Nuclear pact to re-energise Iranian economy, analysts say

Tehran’s historic nuclear pact with world powers and the ensuing easing of sanctions will boost Iran’s economy after swaying from recession in the past two years, analysts say.

Tehran’s nuclear pact with world powers and the ensuing easing of sanctions will boost Iran’s economy, which has been struggling since falling into recession last year, analysts say.

But the landmark agreement is unlikely to change the need for continuing fiscal austerity and reforms to deep-seated challenges such as subsidies.

Rachel Ziemba, an emerging markets research director at Roubini Global Economics (RGE), said the deal “increases Iran’s resiliency, ability to cope with a balance of payments shock and reduces the chance of deeper recession.”

Under the agreement signed between Tehran, the United States, Russia, China, France, Britain and Germany on Saturday, Iran pledged to curb some of its nuclear activities in return for an easing of sanctions over a six-month period.

Tightening sanctions have dragged Iran’s economy into a downward spiral since 2011 as oil sales and other exports – a source of revenues and foreign currencies – were blocked.

Regaining direct access to “locked” revenues, a trimming of trade restrictions on cars and petrochemicals, as well as the shelving of planned further oil curbs are worth US$10 billion to $15bn to Iran, RGE estimates.

Optimism from the nuclear deal has already bolstered the Iranian rial, which strengthened more than 3 per cent against the US dollar on Sunday.

The rial lost as much as 80 per cent of its value during the 12 months that ended in March this year, helping to stoke an annual inflation rate estimated at about 60 per cent in June.

A pullback of global sanctions against Iran would likely ease rampant inflation by narrowing the spread between the official and black-market currency rates, said the Institute of International Finance (IIF) in a report.

It would also help the economy achieve growth of 0.4 per cent this year, the report said.

Still, other challenges are likely to take longer to address.

An IMF mission to Iran this month urged Tehran to follow through with the reform of subsidies.

Under the first round of reforms in 2010, Tehran pushed up the prices of petrol, water, electricity and bread. But that crippled some industries that relied on cheap energy to remain competitive.

Iran has the highest break-even oil price among oil exporters in the region, which the IMF places at US$120 per barrel.