A jewellery shop in Tehran. Iranians are celebrating their New Year under austerity conditions exacerbated by the US drive to isolate the country’s economy. The sanctions are pushing up costs which have already been on the rise. Image Credit: EPA

Tehran: Mehdi slams a bottle of Heinz ketchup on the counter of his Tehran grocery store and says it's the kind of item Iranians have stopped buying, after the price doubled in two months.

"People are spending their cash with more caution," Mehdi said. He blames Iran's government, as well as international sanctions, for the inflation that is hurting his business. "It's a crisis in policy making, there's not much thought behind it," he said. "It was obvious from the start that this is what we were heading for."

Iranians are celebrating their New Year under austerity conditions exacerbated by the US drive to isolate the Islamic republic's $480 billion (Dh1.76 trillion) economy — about the size of Norway.

Measures aimed at curbing Iran's nuclear programme have targeted trade, banking and oil exports. Some imports have disappeared from the shelves and others have soared in price, amid a run on the Iranian currency that saw its dollar value drop by half on the black market.

The sanctions are pushing up costs which were already surging after the government started removing energy subsidies less than a year and a half ago. Inflation has been above 20 per cent since May, according to central bank figures. "Sanctions impact the most when the domestic policies of the government are unsuccessful," said Hussain Raghfar, an economist at Tehran's Al Zahra University.

"Purchasing power has decreased and Iranians are worried about inflation, especially employees who have a fixed income. The public perception is that there is no management of the economy."

Iran has the Middle East's second-biggest oil reserves after Saudi Arabia. It earned about $100 billion from crude exports in the 2011-12 fiscal year, according to International Monetary Fund projections.

The US and European Union are blocking financial transactions with Iran, and an EU ban on Iranian oil is to be enforced in July. Iran denies western charges that it's seeking to develop nuclear weapons capability.

Domestic production

More local production is the best way to counter the effects of sanctions, Supreme Leader Ayatollah Ali Khamenei told Iranians last week as they began almost two weeks of celebrations for Nowrouz, the start of the Iranian calendar year. Khamenei urged Iranians to favour domestic products whenever possible and shun imports.

In some cases there's no choice but to comply. In Tehran, shoppers and retailers list the international brands they can no longer obtain. Shahram, the head of a pharmacy on Vali-Asr Avenue, says he had to stop stocking items including imported razors and nappies.

Though sanctions prevent US companies from selling to Iran, their products often make their way to shelves in Tehran and other cities through traders who purchase them in the US or elsewhere and send them to Iran.

"The future of foreign products is unclear," said Shahram, who like Meh-di and many others interviewed in Tehran, declined to be identified by his surname.

"Some shops had stocks and stored them away, thinking that in the new year perhaps prices will increase even more."

Shahram said the prices of locally made drugs "hasn't changed a cent" because they are fixed by the government, and that is hurting his business as costs rise. "When there's inflation and the government seeks to control prices, it's not possible to make profits," he said. "We need to be able to go along with inflation."

At the Tajrish bazaar, Abdullah, 50, wearing plastic boots up to his knees as he rinses fish for display, says the price of a kilogram of white fish, the traditional Nowrouz meal, has risen as much as 50 per cent to 120,000 rials (Dh36.70). People are opting for cheaper options such as trout, selling at 65,000 rials, he says. Nuts and pistachios, another holiday staple, have doubled to 300,000 rials per kilo.

Knock-on effect

Higher food prices show how the effects of sanctions have spread through the economy. Iran relies on imported manure, while operating costs for farm machinery rose after subsidies were cut in December 2010.

Meanwhile, many Iran-ians who would usually have gone abroad for Nowrouz couldn't afford to do it this year, said Mohsin Ghasemi, director of the Pardis tourism network. A knock-on effect is increased demand for domestic travel, and hotels in Iran's main tourist cities such as Shiraz have lifted their prices by 25 per cent, Ghasemi said.

"My wife and I used to travel somewhere abroad every year during the Nowrouz holidays," said Hamid, in his mid-30s and manager of a hotel in the capital.

"This year, everywhere we've looked at is too expensive."

Packages to short-haul destinations such as India and Lebanon cost at least 20 million rials per person, he said.