Iran economy's recovery strengthening but bank reform is urgent, IMF says

DUBAI (Reuters) - Iran's economy is starting to recover more rapidly from years of international sanctions but the country urgently needs to shore up its banks, a senior International Monetary Fund official said on Monday.

Gross domestic product growth soared to 12.5 percent in the year through last March 20, but that was almost entirely due to a leap in oil exports, after most sanctions were removed under a deal with world powers on Tehran's nuclear programme.

Oil exports are no longer growing nearly as fast. But the economic recovery is now beginning to extend to non-oil areas, said Catriona Purfield, head of an IMF team which held annual consultations with the Iranian government this month.

"Growth has begun to broaden to the non-oil sector," Purfield said in a statement, predicting GDP would expand 4.2 percent in the current fiscal year and that growth could rise towards 4.5 percent in subsequent years with financial reforms.

Official statistics in Iran are often incomplete and released only slowly, and the policy-making process can be opaque, so Iran's consultations with the IMF provide one of the clearest glimpses into its economy.

The country's recovery has been slowed by tensions with the United States, where President Donald Trump has raised the possibility that sanctions could be reimposed or new sanctions introduced. This has deterred many banks and other foreign companies from operating in Iran.

Purfield said that given such uncertainty and the increasing vulnerability of Iran's financial system, the government urgently needed to restructure and recapitalise banks and credit institutions.

"An asset quality review, related-party lending assessment, and a time-bound action plan to recapitalise banks and address non-performing loans should start immediately," she said, adding that the cost of recapitalising banks could be covered with long-term government bond issues.

Iranian banks were weakened during the sanctions years by a sluggish economy, government interference in lending decisions, lax regulation and excessive competition with unlicensed financial institutions.

Authorities are now discussing how to deal with tens of billions of dollars of bad debt, but efforts to address the problem have been slowed by its cost and complexity.

The government of President Hassan Rouhani has also submitted to parliament amendments which it says would strengthen legislation against money laundering and the financing of terrorism.

The IMF urged Tehran to pass the amendments by an end-January 2018 deadline set by the Financial Action Task Force, a global body fighting illicit money flows. This would help Iran re-integrate into the global financial system, the IMF said.

Iran's central bank has been intervening in the foreign exchange market to support the rial currency in the face of the international uncertainty.

But the IMF urged the central bank to let exchange rates move more freely and to abolish a dual system of official and market rates, saying this would prevent Iran's foreign reserves from running down and make the economy more competitive.

(Reporting by Andrew Torchia; Editing by Raissa Kasolowsky)