Iran steadies as tensions ease

SHIRAZ, Iran—Iran’s economy, though still crippled by sanctions, has begun to improve as a new president and a nuclear accord with the West stabilize its currency and raise confidence, say economists and merchants here and abroad.

Residents of this ancient trade hub say they are encouraged by the new administration’s economic policies and the prospect of a lifting of international sanctions in the coming years. Such sentiments have helped stabilize the volatile Iranian rial, which in turn has eased rising prices and spurred an uptick in informal trade, economists say.

Shiraz, the heartland of Iran’s Persian identity, has been particularly hard-hit by sanctions. Its once-plentiful international tourists, who came to visit the nearby archaeological ruins of Persepolis and tombs of Iran’s most famous poets Hafez and Saadi, have dwindled to a trickle.

Many Iranians are optimistic things will gradually improve. At his animal-feed factory here on the outskirts of Iran’s fifth-largest city, 30-year-old Hadi Oboudi hopes he will soon be able to boost production—which is being held back by difficulties importing raw materials like corn and barley—and after that find new export markets.

“It is going to happen. Our quality is good,” he said. “People will call us.”

The International Monetary Fund on Wednesday projected Iran’s economy to grow by up to 2% for fiscal year 2014-2015, which begins in March. That contrasts with a 2% contraction the IMF estimates for the current fiscal year. It predicts a fall in inflation to between 15% and 20% in the year starting in March from a 45% high in July.

Such data lead critics of the easing of sanctions to say the White House is undermining its own efforts. “As Iran’s economy improves and our sanctions regime unravels, the mullahs will be under less and less pressure to fully dismantle their nuclear- weapon capabilities,” Sen. Mark Kirk, an Illinois Republican, said in an email.

To be sure, many economists say Iran’s economy will take years to return to its former size—even if sanctions are fully lifted, which itself could take years if a comprehensive deal is reached. They also expect inflation to be in the 20% range this year, signaling continued strains for Iranians.

U.S. officials have played down the impact of the agreement on Iran’s economy, and warned businesses contemplating deals with Iran that the sanctions remain in effect and exceptions made under the interim nuclear accord could expire at the end of the six-month deadline if a wider-ranging permanent deal isn’t achieved. President Barack Obama on Tuesday warned potential sanctions violators, saying “we will come down on them like a ton of bricks.”

Talks between Iran and global powers are set to resume in Vienna on Tuesday.

Economists say the recent interim nuclear deal, which caps Iran’s nuclear program in exchange for easing some sanctions, should continue to stabilize the country’s ailing economy.

The deal allows the import of some goods—airplane and car parts and pharmaceuticals and medical equipment—and raises the amounts of money Iranians can wire home through standard banking channels in Europe.

“That means a lot of goods can come and go,” said Ramin Rabii, whose Tehran-based investment fund, Turquoise Partners, advises international investors. “It is already happening.”

Arresting the steep decline of the economy has been a major goal of President Hasan Rouhani and his new economic advisers. His team has reversed a host of policies put in place by his predecessor—changing the way foreign exchange is allocated and lowering key interest rates—that many blamed for worsening the impact of sanctions.

Rocky Ansari, a Tehran-based economist and financial consultant, said the sharp decline in imports when Mr. Rouhani took office has now likely stabilized, albeit at a historically low level. Full economic recovery still depends on sanctions being lifted, but the recent advances have created new breathing room for the government and new opportunities for Iranian companies that couldn’t get the raw materials they need for production.

“This is huge,” Mr. Ansari said. “The Pandora’s box has been opened.”

Iranian businesses harbor hopes of renewing their commercial ties via long-standing regional hubs like Dubai and reactivating informal trade channels as the economic climate improves.

Sohrab Sharafi, a 57-year-old Iranian importer and exporter, said that after a long pause, he has started again to receive emails and phone calls from European companies he represents and invitations to European trade shows.

His business, importing hand tools and hardware and exporting agricultural goods, has been devastated by the currency fluctuations brought on by sanctions and misguided economic policies at home, he said. He figured he has lost about 80% of his export market and laid off half his staff in the past two years.

He is starting to reactivate that network to take advantage of some opportunities with auto parts under the interim deal and gear up for more ambitious moves if Iran reaches a more-permanent accord with Western powers.

“So many people here are ready for European products. And they’re ready for our goods on the other side,” he said. “It is a crack now that will gradually open.”

While sanctions have raised costs both for merchants and their customers, many traders in Dubai, a major conduit for nonoil trade with Iran, say the instability of Iran’s currency has been the bigger problem. It has weakened sharply recently, falling from 12,300 rials to the dollar last September to roughly double that amount today.

This has helped Iran’s exporters—they get more rials for goods they sell to overseas buyers who pay in dollars—but has fed into domestic inflation, made imports more expensive and raised the risks of doing business.

As the rial has stabilized, those problems are starting to ease, say traders who deal with Iran.

“If it is fixed we have customers,” said one trader in Dubai’s Deira souk, an area well-populated with Iranian wholesalers.

He pointed to a couple of customers he said had come from Iran to make large orders of the shop’s toys, most of them brought in from China for re-export. “It is hard for us, but it is kind of getting better,” he said.

By The Wall Street Journal 


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