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Iran's economy

From  The  Economist  -  Jan. 2016

Waiting for the peace dividend

The economy has great potential, but will it be realized?

THERE were no street parties. When sanctions relating to Iran's nuclear programme were lifted on January 16th, it was instead Iranians' deep cynicism that prevailed. "Quick, prepare the [immigration] forms," some joked on social media, scoffing at the idea that tourists would suddenly come pouring in.

Nor was Hassan Rohani, Iran's president, able to enjoy the moment. Within days of the announcement the Guardian Council, a body of jurists and theologians, barred a majority of reformist candidates from running in parliamentary elections next month. Then on January 18th America slapped new sanctions on those involved in Iran's missile programme.

Yet the next few weeks - and the speed of the economy's response to the lifting of sanctions-will be crucial in determining the direction that Iran takes over coming years. Next month the country also votes for members of the Assembly of Experts, a committee that will choose the next supreme leader, who outranks the president. To keep the hardliners at bay, Mr Rohani, who himself must seek re-election next year, will have to persuade them of the virtues of a more liberal, less state-run, more outward-looking economy.

To do so he has to hope for a quick turn in the fortunes of the world's 18th-largest economy (by purchasing-power parity). Yet overcoming the lingering effects of its isolation will be no easy task. "It took years to put the sanctions on, and removing them will be a process," says Ramin Rabii, who runs Turquoise Partners, an Iranian investment firm. Foreign banks, some of which faced swingeing fines for having facilitated trade with Iran, complain about inconsistencies in official sanctions lists published by different countries and fret they may again face prosecution for violating sanctions still in place, or new ones.

Iran's most immediate benefit will be the unfreezing of assets abroad worth at least $32 billion. (American officials put the figure at $55 billion; others give still higher numbers.) Iran plans to spend a chunk of this on railways, airports and aircraft; it is close to clinching a deal with Airbus to buy 114 new planes, and says it needs 400.

Source: Economist Intelligence Unit

Much of the rest of the cash, say Iranian officials, will help sort out the country's banks, which were pushed to the brink of insolvency, if not into it, by the previous administration of Mahmoud Ahmadinejad. Up to a fifth of all bank loans are said to be non-performing and several banks are bust, not least because the government instructed them to lend even when they thought it imprudent. Some critics fret that the money will instead be used to fund terrorism and Shia militancy abroad.

Another quick win will come from Iran's readmission to the global banking system and payment networks such as swift. This will help drive down the cost of imports since, in recent years, Iranian businessmen have not had access to letters of credit. As a result they had to pay upfront in full for imports. Ending such restrictions could add up a percentage point to annual growth, the IMF reckons. Industry should benefit within months.

Over the longer run Iran should be able to attract foreign investment, which has fallen in recent years. Among Iran's attractions are a young, well-educated and largely urban population of 80m. European delegations have flooded into Tehran in the past 18 months, but they still need convincing that the country is politically stable and friendly to business.

The most attractive industries are food and drink, pharmaceuticals and other consumer goods. Many Iranians want European brands rather than the Chinese ones that dominated the market under sanctions. "We used to sell high-quality Italian washing machines, but our customers have gone elsewhere to buy Chinese imports," says Ramin Farahi, a salesman near Tehran's Grand Bazaar. Foreign hotel chains are also poised to invest.

The biggest prize for investors may be car making. The automotive industry employs hundreds of thousands of workers, but output is shoddy. Some expect that production could bounce back by the end of this year to 1.6m vehicles, matching the high point achieved in 2011. Renault and Peugeot, which have a long history in Iran, are already back.

The government's priority is probably to increase production of oil - which made up 17% of GDP and 30% of the government's income in 2014--by 500,000 barrels per day (b/d), to about 1.5m b/d. In time it hopes to get back to the 3m-4m b/d it used to pump before sanctions. But because of the slump in world prices, oil will be less of a cash cow than was once hoped and Iran will struggle to get investment from debt-laden international oil companies.

Iran's economy is far more diverse than those of other oil producers in the region, such as Saudi Arabia, its regional rival. By most estimates its GDP could grow by 5-8% a year, despite weak oil prices.

Quite apart from the lifting of sanctions, Mr Rohani's team realizes that it needs to address a raft of problems in an economy that was sorely mismanaged by Mr Ahmadinejad. Corruption is rife: Transparency International, a Berlin-based watchdog, ranks Iran 136th in its corruption perceptions index. In addition, the World Bank puts Iran at a lowly 118th in its ease-of-doing-business index. Capital markets need developing. Firms need access to finance. Unemployment and underemployment are rife and labour productivity is low. Now that sanctions are being lifted, the regime will no longer be able to blame foreigners for Iran's woes. Yet unless he can show quick progress, Mr Rohani may well be punished at the ballot box for the sins of his predecessor. ■

SO  ONCE  AGAIN  LOOK  FOR  IRAN  TO  BECOME  A  DECENT  PLAYER  ON  THE  WORLD  SCENE  OF  TRADE  AND  ECONOMY,  IN  THE  COMING  YEARS  -  Keith Hunt