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Afghanistan
The Afghan economic performance in FY 2007 was broadly satisfactory. All September 2007 quantitative performance criteria and indicative targets, as well as structural benchmarks for the second review, were observed, except for the benchmark related to state-owned enterprises (SOEs) and government agencies engaged in commercial activities. For FY 2008, real GDP growth, excluding opium production, was projected to reach 13.5 percent, mainly as a result of a strong rebound in agricultural production from the drought-triggered decline in 2006/07.
The IMF staff says that with continued donor assistance, the near-term macroeconomic outlook remains favorable. Growth in agriculture in FY’09 is expected to moderate to its pre-drought trend. Nonetheless, GDP growth is likely to exceed nine percent, reflecting the strengthened fiscal impulse from increased donor contributions. Assuming that fiscal and monetary policy remains prudent, inflation is expected to drop below 10 per cent. The fund forecasts that economic growth over the medium term will depend critically on confronting corruption, overcoming infrastructure bottlenecks, and structural reforms in support of private entrepreneurship.
While growth is likely to fall from around nine per cent in 2008/09 to seven per cent in 2012/13, higher growth rates would be attainable if structural reforms were implemented decisively and public investment targeted key areas of infrastructure, notably transport and electricity, which would mitigate constraints on private sector growth. The midyear review of the budget is consistent with the program for the remainder of the fiscal year. Revenue should reach Af 35.7 billion (8.2 per cent of GDP), in line with the program, and operating expenditures are projected at Af 53.3 billion (12.2 per cent of GDP). Core budget development expenditures are expected to reach about Af 45.5 billion (10.4 per cent of GDP).
The government will seek to reduce the operating budget deficit excluding grants from four per cent of GDP this year to 3.6 per cent in 2008/09. This is consistent with the authorities’ objective of covering operating expenses from domestic revenue-a target that anchors fiscal policy and is expected to be reached by 2012/13. The revenue assumptions underlying the fiscal outlook reflect primarily the consolidation of administrative reforms in preparation for tax policy decisions slated for 2009/10. On the expenditure side, preparation of the 2008/09 budget focuses on the costing of programs underpinning the ANDS.
Monetary policy will remain focused on containing inflationary pressures. To that end, there is a need for DAB—in cooperation with the MoF—to improve its liquidity forecasting to ensure smooth monetary policy execution. It is also important that DAB’s management strengthen the internal consultation mechanism over liquidity forecasts and intervention policy by endowing the Monetary Policy Department with greater ownership and accountability for its policy advice. The mission welcomed the intention of DAB to expand the volume of capital notes auctions with a focus on managing bank liquidity and developing the yield curve.
The IMF welcomed the stated commitment of the government to a trade regime that minimizes distortions and does not discriminate across importers. In this connection, an agreement was reached with the authorities to repeal Presidential decree that allows selected businesses to import raw materials at a preferential tariff rate. The mission agreed with the government that goods eligible for the one per cent rate would be incorporated in the tariff schedule at rates to be decided with due consideration for government revenue.
Similarly, the fund welcomed the decision to repeal by end-July 2008 the Presidential decree that raised the tariff rate on soft drinks from 20 to 40 per cent and to reduce the tariff rate to 20 per cent by end-March 2009. It also stress that a private sector-led petroleum sector, regulated by the government, is the most effective way to ensure that the petroleum market develops and that prices are maintained at appropriate levels through competitive forces in the market. Accordingly, the mission recommended that the government’s Fuel and Liquid Gas Enterprise (FLGE) limit its role to the provision of key services that are not provided by the private sector.
Iran
Iran’s economy is marked by an inefficient state sector, reliance on the oil sector (which provides 85 per cent of government revenues), and policies that create major distortions throughout. Most economic activity is controlled by the state. A combination of price controls and subsidies, particularly on food and energy, continue to weigh down the economy, and administrative controls, widespread corruption, and other rigidities undermine the potential for private-sector-led growth. As a result of these inefficiencies, significant informal market activity flourishes and shortages are common.
High oil prices in recent years have enabled Iran to amass nearly $70 billion in foreign exchange reserves. Yet this increased revenue has not eased economic hardships, which include double-digit unemployment and inflation. The economy has seen only moderate growth. Iran’s educated population, economic inefficiency and insufficient investment - both foreign and domestic - have prompted an increasing number of Iranians to seek employment overseas, resulting in significant “brain drain.”
The International Monetary Fund (IMF) has urged Iran to raise interest rates and take other policy measures to contain inflation. It said Iran’s economy is expected to slow in 2008-09 to 5.7 per cent from 6.6 per cent last year, but nevertheless judged that overall prospects for the economy are good. The country’s external position had strengthened, reflecting the impact of higher oil prices. However... inflation is rising, largely due to the expansionary policy stance and also, in part, to higher import prices. The IMF said inflation, which rose to 24.2 per cent in April 2008, would likely remain at around 25 per cent in the near term, and urged the government “to act promptly to prevent inflationary expectations from becoming entrenched.”
Iran’s central bank has proposed raising rates to three percentage points above inflation to curb prices while an economic committee responsible for setting rates has proposed 14 per cent or less. Over the longer term, restraining government spending would reduce inflationary pressures. The fund estimated that Iran’s external current account surplus would remain broadly unchanged at 9-10 per cent of gross domestic product, if oil prices remained around current high levels. The non-oil primary fiscal deficit was expected to increase to 18.5 per cent of GDP in 2008/09, from 17 per cent in 2007/08.
But if global oil prices begin to fall, oil export volumes would decline and imports will expand steadily, in line with growing consumer demand and investment spending. As a result, the trade surplus will ease slightly from $22.9 billipn in 2007/08, before easing to $19.9 billion in 2008/09 and $13.3 billion in 2009/10. The non-merchandise deficit is expected to remain largely stable, as the gradual widening of the services deficit, related to the growing import bill, is largely offset by the growth in the income surplus, as debt interest payments fall in line with Iran’s declining external debt stock.
Overall, the current-account surplus will decline from $18.5 billion (7.5 per cent of GDP) in 2007/08, to $15.1 billion (5.4 per cent of GDP) in 2008/09 and $8.5bn (2.8 per cent of GDP) in 2009/10. According to the Economist forecast, the country’s economic growth rate in the Iranian year starting March 21, 2009 will be six per cent, to be followed by a rate of 5.6 per cent in the following two years. The forecast puts the country’s rate of economic growth at 5.8 per cent four years from now. Further strong increases in food and housing costs, which pushed up consumer prices by an average of 17.1% in 2007, will continue to persist. As a result, inflation will average 28% in 2008 and 25% in 2009. Year-on-year inflation climbed to 26.4 per cent in June.
High international oil prices and moderate import growth will ensure that Iran continues to record healthy current-account surpluses, which are forecast to average 12.5 per cent of GDP a year in 2008-09. Iran’s bank interest rates will remain at 12 per cent during the 2008-09 year, despite a call by the IMF to tighten monetary policy to fight rising inflation. Iran’s Central Bank officially notified state and private banks that lending rates would not change in the Iranian year ending in March, even though annual inflation is now running at around 26 per cent in the world’s fourth-largest oil producer. The government’s policy to keep interest rates well below price rises has drawn widespread criticism from economists.
Iraq
According to the IMF, Iraq’s economy is expected to find stability in 2008-2009 despite political and security problems as oil production recovers and the government moves ahead with reforms. Iraqi gross domestic product growth would likely top seven percent this year and hold between 7-8 pct in 2009. Oil production, which accounts for 70 pct of the war-ravaged country’s GDP activity, is expected to increase ‘at least’ by 200,000 barrels per day in 2008. The IMF estimates Iraq produced two million bpd in 2006-2007. The IMF’s full-year 2007 forecast of 1.3 pct GDP growth for Iraq was based on non-oil data from the first six months and probably will be revised upward.
Iraq’s performance under the first IMF stand-by arrangement that covered 2006 and 2007 was very impressive. In fact, it is quite remarkable that the program has held together in light of the very difficult security circumstances on the ground.
