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International Monetary Fund


Iran has received much attention from a geopolitical and regional standpoint, but its economic challenges have not attracted a similar degree of interest. With a population of 69 million, considerable hydrocarbon resources, a dynamic and entrepreneurial middle class, and a relatively well-educated labor force, Iran's economic potential is considerable. This volume takes stock of critical developments in the Iranian economy in recent years. The study reviews the key issues and policy responses, highlights the nature of the challenges ahead, and draws implications for the next phase of reforms. The authors conclude that major challenges remain, although significant advances have been made in recent years in opening up the economy to international trade and foreign direct investment, encouraging the private sector, removing exchange restrictions, reforming the tax system, and enhancing macroeconomic management.

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V. R eal E ffective E xchange R ate and C ompetitiveness in S waziland 61 105. During 1990–2002, higher inflation in Swaziland than in its trading partner countries has prevented an improvement in overall competitiveness . In nominal effective terms, the lilangeni depreciated steadily, losing about 15 percent of its original value. The real effective exchange rate of the lilangeni fluctuated markedly during the period, but as of July 2002 it was close to its 1990 level ( Figure V.1 ). Figure V.1. Swaziland: The Real Effective Exchange Rate and Its

Ms. Zuzana Murgasova

country’s external current account deficit was low and export growth strong. Judged by Poland’s real effective exchange rate vis-à-vis its trading partner countries (based on consumer price indices and producer price indices), the country saw an appreciation of 2 to 3 percent a year between end-1994 and mid-2004. A real appreciation can be expected during transition periods, and it need not imply a deterioration in competitiveness to the extent that there are “equilibrium effects”—that is, faster productivity growth in the tradable than in the nontradable sector. The

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and some of its trading partner countries is very limited. Second, the methodology is based on the assumption of functioning markets, which did not hold in the early 1990s due to insufficient progress in transition. 18 Before proceeding with the multivariate analysis ( Table 4 ), the stationarity characteristics of the series have been tested performing augmented Dickey-Fuller and Phillips and Perron tests. The results indicate that the hypothesis that the variables are integrated of order one cannot be rejected. 19 An impressive reform agenda is planned

Mr. Eswar S Prasad and Mr. Thomas Rumbaugh

economic changes wrought by this ongoing transformation will no doubt pose many challenges—both to China itself and to its trading partner countries—the potential benefits could be substantial for those countries that position themselves to take advantage of such changes. And, as China assumes a central place in the world economy, its growth and stability will become increasingly important to the world trading system at large. Eswar Prasad and Thomas Rumbaugh are, respectively, the Division Chief and Deputy Division Chief of the China Division in the IMF’s Asia and

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was lower than in its trading partner countries during the 1970-2000 period, the differential narrowed substantially over time ( Table 2 ). Indeed, during 1992-2000, a period that includes the most recent economic expansion, U.S. growth was ½ percentage point higher than in partner countries. Meanwhile, the real effective exchange rate, notwithstanding marked fluctuations in specific years, has not exhibited a long-term trend. Table 2. United States and Trading Partners: Real GDP Growth (average, in percent) United States Trading Partners

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leave much space for further fiscal consolidation at this time. On the other hand, attempts to stem nominal appreciation through systematic intervention would likely be ineffective over time. 23 Unsterilized foreign exchange purchases would ultimately push up the inflation differential between Haiti and its trading partner countries, and thus not prevent REER appreciation. Sterilized intervention would be very costly. However, the authorities could strengthen their monetary policy instruments and regime, to ensure that monetary programs are implemented as planned and

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relative to its trading partner countries is used. The variable is expressed in logarithms. The series used are the ones published by the Information Notice System (INS). Net foreign Assets (nfa t ) positions for each country are calculated by adding up the current account balances. The initial stock of net foreign assets is 1999Q3, as provided by the EDSS. The net foreign assets position is then normalized by the GDP in order to adjust for the size of the economy. Relative Prices of Non-tradable to Tradable Goods (n t ) are defined as the ratio of the domestic

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devalued on two separate occasions (June 29 and October 6) by a cumulative amount of 33 percent against the U.S. dollar (intervention currency), which led to large depreciations in nominal and real effective terms. Since the devaluations, the nominal effective exchange rate remained relatively flat, while the real effective exchange rate appreciated by about 15 percent through 1993, as a result of higher inflation in Fiji than that of its trading partner countries. Since mid-1994, relatively low domestic inflation has reversed the trend appreciation in Fiji’s real

Jan Gottschalk, Carl Miller, Lanieta Rauqeuqe, Isoa Wainiqolo, Yongzheng Yang, and Mr. Markus Rodlauer

export volumes to a change in relative prices, will also form a critical component of Fiji’s tourism demand equation. Typically, the level of aggregate real demand in trading partner countries, weighted by their respective trade shares, are positively related to income levels. In contrast, export demand depends negatively on the relative price variable that compares the home country’s export price to prices of a similar product in its trading partner countries, with both prices expressed in the same currency. Since the primary focus is price competitiveness amongst