News Column

Trade, financial sanctions weaken Iranian economy -- IMF

February 13, 2014

| WASHINGTON, Feb 12 (KUNA) -- The International Monetary Fund (IMF) affirmed here Wednesday that a "marked deterioration in the external environment stemming from the intensification of trade and financial sanctions" have weakened the economy in Iran.

Following an IMF consultation mission to Iran, the Fund said in a statement that "large shocks and weak macroeconomic management over the past several years have had a significant impact on macroeconomic stability and growth." "A combination of shocks, associated with the implementation of the first phase of the subsidy reform, ambitious social-programs inadequately funded, and a marked deterioration in the external environment stemming from the intensification of trade and financial sanctions, have weakened the economy," it affirmed.

It indicated that inflation and unemployment are high, while the corporate and banking sectors show "signs of weakness," where these shocks have "exposed structural weaknesses in the economy and in the policy framework." "Iran now stands at a crossroad. With risks that the economy could continue to face a low-growth and high-inflation environment ahead, there is a need to begin advancing reforms to promote stability, investment, and productivity," the IMF stressed.

It said that the new authorities "should embark on a prompt and vigorous implementation of fundamental reforms to the frameworks supporting product, labor, and credit markets." It added that these reforms would "lay the basis for sustained high growth and lower unemployment, especially if the external environment continues to improve." The Fund indicated that the new authorities "are well aware of these challenges and the need to advance reforms, and have begun the preparatory work in many of these areas." According to the IMF, the pace of contraction in economic activity is "slowing." The economy has continued to shrink in the first half of 2013/14 (the Iranian calendar and fiscal years run from March 21 to March 20), and the IMF staff expects "further but diminishing contraction" in the second half, with real gross domestic product (GDP) declining by 1-2 percent in 2013/14.

It noted that 12-month inflation has dropped "rapidly" from about 45 percent in July 2013 to below 30 percent in December 2013.

This drop reflects "tighter" CBI (Central Bank of Iran) credit, the appreciation of the Rial, and global disinflation in some key staples. Inflation could end at 20-25 percent by end-2013/14.

It added that "prospects for 2014/15 have improved with the interim P5+1 agreement but still remain highly uncertain." Under the current external environment, IMF staff projects economic activity to begin to "stabilize" in 2014/15, with real GDP growing by 1-2 percent in 2014/15.

Inflation would potentially decline to 15-20 percent, excluding the impact of planned higher domestic energy prices.

"Comprehensive reforms are needed to address many complex challenges," the Fund stressed.

The IMF team, led by Martin Cerisola - Assistant Director for the Middle East and Central Asia Department, visited Tehran during January 25-February 8 to conduct the 2014 Article IV Consultation discussions.

They exchanged views with senior officials of the CBI and Ministry of Economy and Finance on recent developments in the Iranian economy, the near-term outlook, and the authorities' macroeconomic plans and structural reform agenda. (end) KUNA 122022 Feb 14NNNN

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Source: Kuwait News Agency

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