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September 20, 2015 11:53 am
Iran desperate for nuclear deal dividend as economy stagnates
Najmeh Bozorgmehr in Tehran
EDITORS’ NOTE: Reuters and other foreign media are subject to Iranian restrictions on their ability to film or take pictures in Tehran. A worker assembles a vehicle at a production line of carmaker Iran Khodro, west of Tehran June 20, 2011. Iran Khodro, Iran’s biggest car maker which runs what it says is the largest car factory in the Middle East, sees sales rising at home and abroad, despite economic sanctions on the Islamic Republic. REUTERS/Morteza Nikoubazl (IRAN – Tags: TRANSPORT BUSINESS)©Reuters
A worker at a car factory near Tehran. Sales of locally made vehicles have declined 15 per cent in five months
“Don’t buy cars; prices will go down!” “No to new cars,” blare the headlines in an Iranian social media campaign that some government officials blame for fuelling the country’s economic malaise.
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“Shoddy and expensive domestically made cars should be reasonably priced and have appropriate after-sales service,” insists a Facebook post.
The motor industry — Iran’s biggest non-oil sector and employer of half a million people — has become the latest symbol of the country’s economic stagnation and the public’s declining purchasing power after years of international sanctions and political populism under the previous government.
With hopes high that Tehran’s nuclear accord with world powers could lead to the lifting of international sanctions, consumers are holding back on spending in the expectation of price drops and the arrival of better quality imported goods. The motor industry has been badly hit, with sales of domestically produced cars dropping by 15 per cent over the past five months, according to official figures.
Officials warn the carmakers’ crisis is having knock-on effects across the economy, hitting sectors from parts-makers to the critical steel industry, the second-biggest non-oil sector, which is already struggling amid a housing slowdown.
Mohammad Reza Nematzadeh, Iran’s minister of industries, even accused anonymous online campaigners of “treason” for undermining local production — before setting up an inquiry into their complaints.
But any dividends from the nuclear deal will take many months to materialise, and Iran’s economy remains mired in stagnation.
The centrist government of President Hassan Rouhani has managed to cut inflation from about 40 per cent to 12.6 per cent over the past two years and end three successive years of economic contraction, with growth of 3 per cent in the year to March. But economists believe the economy has now stopped growing and may even be contracting.
“The economic growth rate has not been positive in the first half of this Iranian year [since March] and will probably be negative in the second half, which makes negative economic growth this year almost inevitable,” said Mohsen Safaei Farahani, a former deputy economy minister.
Iran under Rouhani
‘Iran after Rouhani’ in depth
After nearly a decade of isolation Iran has agreed a breakthrough deal with six world powers to wind back its progress towards building a nuclear bomb in exchange for a sweeping reversal of international economic sanctions
Plunging oil prices have added to the strain on a budget already depleted by a halving of oil revenues, the country’s economic lifeblood, and the freezing of tens of billions of dollars of assets held in overseas banks under EU and US sanctions.
“The pressure of sanctions over the past four years, which is going to continue at least to the end of 2015, the dramatic fall of petrodollars in an oil-dependent economy, and mismanagement over the past decade have put Iran’s economy in the worst situation ever,” said Mr Safaei Farahani.
The economic situation is so grave that even the expected unfreezing of more than $100bn in Iranian assets in foreign banks under the nuclear deal will do little to help, according to economists.
“The unfrozen assets may not have much impact on Iran’s economy,” said Mr Safaei Farahani. “What Iran needs the most is lifting of sanctions to bring in investments, technology and know-how from foreign investors and the Iranian expatriate community, to help renovate and upgrade the management of big industries, such as car-producing factories and petrochemical plants.”
Mr Rouhani’s government lacks the resources needed to boost domestic industry by itself, economists say. Even as depleted oil revenues constrain its budget, Tehran remains obliged to pay IR480tn ($16.6bn) annually to individuals to compensate for a cut in energy subsidies, a populist measure inherited from former president Mahmoud Ahmadi-Nejad.
“The best the government has been able to do so far is to pay state employees and monthly cash payments for subsidies on time,” said one economist. “There is no budget for development projects.”
Bijan Namdar Zanganeh, Iran’s oil minister, said state officials were “in tears” at the end of each month as they struggled to find the cash for compensation payments.
Mohammad-Ali Najafi, secretary of the state-owned Economic Co-ordination Headquarters, which co-ordinates economic policy across ministries, expects a budget deficit of IR550tn this year, making it “probably the worst over the past 37 years”.
Meanwhile, as consumers across Iran feel the pinch and the campaign against local cars continues, business leaders fear bankruptcy.
“Nobody is buying anything and people are waiting for prices to go down after sanctions are lifted,” said Ali, whose business making balcony fences has dramatically declined. “But it is wishful thinking for people to think their campaign will lead to higher quality and lower prices any time soon.”