Consequences for the Iranian Economy

A Growing Crisis: The Impact of Sanctions and Regime Policies on Iranians’ Economic and Social Rights

Consequences for the Iranian Economy

The most important arena in which the interplay between sanctions and internal vulnerabilities has undermined the Iranian economy is the currency exchange market. The value of the Iranian currency, which had been kept at the rate of some 10,000 rials to the US dollar for the previous 10 years, began its precipitous decline in December 2011. The initial impetus for the decline was the decision by the Dubai-based Noor Islamic bank, which had up to then reportedly been responsible for clearing upwards of 60 percent of Iran’s oil earnings, to submit to the request of the US Treasury Department to terminate its relationship with Iran.[106] Thereafter the plunge in the value of the rial continued and gathered momentum, particularly in the aftermath of the tightening of US and EU sanctions in the course of 2012. The value of the Iranian currency reached its nadir against the dollar in October 2012, trading at some 42,000 rials to the US dollar on Tehran’s open/black market. Various governmental measures subsequently stemmed and temporarily reversed the decline, restoring the value of the rial to 28,000 to the dollar. In the face of escalating sanctions and lack of confidence in the prospects for resolving Iran’s nuclear dispute, however, the decline in the value of the Iranian currency has since resumed, with each dollar trading for 36,000 rials by December 2012.[107]

The most pivotal factor accounting for the decline in the value of the rial has been the sanctions, which have severely restricted the capacity of the government to draw on its hydrocarbon earnings (which amounted to $115 billion in 2011)[108] to prop up the value of the rial. With its foreign exchange earnings halved, unable to transfer its oil earnings back to Iran, and its access to its dwindling foreign currency reserves diminished, the Iranian government has found it increasingly difficult to supply the requisite funds for supporting its currency.[109]

To be sure, Ahmadinejad’s policies, which created rising demand for dollars and other forms of hard currency in Iran, compounded the problem. By raising the liquidity rate (the number of rials in circulation) by almost 600 percent in the course of the last seven years through his expansionary fiscal and monetary policies, as well as by allocating monthly cash handouts to 60 million Iranians as part of his subsidy rationalization plan, Ahmadinejad helped to spawn an “avalanche” of cash in search of safe areas for investment.[110] With the political, economic, and business climate in the country deteriorating, the value of the rial decreasing, and bank deposit rates kept well below the rate of inflation, this avalanche has gone after relatively safe investments that are likely to preserve their value, such as gold, real estate, art pieces, and especially hard currency. As with any other commodity, the outstripping of supply with demand has brought about an extreme rise in the value of hard currency.[111]

In the meantime, the government’s ad hoc policies for slowing the slide in the value of the rial have included the following: “[Restricting] open market foreign exchange trading, devalu[ing] the official rate of the rial by almost 50 percent, limiting the availability of foreign exchange at the official rate [(12,260 rials to each dollar)] to imports of essential foods and pharmaceuticals,” although subsequently the government did not allocate the requisite funds for the import of medicines, “and setting multiple rates [based upon their level of necessity] for other imports; bann[ing] the import of a long list of luxury goods,” although in practice, the government allowed such imports for those who were well-connected; “require[ing] exporters to sell their foreign exchange to importers at official rather than free market rates; and restrict[ing] the export of over 50 items, including wheat, grains, sugar, vegetable oil, automobile tires, paper, and a variety of metals and petrochemical building blocks.”[112]

Such measures, however, along with the arrest and imprisonment of a number of currency dealers, have at best temporarily slowed the decline in the value of the rial. They have also failed to provide most of the hard currency that importers require to supply the nation’s requisite imports. According to Mohammad Nahavandian, who heads the Iranian Chamber of Commerce, the requirement that Iran’s non-oil exporters (who accounted for only 10 percent of the country’s exports last year)[113] sell their hard currency earnings to importers at the Currency Exchange Center has been able to cover only 10 to 20 percent of the importers’ need for hard currency.[114] Moreover, with the nation dependent on imports for a significant proportion of the raw materials for its industries, the government’s failure to allocate the most favorable foreign exchange rate of 12,260 rials to the dollar for industrial inputs and capital goods has further fueled inflation.

The tripling of the value of the dollar in one year, along with ever increasing transaction costs, has brought about a drastic rise in the price of essential and non-essential imports, upon which the country had become increasingly dependent during the presidency of Ahmadinejad. According to the Iranian Customs Authority, of the $62 billion (legal) imports that entered the country last year, 72 percent consisted of primary material and inputs, 17 percent were devoted to capital goods, and roughly 21 percent were comprised of consumer goods.[115] The decline in the value of the rial, therefore, has been destructive for producers and consumers alike, causing a decline in the economic status of all wage earners, impoverishment of ever-larger segments of the population, and the concentration of wealth into fewer hands.

In January 2013, the Baztab Emrooz website, affiliated with Secretary of the Expediency Council Mohsen Rezaie, put the annual inflation rate at 110 percent (roughly four times the official 27 percent figure put out by the Iranian central bank).[116] Rezaie, meanwhile, in an interview with the Fars News Agency (which is affiliated with the IRGC), claimed that the purchasing power of the Iranian people had halved in the course of the previous year,[117] and Fatollah Hosseini, a Majlis representative, claimed that the unemployment rate in his province of Kermanshah had surpassed 30 percent, with the situation being more or less identical for the provinces of Fars, Lorestan, Alborz, and Gillan.[118]