33.2−1.612.52.25.54.34.04.04.14.24.4
GDP deflator in US dollars (change in percent)−26.92.23.5−9.9−4.33.014.42.4−6.8−5.2−7.41.41.6
Nominal external interest rate (in percent)5.612.112.435.212.611.09.028.716.715.615.014.614.2
Growth of exports (US dollar terms, in percent)−32.6−4.0−0.1−25.526.93.923.015.919.0−2.1−1.12.83.3
Growth of imports (US dollar terms, in percent)−13.6−8.818.0−16.67.53.313.515.112.80.41.62.02.3
Current account balance, excluding interest payments6.36.93.40.84.35.43.04.97.36.66.16.26.3
Net non-debt creating capital inflows−0.20.70.00.10.60.00.40.20.20.20.21.41.3

Derived as [r – g – r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Derived as [r – g – r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Figure 1.Islamic Republic of Iran: External Debt Sustainability: Bound Tests 1/2/

(External debt in percent of GDP)

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

4/ One-time real depreciation of 30 percent occurs in 2016.

The foreign assets in domestic currency terms as reported in the monetary survey, together with within year preliminary data on the change in official reserves shared with staff, may imply sizeable valuation changes once annual data on the change in gross international reserves become available.

See IMF Country Report 17/63.

Selected Issues Paper (SIP) Chapter I.

SIP Chapter II

SIP Chapter III

SIP Chapter IV

The primary balance shock assumes a reduction relative to baseline by half of the historical standard deviation, the interest rate shock assumes that for every 1 percent of GDP deterioration in primary balance, the interest rate increases by 25 basis points (see Figure 3).

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