Iran's near-term economic prospects look favourable but tensions over its nuclear plans have had some impact on private investment and are a threat to growth, the International Monetary Fund said on Monday.
The IMF said economic growth in Iran was likely to increase to 5.8 percent in 2006/07, up from 5.5 percent last year, amid strong activity in the country's non-oil sector and high oil prices.
The IMF warned, however, that growth could be harmed if tensions over Iran's nuclear program worsen, as six world powers negotiate a widening of sanctions against Tehran for pressing ahead with uranium enrichment plans.
"An escalation of the tensions associated with the nuclear program could, however, affect adversely the growth outlook," the Washington-based IMF said in its annual health-check of the Iranian economy.
The fund said Iran's expansionary policies were fuelling inflationary pressures. It said inflation, which is officially running at about 16 percent, is likely to remain entrenched in the double digits. Economists say fast-growing money supply is partly to blame for Iran's rising inflation.
Iranian President Mahmoud Ahmadinejad came to power in 2005 vowing to share out Iran's oil wealth more fairly. However, he has been accused by opponents of stoking prices with profligate spending of petrodollars. He has said the media exaggerates the issue. The IMF called for a tightening of monetary policy and better use of monetary instruments in Iran.
"In this regard, (the IMF) stressed that the central bank needs greater independence to issue short-term paper as needed to absorb liquidity," the IMF said, adding, "More generally, (IMF) directors encouraged the authorities to gradually lift controls on banks' rates of return and phase out remaining credit allocations." The IMF called for a more "restrictive" fiscal stance to ease demand pressures and welcomed the government's plan to restrain spending in 2007/08.
It further urged Iran to phase out energy subsidies in a way that did not hurt the poor. Some IMF directors said Iran should increase the flexibility of its currency to buffer the economy from outside shocks and increase the effectiveness of monetary policy in controlling inflation. Other directors said they preferred "nominal" exchange rate stability.