Economic consequences of détente with Iran

Improved relations with Iran would be good for the region – writes Dr Nasser Saidi

This is a momentous period for the Middle East. By the time this article is published, negotiations with Iran will have reached a turning point. A nuclear deal is imminent. The interim nuclear agreement with the five permanent members of the United Nations Security Council and Germany – in effect since January 20, 2014, and extended to June 30, 2015, – will become a comprehensive nuclear agreement. There are obstacles. United States President Barack Obama faces an uphill battle convincing Congress and various US allies (Israel and Saudi), while the European Union nations remain tough on conditionality. Nonetheless, a historic deal to restrict Iran’s nuclear programme in exchange for relief from sanctions would be a geopolitical and economic game changer for the Gulf region.

Negotiations have mainly focused on Iran’s nuclear capability. But what is at stake is Iran’s regional role and this should include the economic consequences of détente. The biggest immediate benefit for Iran from an agreement is that the US, EU and United Nations would lift their nuclear-related sanctions after a UN watchdog verifies that Iran has taken key steps in implementing the nuclear agreement. But policymakers should have a more comprehensive vision. The economic benefits from détente with Iran will accrue over the medium and longer term with domestic and regional, as well as global, consequences.

Iran détente: upsurge in growth, trade and investment

Iran is a large, strategically located country with a population of about 80m (similar to Egypt), an educated labour force and diversified economy. Iran also has enormous resources with 18.2 per cent of the world’s proven gas reserves (larger than Russia and Qatar) and 9.3 per cent of oil reserves. Sanctions resulting in low international economic and financial integration and inward-looking economic policies have generated growth below potential over an extended period of 25 years. More recently, populist policies under former president Mahmoud Ahmadinejad and international banking – and payments – sanctions resulted in recession, fiscal deficits, inflation, retrenched current account balances and lower international reserves. Reforms under current President Rouhani’s leadership have stabilised the economy, lowered inflation and improved public finances but growth has been negatively impacted by low oil prices.

A massive trade and investment opportunity

A rapid, unequivocal removal of sanctions with Iran able to access and use its estimated $90bn in foreign exchange reserves would result in the strong recovery of trade, tourism, oil production and exports. It would also boost private investment, lead to higher gross domestic product growth and set the basis for macroeconomic stability.

We know Iran is a gas and oil giant. Renewed investments in the energy sector would not only mean increased exploration and new technology that would increase productivity. It would also change regional energy infrastructure. Iran’s re-entry into the international oil and gas market will likely depress oil prices by $5 to $10 with a reduction in the oil risk premium. Iran’s large gas reserves would propel the country to become a major global player, especially given the recent Group of 20 impetus to address climate change – implying a rapidly growing market for gas relative to oil. These changes would have spillover implications for the future of the Organisation of Petroleum Exporting Countries and the global energy market.

Beyond the energy sector, the removal of sanctions can lead to a rapid resurgence of growth. From a lacklustre 3 per cent in 2015 to 2016, to 6 to 8 per cent in 2016 to 2018 – driven by trade, portfolio and direct investment, both domestic and foreign.

Sustained growth, international integration and undoing the distortions resulting from sanctions to build a modern, knowledge-based, high-productivity growth economy will require structural reforms. Iran will also need high levels (30 per cent-40