Statement by the IMF Staff Representative February 23, 2007

This 2006 Article IV Consultation highlights that with high oil prices and a significant policy stimulus, the Iranian economy continued to grow strongly in 2005–06. Real GDP growth is estimated at 5½ percent. Oil GDP growth was modest owing to capacity constraints, while non-oil GDP growth was broad based, reaching 6 percent. The tensions associated with the nuclear issue, however, had some adverse effects on private investment. With energy prices projected to remain high and external demand continuing to support non-oil exports, Iran’s near-term growth prospects look favorable.

Abstract

This 2006 Article IV Consultation highlights that with high oil prices and a significant policy stimulus, the Iranian economy continued to grow strongly in 2005–06. Real GDP growth is estimated at 5½ percent. Oil GDP growth was modest owing to capacity constraints, while non-oil GDP growth was broad based, reaching 6 percent. The tensions associated with the nuclear issue, however, had some adverse effects on private investment. With energy prices projected to remain high and external demand continuing to support non-oil exports, Iran’s near-term growth prospects look favorable.

This statement updates the information provided in the staff report for the 2006 Article IV consultation with the Islamic Republic of Iran that was issued on February 1, 2007. The new information does not alter the thrust of the staff appraisal.

  • Following the downward revision of the WEO oil price baseline on January 22, 2007, the staff has updated the medium-term macroeconomic projections presented in the staff report. The lower oil prices would increase the fiscal deficit and reduce the current account surplus relative to the staff report’s “current policies” scenario by about 2¾ percentage points of GDP, on average, over the medium term. Gross international reserves would be $41 billion (4½ months of imports) by the end of 2011/12. These projections are subject to a high degree of uncertainty, as oil prices remain volatile. Moreover, the authorities are considering significant measures to strengthen the fiscal position (see below).

  • End-of-period inflation increased to 15.9 percent in December 2006, from 14.7 percent in November. The rial has remained stable vis-à-vis the U.S. dollar in the past two months. Parliament recently approved the issuance of Rls 10 trillion (close to 4 percent of base money) in central bank participation papers (CBPPs) to help absorb liquidity. This is in addition to the issuance of Rls 20 trillion in CBPPs, which had already been approved by parliament.

  • The fiscal outturn for 2006/07 is now likely to be significantly better than projected. The staff report’s fiscal projections for 2006/07 included an additional budgetary appropriation of Rls 45 trillion (2¼ percent of GDP), to be financed mainly by resources from the Oil Stabilization Fund, which was expected to be approved before the end of the fiscal year. Following parliamentary opposition, the government scaled down the requested appropriation to Rls 30 trillion (1½ percent of GDP). However, the proposed amendment bill has been rejected by the Plan and Budget Commission and has not been approved by parliament.

  • The 2007/08 budget was submitted to parliament in late January 2007. Based on preliminary information, the proposed budget is based on a conservative oil price of US$33.7 per barrel, compared with US$46.9 per barrel implied in the new WEO oil price baseline. The budget proposal envisages a non-oil fiscal deficit of about 14 percent of GDP, compared with 20½ percent of GDP in the staff report, owing to substantial cuts in current outlays. In particular, the proposal envisages cuts in the subsidies on selected nonenergy items and a reduction in gasoline imports, which are financed through the budget. The reduction in gasoline imports will be supported by the introduction of a rationing scheme. While the proposed fiscal retrenchment is very ambitious, the parliamentary discussion of the budget and its implementation are likely to involve changes.

  • The authorities informed the staff that the share of deposits held by private banks rose from 10½ percent of total deposits in March 2006 to 15 percent in November.

  • The authorities have taken steps to improve the timeliness of data dissemination. In January 2007, the Central Bank of Iran started disseminating on its website the monthly electronic publication Selective Economic Indicators. In addition, the Tehran Stock Exchange plans to disseminate market data and related information, including English translations of rules and regulations.