Relief at last for Iran?

Should the Iranian nuclear deal be finalised, its economy will get a huge boost, but it could be several years before the full benefits emerge. Published in The Gulf, May 2015

There is finally some light at the end of the tunnel for Iran. The outlines of a deal announced at the start of April between Tehran and the group of six countries led by the EU and the US herald the end of years of debilitating sanctions and Iran’s return to the global economic mainstream.

Many of the finer points have still to be hammered out between now and 30 June, by which time a comprehensive deal is meant to be finalised, but it seems the momentum will be hard to stop. Even so, it is probably still too soon for ordinary Iranians to celebrate. While a deal will undoubtedly bring great benefits to Iran, it may be a year or more before those gains really kick in.

Under the outline agreement announced on 2 April, Iran will reduce its stockpile of enriched uranium by 97 per cent, cut the number of installed centrifuges by two-thirds, and limit any uranium enrichment at Natanz to a low level. It will also halt uranium enrichment at Fordow and redesign the Arak reactor so it no longer produces weapons-grade plutonium. All this will be monitored by inspectors from the International Atomic Energy Agency (IAEA).

It is only once the IAEA is satisfied that Iran has implemented all of its key commitments that sanctions will be eased. US secretary of state John Kerry suggested this is likely to take many months. “It’s really a matter of anywhere from probably six months to a year or so that it will take to begin to comply,” he said, at a press conference on 2 April.

The exact timing and order of sanctions relief is part of the ongoing negotiations, but the US and the EU have said they will drop their economic and financial sanctions as soon as IAEA clearance is given. At the same time a new UN Security Council resolution will rescind the existing sanctions on Iran, although it will also re-impose restrictions on the transfer of items such as conventional arms and ballistic missiles.

Even the US sanctions would not be eliminated entirely. US president Barack Obama has made clear that American sanctions targeting Iran’s ballistic missile programme, its support for terrorist groups and its human rights abuses will remain in place.

Nonetheless, the relief that has been promised means that Iran could resume oil exports and rejoin the SWIFT international banking network, and foreign businesses would again be able to invest freely in the country.

The impact ought to be substantial. The International Institute of Finance (IIF) says overall economic growth could accelerate to six per cent a year in 2016-17 and 2017-18, compared to its forecast of around three per cent in the current fiscal year, which began on 21 March. This growth will come from a mix of rising oil exports, renewed access to frozen foreign assets and foreign capital inflows. The IIF also suggests that Iran’s fiscal deficit would narrow and the gap between the official and black market exchange rates could disappear.

The IMF also thinks the lifting of sanctions should lead to strong growth. “If the framework agreement that has been announced is indeed completed and followed through, this would have a substantial positive impact on the economy of Iran,” said Masood Ahmed, director of the Middle East and Central Asia Department of the IMF, during a press conference on 17 April.

However, Ahmed did not put any figures on how much better off Iran would be. “It’s very hard to [quantify] now, because we don’t really have a very clear picture yet of the sequence and pace during which the agreement could lead to a lifting of some of the sanctions,” he said.

The timing of sanctions relief will determine how quickly international investors return to the market, but there is little doubt that many are eager to do so. Plenty of international business delegations have visited Tehran in recent years, particularly from Europe and Asia, but few have been able to sign deals while the sanctions have remained.

President Hassan Rouhani referred to this during a speech on 15 April when he said “You think that the Iranian nation only calls for lifting of economic sanctions, but the fact is that your companies are eager for this. European, American and Asian companies are waiting for the signing of a final deal.”

It is worth noting that, even with the sanctions still in place, things have been improving in Iran. According to the central bank, inflation has fallen from above 40 per cent in 2013 to 14.4 per cent. And the IMF says the economy is expected to grow this year after two years of recession.

Much of the credit for this is due to Rouhani, who has stabilised the economy since taking office in August 2013. For Iran to make the most of the opportunity that will come from the ending of sanctions, such domestic reforms need to continue. The country is still ranked badly in most international league tables. It is 130 out of 189 countries in the World Bank’s Ease of Doing Business report, 136 out of 175 in Transparency International’s Corruption Perceptions Index and 83 out of 144 in the World Economic Forum’s Global Competitiveness Report.

“While the agreement will have an impact on the economy of Iran, a lot of what happens to the economy of Iran will be a function of policies and measures that are put in place within Iran itself,” said Ahmed. “There’s a lot to be done to continue with the reform of the industrial and productive infrastructure.”

Of course it ought to be remembered that a final deal is still not certain. Hardliners in Iran and the US could yet scupper any agreement and both sides are giving themselves room to blame the other for any failure. On 2 April, Obama said “If there is backsliding on the part of the Iranians… there will be no deal.” A week later, on 9 April, the Iranian Supreme Leader Ayatollah Ali Khamenei tweeted “I trust our negotiators but I’m really worried as the other side is into lying and breaching promises.”

If they can put such distrust to one side, hold their nerve and persuade their more reluctant compatriots to follow, then Iranians should be able to look forward to a more prosperous future. There are still a lot of ifs though.