WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

A comment by Mahdi Ghodsi

Saturday, the 16^th of January, marks the date when the Joint Comprehensive Plan of Action (JCPOA) was implemented, showing Iran’s willingness to start a trustworthy relationship with the West. This will be a new era of diplomatic ties between Iran and the West, which will consequently lead to a new economic environment for Iran hoping for a better and more peaceful Middle East. Since initiating the JCPOA on July 14 2015 in Vienna, Iran already established tighter economic relationships with the West, especially with the EU.

First effects

After the Iran nuclear deal framework was announced in Lausanne, Switzerland, on 2 April 2015, the Iranian Oil Minister Bijan Zanganeh reiterated that Iran would increase its oil export after easing the sanctions by 500,000 barrels per day (bpd). Despite lack of maintenance in petroleum exploitation due to sanctions, Iran still has the capacity to increase its exports above 4 million bpd. Easing sanctions will additionally release estimated $107 billion Iranian assets overseas, of which $29 billion will be released immediately. These new flows of income and assets could bring an extraordinary opportunity for Iran to develop the economy.

Short run boost in trade

Iran’s Central Bank Governor, Valiolah Seif, insists on not using the released funds immediately after the sanctions removal. Instead, those funds are directed for necessary goods imports. Hence, a higher flow of consumption goods to Iran is expected in the short-run to balance the market and counteract inflation. This is accompanied by tightened monetary policies that raised conservatives’ concerns. However, the Iranian government’s economic strategies are expected to be effective in the longer run as these are not mainly focused on the demand side but mostly on the supply side.

Plans for long term investment

Seif reported that Iran would be setting strategies to channel the released funds in order to accelerate the development in key sectors. This will become easier in a few days when the Iranian banking system will be reconnected to the SWIFT system and the foreign branches of its banks restart. In addition to oil and gas industries, tourism and IT sectors will be the new sectors directed for development. The majority of already signed contracts are related to infrastructure at large scales such as the enlargement of airports in Tehran and major cities, high-speed electrical railway connections between Tehran and major cities, metro establishments and enlargements. Thus, all these contracts will provide a new environment to attract FDI in the near future leading to a major technology transfer. Therefore, it is expected that trade volumes with Iran will reach again levels as existed before the era of intensified sanctions starting in 2009. Furthermore, the new relationship with the West – which is a unique opportunity after the Islamic Revolution in 1979 – could change the structure of trade to more capital and high-tech intensive products enabling a fast economic recovery and sustainable growth.

Details

Detailed figures on developments in trade and potential effects of the abolishment of major sanctions will be available in our February issue of the wiiw Monthly Report.