February 21-2014
A new report on Iran from the International Monetary Fund (IMF) says the Islamic Republic’s new government must move quickly to adopt needed reforms if it wants to get the economy moving.
“Iran now stands at a crossroad,” the report said. “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, which was in Iran early this month, said the economy is still in recession and still contracting, albeit not as badly as before. It estimated the economy would decline by 1-to-2 percent in the current Iranian year, which ends in one month. It forecast growth next year of 1-to-2 percent, which would mean a combined two years of zero growth.
Its forecast of minimal growth next year was, however, highly qualified. It said prospects for the economy next year have “improved” as a result of the interim nuclear agreement with the Big Six. But it said the prospects for the coming year “still remain highly uncertain.”
It said management of the economy has been “weak” for the past “several years,” which is a common complaint of Iranian economists. On top of that, the economy has suffered from three “large shocks.” It said those were: the reductions in subsidies that had held down prices of many commodities; ambitious social programs that were “inadequately funded,” like the payment of cash welfare to every citizen; and the imposition of sanctions.
It said the new government must embark on “prompt and vigorous” economic reforms to get the economy moving. In one of the few positive comments, the IMF report said, “The new authorities [of the Rohani Administration] are well aware of these challenges and the need to advance reforms, and have become the preparatory work in many of these areas.”
The IMF specifically lauded the government for slashing spending to hold the deficit below 3 percent of gross domestic product (GDP). It praised the government for plans—little publicized inside Iran—to raise more money through taxes so as to rely less on oil income. It specifically said the government plans to increase the rate of the value-added tax (VAT) that businesses pay, and to cut back on tax exemptions that allow many wealthy people to avoid all taxes.
The IMF urged that the VAT be raised even higher than currently planned and that the government introduce a capital gains tax.
As it has in the past, the IMF lauded Iran for lowering subsidies in order to discourage waste. It said there have been many problems in the program, however, and urged the government “to make the lessons known to the public,” a call for transparency the government has shown no interest in embracing.
The IMF called on the government to give the Central Bank more influence over the economy, in line with the authority given most central banks around the world. Iranian economists have frequently cited the need for more Central Bank independence and authority, but no government has adopted such policies.
Finally, the IMF urged the government to reform its labor policies if it ever expects to make a dent in the very high level of youth unemployment.
The Tehran media was generally more concerned to make the government look good than to reflect the reality of the IMF report. For example, state broadcasting falsely said the report painted a positive outlook for the Iranian economy. It said the IMF forecast real growth next year, without revealing either how small the growth forecast was or how qualified the forecast was.
Only at the very end of its report did state broadcasting tack on a sentence saying the IMF “has also called on Iran to undertake more reforms,” thus obscuring the fact that was the meat of the IMF report.
The Iran Daily, which is state-owned, led its story by saying, “Experts at the International Monetary Fund reported that Iran’s economy is improving and the country is heading toward a promising future,” which is not what the IMF said at all.
However, it wasn’t just the Iranian media that gave an ideological cast to the coverage of the IMF report.
In the United States, The New York Times emphasized the negatives while The Wall Street Journal, which argues that the Obama Administration gave away too much in its interim nuclear agreement with Iran, emphasized the positives in the report.
The Times led its story: “The International Monetary Fund issued a sobering appraisal of Iran’s economy on Wednesday, warning that years of government mismanagement aggravated by the impact of the West’s antinuclear sanctions had left the country vulnerable to anemic growth and rampant inflation that require urgent attention.”
The Journal, on the other hand, led off its story: “Iran’s economy is getting a boost from the reprieve in international sanctions amid ongoing talks with Tehran over the country’s nuclear program, the International Monetary Fund said in a new assessment. The optimistic outlook could give credence to critics who say that the interim nuclear deal is a stall tactic by Tehran to ease its economic travails.”
The Journal also said, “After the interim deal in November, the Fund said inflation pressures eased as the rial stabilized.” The fund did not say that and the stabilization of the rial actually began immediately after President Rohani won election in June. The rial immediately strengthened and has been very level at around 30,000 to the dollar ever since mid-September, long before the nuclear deal and even before Presidents Rohani and Obama spoke over the phone at the end of September.
The agreement and sanctions relief took effect January 20. The IMF team left Iran 19 days later. The report did not suggest the IMF could measure any impact in that time frame.
