SERAI MUSHIR is a string of souvenir shops that started life as a caravanserai, a pit-stop for weary travellers and their camels. Looking onto a courtyard filled with orange trees, it is the prettiest part of Shiraz's warren of bazaars. Tourists from home and abroad should be swarming into this fabled “city of roses and nightingales”.

In late December, when icy winds sweep across Iran's deserts, Shiraz, in the deep south, is still warm. At the winter solstice, the longest night of the year, people of the city stayed awake eating pomegranates. Some recited Hafez, perhaps the country's most celebrated poet, whose tomb lies not far away.

Yet business is bad, says an Afghan shopkeeper in Serai Mushir. His rent has shot up, sales are down, and inflation at 23% is eating away at his margins. Though he has been in Iran for 20 years, the shopkeeper says he is thinking of going back to Afghanistan.

Even before the effects of the latest round of sanctions can be felt, Shirazi discontent with the government's policies is simmering. The economy is plainly in a shambles. People know the regime is consumed with infighting. Across the country, repression has continued to grow since the protests following the disputed presidential election of 2009 were squashed.

Last year's drought has parched rivers and fields, pushing rural people into the towns. Officially, the population of Shiraz is 1.2m. But locals complain that the real figure has doubled in the past few years, as farmers have abandoned their land. Crime is up, too. Whereas the streets were safe three years ago, says an elderly Shirazi, nowadays he warns his family to be careful after dark. Unemployment in the city is hovering at 15%.

The officially orchestrated storming of the British embassy in Tehran in November made matters worse. Shiraz is the gateway to Persepolis, 70km (43 miles) away, the 2,500-year-old capital of the Achaemenids, who ruled Persia's grandest empire under such titans as Cyrus the Great. Persepolis's vast complex of towering pillars and ruins used to be thronged with tourists, most of them Iranians but quite a few of them foreign. Now it lies deserted.