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Is Iran’s Economy Growing?An Assessment of the IMF’s 2011 Reporton Iran

Is Iran’s Economy Growing?An Assessment of the IMF’s 2011 Reporton Iran

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In August 2011, the International Monetary Fund (IMF) published an unusually controversial assessment of Iran’s economy that projected a relatively positive economic future. In this Brief, Prof. Nader Habibi critically evaluates the main factors that account for the report’s positive assessment and concludes that the IMF forecast underestimates the political and geopolitical threats facing Iran; it also underestimates the adverse effects of governance issues and factional politics on the successful implementation of economic reforms that are crucial for Iran’s economic growth. Nonetheless, Prof. Habibi also argues that while sanctions and domestic political mismanagement will hurt the economy, as long as Iran can avoid a comprehensive oil embargo and a military confrontation with the West, the likelihood of a severe economic collapse remains small.
In August 2011, the International Monetary Fund (IMF) published an unusually controversial assessment of Iran’s economy that projected a relatively positive economic future. In this Brief, Prof. Nader Habibi critically evaluates the main factors that account for the report’s positive assessment and concludes that the IMF forecast underestimates the political and geopolitical threats facing Iran; it also underestimates the adverse effects of governance issues and factional politics on the successful implementation of economic reforms that are crucial for Iran’s economic growth. Nonetheless, Prof. Habibi also argues that while sanctions and domestic political mismanagement will hurt the economy, as long as Iran can avoid a comprehensive oil embargo and a military confrontation with the West, the likelihood of a severe economic collapse remains small.

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Published by: Crown Center for Middle East Studies on Dec 18, 2011
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Is Iran’s Economy Growing?An Assessment of the IMF’s 2011 Reporton Iran
Prof. Nader Habibi
I
n August 2011, the International Monetary Fund (IMF)published an assessment of Iran’s economy that projected a relatively positive economic future. This report followed another optimistic IMF report on Iran’s subsidy reformprogram that had been released only a month earlier.
1
Bothreports were based on the findings of the IMF team’s June2011 visit to Iran and its follow-up contacts with governmentofficials in the Ministry of Economy and the Central Bank.The IMF regularly releases similar economic assessmentreports for all member states (commonly referred to as ArticleIV reports), but these reports rarely attract media attentionor provoke strong political reactions. The above-mentioned reports on the Islamic Republic of Iran, however, wereexceptions.
2
Immediately after its release, the August reportwas criticized in a
Wall Street Journal
article, followed by aseries of commentaries by analysts inside and outside of Iranwho were critical of the report’s assumptions and conclusions.The common concern expressed by these critics was that thenew IMF projections of Iran’s growth prospects were toooptimistic. Some critics questioned the report’s impartiality,while others doubted the accuracy of the economic data used by IMF analysts to generate their optimistic assessments.
December 2011No. 57
 Judith and Sidney Swartz Director 
Prof. Shai Feldman
 Associate Director 
Kristina Cherniahivsky
 Associate Director for Research
Naghmeh Sohrabi, PhD
 Senior Fellows
Abdel Monem Said Aly, PhDKhalil Shikaki, PhD
 Myra and Robert Kraft Professor of Arab Politics
Eva Bellin
 Henry J. Leir Professor of the Economics of the Middle East 
Nader Habibi
 Sylvia K. Hassenfeld Professor of Islamic and Middle Eastern Studies
Kanan Makiya
 Junior Research Fellows
Abigail Jacobson, PhDPeter Krause, PhDShana Marshall
 
2
Nader Habibi is the Henry J. Leir Professor of theEconomics of the MiddleEast at the Crown Center,Brandeis University.
The opinions and findings expressed in thisBrief belong to the author exclusively anddo not reflect those of the Crown Center or Brandeis University.
The attention that these IMF reports have received is a result of the ongoingtensions between Iran and Western powers over Iran’s nuclear program. TheUnited States and its European allies have implemented several rounds of unilateral economic sanctions on Iran with the stated goal of imposing economicpressure on the ruling Islamic regime until it agrees to stop its alleged nuclearweapons program. Political leaders and policy makers on both sides of thisconflict are closely monitoring the impact of the sanctions on Iran’s economy.For its part, the Iranian government is interested in demonstrating that despiteeconomic sanctions, its domestic economy has remained strong and has continued to grow. Sanctions advocates in the United States and elsewhere, on the otherhand, are looking for signs—such as slower economic growth—that the sanctionsare imposing serious economic constraints on the Iranian economy.
3
Thus, theIMF projections of 3% to 4% economic growth in the near future, if they arerealized, would be an indication that the sanctions were not working.Against this backdrop, this Brief critically examines the IMF’s August 2011 reporton the Iranian economy. It first evaluates the two main factors that account forthe report’s positive assessment of Iran’s economy: the prospects of Iran’s non-oil sectors and the supposed success of the 2010 subsidy removal reforms. It thendiscusses the report in relation to the current sanctions against Iran, as well aswith respect to Iran’s problems of domestic governance, on the one hand, and theresilient aspects of Iran’s economy, on the other.
Economic Growth Prospects
The International Monetary Fund August 2011 report’s analysis of theIranian economy has two distinct components: a) an evaluation of currentmacroeconomic conditions and of the medium-term outlook for Iran, and b) anassessment of Iran’s ongoing economic reform policies, with a special emphasison the subsidy reform program (which was addressed in more detail in the Julyreport). These are followed by a set of economic policy recommendations thatreflect the core values of the IMF: recommendations that are often known as theWashington Consensus and are prescribed by the IMF to most member states.They include exchange rate and financial deregulation, creation of a business-friendly economic climate, liberal trade policies, a balanced fiscal budget, and aconservative monetary policy to assure price stability.The August report’s evaluation of current economic conditions in Iran led it tooffer a relatively positive assessment of the country’s near- and medium-termeconomic prospects. Accordingly, the economic growth projections for Iranfor 2009–2011 were revised upward in comparison with the IMF’s April 2011projections that had been released only a few months earlier. Based on the revised economic data, the annual growth estimate for 2009 was changed from 0.06%to 3.53%; the growth estimate for 2010 was also revised upward, from 1.02% to3.24%. And the IMF revised its growth projection for the Iranian economy in2011, from -.03% to 2.51%. These changes signified a visible change in the IMF’seconomic outlook for Iran. (See figure 1.) The report also predicts better growthprospects for 2012–16, with a projected average annual growth rate of 4.18%.
4
 
 
3
Figure 1: IMF Forecasts of EconomicGrowth for Iran
Source
: Data from IMF, Islamic Republic of Iran: 2011 Article IVConsultation—Staff Report. (See footnote 2.)
Some commentators and Iran watchers have questioned the impartiality of IMF forecasts for Iran and havesuggested a politically motivated bias in the Augustrevisions, which sharply increased growth projections for2010 and 2011. On the other hand, the government of Iranwas angered by the low growth projections in the April2011 forecast and accused the IMF of trying to appeasethe United States by forecasting weak economic growthprospects. In order to address the possibility of systematicand consistent bias in IMF growth forecasts for Iran, Ihave compared the IMF forecasts for the Iranian economyfor the 1999–2010 period with realized growth rates. (Seefigure 2.) As shown in figure 2, IMF’s same-year growthestimates (e.g., the growth estimate for 2010 that wasreleased during the same year) underestimated the actualgrowth rate in eight of the twelve years reported in thisgraph; and the one-year-forward forecasts (e.g., the 2010forecast for the growth rate in 2011) underestimated actualgrowth in eight of the eleven years and overestimated it inthe remaining three. These findings allow us to reject thepossibility that the August IMF report resulted from asystemic positive bias in IMF reports on Iran’s economy.If anything, we see that in most years the IMF has
under 
estimated Iran’s actual economic growth.The IMF routinely generates economic forecasts for allof its members, and economists have used sophisticated statistical methods to search for bias in these forecasts.They have found that the underestimation (negative bias)in IMF forecasts for Iran reported above is in line withIMF forecasting behavior generally. Dreher, Marchesi,and Vreeland draw on a large database of IMF forecastsfor all member countries and find that IMF forecasts fornon-OECD countries
5
, such as those in the Middle Eastregion, tend to be pessimistic in general: more likely tounderestimate future growth rates than to overestimatethem.
6
 
Figure 2: Accuracy of IMF GrowthForecasts for Iran
Note: A positive value means actual growth rate was higher than theIMF forecast. Growth numbers reported in percentage.
Source
: IMF,
World Economic Outlook Database
(Washington D.C., variousyears).
So if the IMF has exhibited a tendency to underestimateIran’s growth performance, it has not singled out thatcountry; rather, it is a systematic bias that affects IMF’sforecasts for many developing countries. But in light of this general tendency toward underestimation, whatshould we make of the August 2011 revisions to IMF’s Aprilprojections, which resulted in a more optimistic growthforecast? Is this positive forecast more accurate than theprevious one, or is it
too
optimistic, as some critics haveclaimed? In my judgment, the August forecast was arrived at using a more up-to-date data set with respect to someaspects of Iran’s economy.
7
In addition, the June 2011 visitto Iran by the IMF team gave it a chance to learn aboutthe government’s economic reform plans in more detailand thereby generate a more accurate assessment of Iran’spotential to facilitate economic growth. Yet at the sametime it appears that the August forecast was arrived atbased on an inadequate assessment of the geopolitical risksto Iran’s economy, and as a result its growth predictionsare, in fact, too optimistic.A better understanding of IMF’s positive assessmentsof 2011 and 2012 growth prospects can be acquired bylooking at its projections for the performance of the oiland non-oil sectors of Iran’s economy separately. Whilethe high price of oil has benefited the Iranian economyin many ways, the output of the oil sector has remained relatively stagnant in recent years when measured in realterms. The economic weakness of the 2008 fiscal year(see figure 1) was mostly the result of a 2% decline in theoutput of the oil and gas sector. The non-oil sector of theeconomy registered a negligible growth of 0.9%, which wasa sharp decline in comparison with its 10.5% growth in theprevious fiscal year.
8
The August 2011 IMF report arguesthat the relatively better economic growth rates of the lasttwo fiscal years (2009/10 and 2010/11) were driven entirely
 
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    G   r   o   w   t    h   e   s   t    i   m   a   t   e   s ,    i   n    % 
April 2011 forecastAugust 2011 forecast
-6-4-2024681999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
    G   r   o   w   t    h   e   s   t    i   m   a   t   e   s ,    i   n    % 
Forecast gap (current year) Forecast gap (one year forward)

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