Crisis threatens Iran's economy

DIRE SITUATION: The vote to report Iran to the UN Security Council, and the Iranian government's response to that vote, pose a serious problem for the nation's economy

AFP , TEHRAN

Mon, Feb 06, 2006 - Page 12

Iran's struggling economy is headed for the doldrums amid a worsening international crisis over its nuclear program and despite the country's lucrative oil revenues, analysts and businessmen say.

Although the economy is state-dominated and largely kept afloat by crude sales, the regime had been pinning its hopes on a private sector boom to bring down soaring youth unemployment and add some badly-needed weight to the non-oil sector.

But the weekend vote by International Atomic Energy Agency's 35-nation board of governors to report Iran to the UN Security Council looks set to derail these hopes.

"Investors have to feel secure, and now there are worries about the nuclear case," explained a disheartened broker at Tehran's stock exchange, which has already seen several years of strong growth wiped out by fears over the escalating tensions with the West.

"For the past week, we've already seen a downward trend. The market has been in fear regarding the fate of our nuclear case. The case going to the UN Security Council will be a shock to the market," said the trader, who asked not to be named.

Other, more traditional sectors for local investors, are also coming to a grinding halt.

Tehran housing agent Ali Rahimi said his customers were postponing deals and sitting on their cash, in stark contrast to recent years which have seen breakneck growth in construction and property buying.

"Almost all of my customers who had last week planned to buy a house or land have postponed their deals because of the nuclear issue," Rahimi said. "The big investors are looking to see what happens next. They are holding onto their money."

Inevitably, increasing capital outflow is emerging as a problem -- and although no figures are available many wealthy Iranians do appear to be sending their cash to more inviting climates.

Destinations for nervous Iranians' cash are more stable environments such as the United Arab Emirates and its booming trade hub in Dubai, just across the Gulf and a comfy two-hour, US$200 flight from Tehran.

"The nuclear problems will definitely have a negative impact on the economy, especially investment," said Mehdi Sahraian, a university professor who also works as a business analyst and consultant.

"Capital outflow and the halt in investment decisions have already been there for the past few weeks," he said.

It was three weeks ago that Iran restarted sensitive uranium enrichment research, backing away from a "confidence-building" freeze and lending more immediacy to fears that the country's hardline rulers could acquire weapons of mass destruction.

The enrichment process can be extended from making reactor fuel to the production of fissile material for a nuclear bomb.

The regime and its hardline President Mahmoud Ahmadinejad argue the aim is only to generate electricity, and appear unlikely to back down on what has been presented to the Iranian people as an "undeniable right" and a matter of national pride.

"The government may be able to fill the investment gap, but it will never be able to strengthen market confidence by injecting money," Sahraian explained. "If there are sanctions, the investment trend will get even worse."

Four other traders -- dealing respectively in aluminum, paper, foodstuffs and medicines -- also recounted what they say is a major crisis of liquidity.

"Before I used to handle up to 15 orders, at the moment I have one to deal with," one of them said. "Clients are no longer willing or able to pay up front. If this continues, my money will go to Dubai."

While the clerical regime calls the shots, it could soon find itself facing tough questions from a people who thrust Ahmadinejad to power last June after seizing on his pledge to see oil money reaches the ordinary people.

"Nuclear technology is our right, but not at any cost," said Sina, a 26-year-old private construction engineer. "My company imports parts from Germany, so I'm worried about sanctions."