Since issuance of the staff report (SM/02/279), additional information on recent developments and policy measures has become available. This statement reports on these developments as well as on the findings of the MAE/LEG mission, which, at the request of the authorities, has reviewed the remaining exchange restrictions and multiple currency practices in Iran. This information does not alter the thrust of the staff appraisal.

1. Recent developments

• Growth. Preliminary data for the first quarter of 2002/03 are in line with the projected real growth rate of close to 6 percent. Agricultural output is expected to be higher than projected and construction, manufacturing, and housing continue to grow at double digit rates.

• Inflation. Inflation edged up to 14 percent on average during the first quarter of 2002/03 compared to the same period last year.

• Money. The year-on-year growth of M2 accelerated to 28.5 percent by end-July 2002. The authorities have issued CPPs and activated the standing deposit facility in an effort to absorb excess liquidity.

• Fiscal data. During the first quarter, non-oil revenue performance has been disappointing compared to the budget, but the shortfall is likely to be offset by higher oil revenue.

2. New measures

• The executive and legislative branches are examining revenue raising measures and expenditure cuts to reduce the fiscal deficit. These measures might include excises on various consumer goods and services, cuts on current expenditure, further prioritization of capital outlays, and steps to expedite divestiture of state-owned enterprises. The authorities are also considering measures to strengthen customs administration to reduce smuggling and enhance revenue collection.

• The authorities have approved the establishment of four private insurance companies.

• The draft law on anti-money laundering and combating of terrorism financing (AML/CFT) has been approved by the cabinet and submitted to parliament. An AML/CFT unit has been established in the supervision department of the central bank.

3. Exchange restrictions. At the request of the authorities, LEG and MAE undertook a review of the exchange system of Iran in June/July 2002 in connection with the intention of the authorities to accept the obligations of Article VIII, Sections 2, 3, and 4. The staff has concluded that:

• Effective March 21, 2002, Iran has simplified its exchange system and eliminated several of the exchange restrictions and multiple currency practices that were identified at the time of the 2001 Article IV consultation. In particular (a) the multiple exchange rate system has been replaced by a unified exchange rate determined in the interbank market; (b) bonus payments for early repatriation of non-oil export proceeds have been eliminated for export contracts entered into after March 20, 2002; and (c) the mandatory advance import deposit requirement has been eliminated.

Based on the information available to date, the staff concludes that Iran maintains a number of exchange restrictions and multiple currency practices subject to Fund jurisdiction under Article VIII, Sections 2(a) and 3. The restrictions identified are as follows:

• Multiple currency practices resulting from (a) the new system of subsidies associated with both essential imports and contingent liabilities involving letters of credit opened at subsidized rates prior to March 21, 2002, and maturing thereafter; (b) the absence of a mechanism to ensure that the reference rate used by the central bank for the purchase of oil proceeds from the government does not diverge at any time by more than two percent from the prevailing market exchange rate; and (c) the repatriation bonus for export receipts associated with contracts entered into before March 21, 2002.

• Exchange restrictions resulting from (a) limitations imposed on the availability of foreign exchange for the making of payments for current international transactions associated with certain invisibles (including, for example, travel, education and medical treatment); and (b) restrictions on the convertibility and transferability of rial balances held by non-residents that represent the proceeds of current international transactions. The authorities plan to eliminate all remaining restrictions prior to the acceptance of the obligations of Article VIII, Sections 2, 3, and 4.

The staff is still reviewing the jurisdictional implications of several features of the Iranian exchange system and is in contact with the authorities in order to complete this analysis. The staff does not recommend approval of the retention of the exchange restrictions and multiple currency practices at this stage since the authorities are still in the process of establishing a timetable for their removal. The staff recommends that the authorities eliminate all the exchange restrictions and multiple currency practices subject to the Fund’s jurisdiction.