Domestic Economy

Eventful Year for Iran Economy

Eventful Year for Iran EconomyEventful Year for Iran Economy

March 19 will mark the end of the current Iranian year—an eventful year following a historic nuclear deal struck by Tehran and the world powers in July, which ended years of disputes over Iran's nuclear energy program.

The agreement was implemented in mid-January, after the International Atomic Energy Agency confirmed that Iran had adhered to the terms of the nuclear deal. In turn, the United Nations, the European Union and the United States lifted nuclear-related sanctions that had restricted foreign trade and investment in many sectors of the Iranian economy for years.

The Islamic Republic also gained access to billions of assets that had been previously frozen overseas.

World leaders, officials, pundits and commentators the world over hailed the thawing of relations between Iran and the West, which ushered in a new era for Iran in both political and economic fronts. Amid the breakthrough, Iran's pre-sanctions business partners have been pushing ahead to regain their former stature while many others are hoping to start from scratch.          

The pragmatic administration of President Hassan Rouhani has wasted no time to take advantage of the emerging opportunity to reengage with the world, push for increased foreign trade and rev up foreign investment. Official visits have already led to agreements worth tens of billions of dollars.

Below is a review of some of the most significant events in the outgoing Iranian year by the Financial Tribune:

  Transportation Takes Lead

Transportation, and on top of all aviation and rail industries, took the lead in breathing a new life into the battered Iranian economy in the post-sanctions climate.

Iran’s ambitious plans in the transportation sector were revealed late spring when Minister of Roads and Urban Development Abbas Akhoundi attended the year’s biggest aerial event “Paris Air Show” in June.

The minister said in Paris that Iran’s transportation sector is in need of $80 billion worth of investment, including $25 billion for improving rail infrastructures, $30 billion for roads and freeways, and $25 billion for renovation of Iran’s aviation industry, as the country will need 400-500 passenger planes over the next decade.

Soon after the sanctions were removed, Rouhani and a few Cabinet members, top officials and businessmen visited Italy and France, where they moved forward part of Iran’s aviation plans by sealing a deal with French planemaker Airbus to purchase 118 passenger jets for the state-run carrier Iran Air. The contract is valued at $25-27 billion, according to list prices.

Iran has also said it is interested in buying planes from US plane manufacturer Boeing–Airbus’s arch rival. Recently, Akhoundi announced that the government has invited Boeing for talks.

Meanwhile, Aeroports de Paris and Bouygues SA have agreed to assist in the construction of a new terminal at Tehran’s Imam Khomeini International Airport, while French construction firm Vinci SA signed an outline agreement to renovate and run airports at Mashhad and Isfahan.

The aforementioned deals are part of the government’s plans to turn Iran into a regional transportation hub, not only by air, but also via rail and sea.

Islamic Republic of Iran Railways and German conglomerate Siemens’ transportation subsidiary Siemens Mobility signed several agreements in Tehran early January to develop Iran’s railroads.

The agreements include cooperation for electrification of Tehran-Mashhad railroad and Tehran-Isfahan high-speed train, Iran’s procurement of 500 passenger cars and development of Iran’s railroad infrastructure, apart from providing consultation and technology, according to Iran’s Ministry of Roads and Urban Development.

Iran has also been in talks with Chinese companies for financing a 1,000-km double-track railroad between Tehran and Mashhad. Tehran and Beijing signed an agreement earlier this year to electrify this line, with 85% of the $2.1 billion cost to be financed through Chinese loans.

This will be a strand of China’s Silk Road—a trans-Asian trade route connecting the east to Europe and the Mediterranean Sea.

As part of the revival of the ancient route, a long-distance cargo train traveled from China to Iran in mid-February. The 32-container train took 14 days to complete the 10,399-km journey from China’s eastern Zhejiang Province through Kazakhstan and Turkmenistan–one month less than the sea route from Shanghai to the Iranian port of Bandar Abbas.

Iranian officials have indicated that the ultimate aim is to extend the rail route to Europe, positioning Iran on a key stretch to the continent.

Iran also signed a contract worth €1.2 billion with Russia to electrify the 450-kilometer-long Garmsar-Incheh Boroun Railroad in northern Iran while signing a separate deal with Azerbaijan to create a rail link between Iran and the northern neighbor. Once completed, it will be part of the global mega-project dubbed “International North-South Transport Corridor”, which is meant to connect Central Asia to Europe.

As for seaborne transportation, several major shipping lines have already resumed services to and from Iran. Switzerland’s Mediterranean Shipping Co., France’s CMA CGM and Taiwan’s Evergreen, the world’s 2nd, 3rd and 5th largest shipping groups respectively, have been the latest major shipping firms to call on Iranian container ports.

The Islamic Republic of Iran Shipping Lines hopes to cash in on Iran’s strategic geographical position and thrive as a global maritime transit center.

On Feb. 28, the company hammered out a deal with Singapore after signing earlier agreements with Kazakhstan, Switzerland and Germany with the aim of connecting East Asia to West Africa and Europe, and ultimately to Latin America.

 World Leaders Converge

World leaders from many countries, including major allies China and Russia, paid visits to Iran this year, setting the stage for expansion of trade with Iran.

Chinese President Xi Jinping’s arrival in January was among the most notable trips. During the visit, Tehran and Beijing set the target of pushing bilateral trade to a whopping $600 billion in the next 10 years—almost 10 times the current figure.

Turkish Prime Minister Ahmet Davutoglu, Swiss President Johann Schneider-Ammann and President of Vietnam Truong Tan Sang have been among the latest leaders to visit Iran.

Earlier high-profile visits were made by President of Austria Heinz Fischer and Russian President Vladimir Putin in September and November respectively. Presidents of Turkmenistan, Azerbaijan, Greece, Ghana and Iraq have also paid visits.

Moreover, Germany, Italy, France, Denmark, Slovakia, Brazil, Thailand, Britain, Japan, China, Lebanon, Oman, Turkey, Serbia, Venezuela, South Africa, Kazakhstan, India, Russia, the Netherlands, Indonesia, South Korea, Poland, Thailand, Czech Republic, Pakistan, Switzerland, Hungary, Tunisia, Belgium, Bangladesh, Sri Lanka, Sweden, Croatia, Kenya, Guinea, Lithuania, Malaysia, New Zealand, Niger, Norway, Armenia, Afghanistan, Algeria, Ukraine, Uganda and Spain have been among the countries to send their ministers, top officials and business delegations to Tehran over the past year.

In addition to the plan for a tenfold rise in trade with China, Iran has set ambitious targets with a host of other countries, including a $40 billion target with Moscow, $30 billion with Turkey, $25 billion with Iraq, $5 billion with Brazil and $2 billion with Vietnam.

 The Overhaul Within

Even though the detente with the West generated high hopes for the economy to improve, it fell short of having a palpable impact on overall macroeconomic indices of the country this year, as the effects have yet to manifest itself. Sanctions remained in place until the last quarter, affecting the industries and causing a slowdown in an economy already hit by the decline in oil prices.

Global crude prices have fallen from over $110 per barrel a year and a half ago to around $30 recently, effectively diminishing the government revenues.

Nonetheless, many believe the drop in crude revenues has, in fact, been a blessing in disguise.

The Iranian government is now earning more from tax than oil for the first time in almost half a century, as the country shifts its traditional reliance on crude to taxation revenues in the face of plummeting oil prices.

Rouhani’s economic strategy has been to significantly reduce the government’s dependence on oil and instead collect tax more systematically, the Guardian quoted deputy managing director of National Iranian Oil Company, Ali Kardar, as saying.

The Rouhani administration’s other major achievement has been to curb the runaway inflation it inherited from the previous government of Mahmoud Ahmadinejad, through disciplined monetary policies, including controlling the liquidity and stabilizing the foreign exchange rates.

A point-to-point inflation of 45% was handed to Rouhani in June 2013. According to the latest statistics released by the Central Bank of Iran, the goods and services Consumer Price Index for urban areas in the 12-month period ending February 19, which marks the end of the 11th month, increased 12.6% compared with last year’s corresponding period.

In October, the government opted for quantitative easing in an incentive package to stimulate demand and tackle the recession facing industries, including manufacturing and construction sectors.

The package was aimed at injecting more liquidity into the economy, while curbing inflation and stimulating growth in six months leading to the removal of sanctions.

Businesses, however, are looking ahead to the next fiscal year, which will hold a much brighter economic future, according to the International Monetary Fund.

“Higher oil production, lower costs for trade and financial transactions, and restored access to foreign assets, are expected to lift real GDP to about 4–5.5% next year,” IMF Article IV Consultation announced in its 2015 concluding report.