By Warner Rose, USINFO Special Correspondent

Washington -- The international community’s confrontation with Iran over its nuclear program already has affected the Iranian economy adversely and could threaten investment and growth further if the crisis escalates, according to the International Monetary Fund (IMF).

During 2006, “tensions associated with the nuclear issue” had “some adverse effects on private investment, particularly FDI [foreign direct investment],” says the annual IMF Article IV Consultation Report for Iran, released March 8.

Article IV reports are based on annual consultations between IMF staff and the member country’s top economic officials.

The IMF report is a message to the Iranians that the “nuclear crisis is quite a problem” for them, according to Patrick Clawson, deputy director for research at the Washington Institute for Near East Policy.

“Iranian economic policies are very risky,” he said in an interview with USINFO.  Companies that have shown interest in investing might not follow through if the nuclear issue is not resolved, he continued.

“The Ahmadi-nejad government is needlessly provoking the outside players and putting the country at risk,” he said.

The IMF report did not put a dollar figure on the economic cost to Iran’s economy as a result of the crisis atmosphere generated by Iran’s nuclear program, but noted that “political uncertainty” associated with escalation of tensions over the nuclear issue in 2005 contributed to a 22 percent decline in prices at the Tehran Stock Exchange.

These escalating tensions, along with the possibility of a sharp drop in oil prices, are “major downside risks” for the Iranian economy, according to the report.

The main economic challenges currently facing Iran are lowering inflation and generating sufficient growth to create jobs for the approximately 750,000 young Iranians who enter the labor market annually, the IMF report says.  In recent years, Iran has had high unemployment, high inflation and insufficient growth.

Bolstered by high oil prices, a recovery in domestic agriculture and significant government stimulus, Iran’s gross domestic product (GDP) grew by 5.4 percent in 2006 – up from 4.8 percent in 2005, says the report.  The economy should expand nearly 6 percent in 2007, it continues, noting that in the near term, Iran’s growth prospects are favorable.  GDP growth in 2006 helped reduce unemployment to an official figure just over 10 percent at the beginning of 2007.

Undermining longer-term prospects is the persistent double-digit inflation spurred by government spending and other state stimulus policies, the report says.  Inflation stood at 10.2 percent by the end of 2006, considerably lower than the previous two years; it is again on the rise in 2007 -- fluctuating significantly from month to month.

The Iranian government’s use of oil revenues to sustain growth and job creation and to finance extensive social and investment spending creates “a serious risk” of generating even higher inflation, endangering Iran’s medium-term growth and employment prospects, the report says.

The government has agreed on the need to cut subsidies, including the costly and politically sensitive energy subsidy, the IMF report says.  Cuts to this subsidy, however, will be tied to a program to improve the transportation system, it continues.  In addition, Iran's supreme leader, Ayatollah Ali Khamenei, has issued an executive order to privatize 80 percent of state-owned enterprises over the next 10 years.  Currently, state and quasi-state companies dominate Iran’s economy.

(USINFO is produced by the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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