ImageReuters: Rising inflation in Iran poses the biggest short-term challenge to its economy, the International Monetary Fund said on Monday.

ImageWASHINGTON, May 12 (Reuters) - Rising inflation in Iran poses the biggest short-term challenge to its economy, the International Monetary Fund said on Monday.

In a statement after a visit to the capital Tehran between April 28 and May 11, the IMF said inflation had risen sharply due to strong domestic demand growth.

"The mission recommended strengthening the fiscal stance, increasing banking rates of return, which are becoming increasingly negative in real terms, and allowing for greater exchange rate flexibility," the IMF said.

The fund said Iran should give priority to strengthening government finances and improve overall efficiency of the economy, including by phasing out large subsidies on energy products and replacing them with targeted social assistance.

"The prospects for faster economic growth and employment creation would also be enhanced by deepening financial intermediation and improving the business climate," it added. (Reporting by Lesley Wroughton; editing by Leslie Adler)

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