Media Guide: Inflation in Iran (2021)
/By Senior Research Fellow Andrew Lumsden
The term “inflation,” for most, conjures images of Weimar-era Germany or Venezuela, more recently, where the currency has been so devalued that a loaf of bread or a cup of coffee can cost millions. Though not to the same degree as in these cases, nearly all economies around the world experience inflation and keeping it in check requires diligent efforts on the part of national governments.
Iran has struggled with relatively high inflation since the late 1970s, but seemed to have been making substantive progress in curtailing the phenomenon during President Rouhani’s first term. However, the 2018 re-imposition of economic sanctions by the United States followed by the COVID-19 pandemic sent Iran’s economy into a tailspin with inflation soaring to ever-increasing levels. What follows is an overview of Iran’s experience with high inflation over the past three decades and the ways in which its government and population have reacted to it and how they plan to approach the coming uncertain, potentially difficult years.
● What Is Inflation?
Inflation describes a general, continuous increase in the average prices of goods and services throughout an economy. Accordingly, this leads to erosion of the value, or purchasing power, of a currency. The phenomenon is measured through calculating an inflation rate, which is the percentage increase in average consumer goods prices over a quarterly or annual period. For example, if a country has an annual inflation rate of 10%, this means that at the end of the year one unit of currency would only have the purchasing power which 0.9 units had during the previous year.
● Why Does It Occur?
There are many explanations for why inflation occurs, but two are at the center of the discourse. The first is called the “demand-pull” theory. This ties inflation to the simple principle of supply and demand. Demand-pull inflation occurs following a larger than necessary infusion of money into an economy. More people have access to more money and seek to buy more goods. If there has been no significant increase in the supply of consumer goods, prices will increase.
Demand-pull inflation can occur when:
A government decides to print more money to pay its debts and expenses, which, absent any real economic or productivity growth, leads to higher prices. An example of this was the Confederate States of America, which during the American Civil War, did so to pay debts and military costs. Although the money supply increased 11-fold between 1861 and 1864, commodity prices soared almost 30-fold over the same period.
A country experiences a sudden economic boom. An example of this is the 17th century Spanish Empire which suffered crippling inflation and long-term economic instability after its acquisition of vast reserves of gold and silver from North America.
The other key explanation for inflation is called “cost-push.” This approach attributes inflation to increases in the costs of production, either through wage increases or a rise in the global market price of a critical raw material upon which many segments of an economy rely. For example, if labor unions or governments insist upon higher wages, sellers may pass these costs on to consumers, thus raising prices and potentially causing inflation. Also, a rise in global oil prices is a common cause of inflation growth among economies which are dependent on oil imports. Higher fuel prices can quickly result in rising prices for consumer goods as manufacturing and transportation costs are passed on to buyers. However, cost push inflation can materialize only if monetary policy accommodates cost push factors.
● How Has Inflation Affected Iran In the Past?
1960s-1979
Throughout the 1960s and early 1970s, inflation in Iran was well-checked with rates consistently in the low single-digits. However, the “oil shock” of 1973-1974 would herald the beginning of Iran’s decades-long struggle with high inflation. In 1973, the predominantly Arab, Organization of Petroleum Exporting Countries (OPEC), announced that it would be raising the price of oil and embargoing key Western nations in protest of the latters’ support for Israel in the ongoing Yom Kippur War. The embargo ended in early 1974, but oil prices remained significantly higher. While the oil shock sent tremors through economies reliant on oil imports, for producers like Iran, it was a windfall. Tehran’s oil revenue increased nearly 300% in 1974 over the previous year. This rapid infusion of capital however, was only matched with a less than 60% rise in production. This meant that although Iranians enjoyed higher nominal wages and the government invested in new projects, the expanding demand for consumer goods outpaced the supply, thus resulting in price increases which gradually wore down the value of wages. As spiraling inflation stoked discontent and strikes among the working class, Iran’s imperial government responded in part by attempting to raise wages, a move which would be paid for by printing an additional 30 billion rials. This only exacerbated inflation, which has been cited as one of the many causes for the 1979 revolution which ultimately brought down Iran’s monarchical regime and gave rise to the current Islamic Republic.
1979-1989
Inflation continued to worsen in the aftermath of the Iranian Revolution. Although the new Islamic government initially reduced government expenditures and implemented wage and price controls, it faced a new set of economic problems. Nationalization of vast swathes of the economy including large farms and factories led to reduced production due to many experienced, private business owners being replaced by political appointees. Moreover, the revolution caused an exodus of Iran’s wealthy elite and educated professionals. In part because of the November 1979 seizure of the U.S embassy in Tehran, foreign investment dried up and Iran was placed under international economic sanctions. These developments cut off many of the government’s revenue sources leaving serious deficits which were again addressed through simply printing money. Between 1979 and 1980, close to 160 billion rials were entered into circulation, while the country’s GDP decreased by 10% during that same period. Accordingly, consumer prices, and thus inflation, grew. Iran’s inflation rate rose by more than 11% between 1979 and 1980.
The Iran-Iraq War (1980-1988) further exacerbated Iran’s economic woes. Whereas state policies had caused “demand-pull” inflation, the conflict’s devastation added “cost-push” inflation to the mix as production costs grew and supplies dwindled. Iran’s inflation rate grew by an average of 20% each year during the war. In 1988, when the war ended, Iran’s inflation rate grew to nearly 30%, higher than at any period since the Second World War.
1989-2000
The death of Ayatollah Ruhollah Khomeini, the Islamic Republic’s inaugural Supreme Leader in June 1989 represented a critical sea change in Iran’s economic progression. Khomeini’s death paved the way for a new group of Iranian leaders with more liberal attitudes towards trade and economic policy. The administration of President Akbar Hashemi Rafsanjani launched a Five-Year Development Plan aimed at postwar reconstruction, curbing inflation, reducing deficits, attracting foreign investment and diversifying the economy. Under the plan, annual inflation, which stood at nearly 30%, was to be reduced to 8.9% by 1993. This would be accomplished in part through scaling back price, wage and import controls, privatization and the establishment of a market-based exchange rate for the Iranian rial.
The plan had initial success. By 1991, the annual inflation growth rate had slowed to 9%, the lowest since 1986. This progress, unfortunately, would be short lived. Production, export and employment shortfalls, mounting private sector indebtedness and import costs—which more than doubled since the removal of an artificial currency exchange rate—all contributed to skyrocketing consumer prices. By the plan’s end in 1993, annual inflation had reached 24%, well exceeding the target rate.
The Rafsanjani Administration launched a second Five-Year Development Plan in 1995 which involved some privatization and economic liberalization balanced by the retention of price controls. Nevertheless, inflation continued to skyrocket, reaching another post-WWII high of nearly 50% in 1996. Ultimately, falling oil prices, U.S. trade sanctions and political gridlock in Tehran between conservatives and reformists (who won the Presidency in 1997), meant that the Second Plan would be no more successful than its predecessor. By its end in 2000, inflation had increased by an additional 20% over the previous year.
2000-2013
In 2000, a Third Development Plan was launched. Like its predecessors, it involved liberal reforms, but focused more on achieving specific and realistic goals regarding GDP growth, investment, deficits and consumer prices/inflation. This plan coincided with a period of high global oil prices and good weather, so its exact impact may be difficult to measure. However, the Iranian economy showed signs of improvement between 2000 and 2005. Unemployment fell, GDP grew and annual inflation rates stood at little over 10%, whereas under the previous development plans, inflation was growing twice as fast.
In 2005, Mahmoud Ahmadinejad was elected President on a conservative populist platform. He called for a rejection of Western approaches to economics and a redistribution of wealth towards low-income families and underdeveloped regions of Iran. Although Ahmadinejad’s economic policies would achieve marginal reductions in income inequality by 2011, they also rekindled high inflation. Ahmadinejad ordered state-run banks to grant large loans to consumers and investors at low interest rates. This had the same impact as printing more currency as more money ended up in the hands of consumers while there was no commensurate increase in production and supply. During the first seven years of Ahmadinejad’s administration, inflation rose by an annual average of about 18%, compared with a rate of 16% under his predecessor, reformist leader Mohammad Khatami.
The situation would only deteriorate, as beginning in 2012, the United States, European Union and United Nations began imposing economic sanctions on Iran over its nuclear program. International sanctions limited much-needed oil revenue, foreign investment and imports. Economic growth slowed, and inflation rose. By the time Ahmadinejad left office in 2013, inflation was growing at a rate of nearly 35%.
● How Did Iran’s Inflation Experience Change Under President Rouhani?
Hassan Rouhani was elected President of Iran in 2013 on a platform which included tackling runaway inflation. Upon taking office, the Rouhani administration moved to secure relief from international sanctions by entering negotiations with the so-called P5+1, (the United States, United Kingdom, France, Russia, China and Germany). It also began reforming key Ahmadinejad-era economic policies. State spending was curtailed to reduce deficits, unproductive government programs were ended, broad fuel subsidies were replaced with targeted social welfare programs and currency exchange rates were reformed.
Rouhani’s policy approach showed initial success. By 2014, Iran’s rate of economic growth had reached 4.6%, a significant improvement over 2013’s rate of -0.3%. Growth would further expand after the Joint-Comprehensive Plan of Action (JCPOA), Iran’s deal with the P5+1 which relieved most international sanctions, was signed in 2015. By 2016, Iran experienced an economic growth rate of 13.3%, a 25-year high. Additionally, JCPOA, coupled with Iran’s improving international reputation and economic performance caused the country’s currency, the rial, to appreciate in the international market and the black market. A strengthening currency and economic growth helped to bring down the rate of inflation in Iran, which plummeted nearly 20% in Rouhani’s first year. By 2017, Iran’s annual inflation rate had reached a twenty-six year low of 9%.
Unfortunately, the benefits of Iran’s economic uptick largely failed to reach the country’s working class. New wealth was essentially confined to the automobile and oil sectors, while food prices continued to rise. Furthermore, the predicted surge of post-JCPOA foreign investment failed to materialize, undoubtedly due in large part to remaining U.S. sanctions not covered by the deal and the 2016 election of Donald Trump to the U.S. Presidency. Trump and his party had long been critical of JCPOA and he vowed to withdraw from it if elected. In July 2018, President Trump announced that the U.S. would no longer recognize JCPOA and would re-impose sanctions on Iran. All sanctions lifted by JCPOA were formally re-introduced in November 2018.
How Did The U.S Exit From The JCPOA Impact Inflation in Iran?
The U.S. withdrawal from the nuclear deal delivered a body blow to an already fragile Iranian economy. The Iranian economy experienced two full years of recession, shrinking by 6% in 2018, 6.9% in 2019. The rial also experienced sharp depreciation in late 2018, plummeting from a value of about 36,000 against the U.S. dollar at the beginning of the year to about 42,000 against the dollar by January 2019, a rate around which it has remained since then. Accordingly, inflation rates have risen.
According to the International Monetary Fund (IMF), Iran’s inflation rate exploded in 2018, growing to 30% and then to 34% the following year. However, Iran’s relatively low external debt and dependence on foreign investment has contributed to some stabilization of the rial and therefore, inflation rates are no longer growing as rapidly as they did in the immediate aftermath of U.S. sanctions reimposition. Nevertheless, growing inflation has had a very real impact on the price of staple consumer goods relied upon by working-class Iranians.
After remaining stable throughout 2016 and 2017, costs of food, rent and utilities, clothing, healthcare and education began spiking in the summer of 2018. By February 2020, the eve of the COVID-19 pandemic, compared with the previous year, transportation costs had grown by 70%, food costs by about 60%, clothing prices by about 40%, rents and utilities by about 30% and healthcare and education by about 20%. These inflationary increases are particularly concerning given that some of the fastest-rising expenses, namely food and housing, constitute substantial portions of household budgets for average, working-class Iranians. In rural areas, food costs can reach up to 43% of average household expenditures. In the cities, food costs make up around 35% of the average budget, with housing costs constituting an additional 30%.
How Has The COVID-19 Pandemic Impacted Iran’s Struggle With Inflation?
Iran is among the countries hardest hit by the COVID-19 pandemic. Over 1.8 million cases of the virus have been reported and more than 60,000 Iranians have lost their lives. The full economic toll of the pandemic in Iran may not yet be fully understood, however, it is clear that the virus has exacerbated existing economic and inflationary problems. Iran’s 2020 inflation rate stands at about 36%. Much of this inflation has been driven by stark increases in the costs of food and housing, meaning that poor and working-class Iranians are bearing the brunt of COVID-era inflation. It should also be noted that due to the prevalence of black market commerce in Iran, inflation rates experienced by ordinary people may far exceed those officially reported.
Between April and November 2020, some of the pandemic’s darkest days, costs of food and housing grew by nearly 30% compared to the previous year. Clothing costs increased by 33% and transportation costs exploded by nearly 70% over the previous year. It is also estimated that over 1.5 million jobs have been lost due to COVID lockdowns. This inflation, combined with pandemic-related employment reductions, is expected to result in a 20 percentage point increase in Iran’s poverty rate over the coming year, which would mean that a full one-third of the country would be living under the international poverty line.
Like many countries, Iran has attempted to mitigate the economic impact of the pandemic through cash transfers to economically vulnerable citizens. Between April and June 2020, Tehran distributed payments of between 1 and 6 million rials (~US$24 to US$142.50) to some 3 million low-income households, with payouts determined by household sizes. Loans of up to 10 million rials (US$ 237.50) were also made available to about 21 million eligible households. Though the World Bank notes that these measures have the potential to hold poverty rates to pre-COVID levels, spiraling inflation seriously threatens to “deteriorate” any “real value” these cash transfers may have for vulnerable families.
Despite initial projections of another recession, the IMF reports that Iran’s economy actually grew by 1.5% in 2020. The head of the country’s Central Bank attributes this growth to a surge in the manufacturing and agricultural sectors. Other analysts note in addition that Iran had a much shorter COVID ‘lockdown’ period than most countries, having begun easing its pandemic restrictions from April of 2020. However, this has not changed the trajectory of inflation, which grew to increased from 34% to 36% last year. and is expected to rise until at least 2022.
How Have Iranians Reacted to Inflation Over the Years?
Conversion
Particularly over the past decade, growing numbers of Iranians have responded to inflation by converting their rials into foreign currencies and moving it out of banks, or out of Iran altogether. The imposition of nuclear-related sanctions of Iran in 2012 and the accompanying spike in inflation, sparked a wave of primarily wealthy and middle-class Iranians to convert their rials into U.S. dollars. To escape the watchful eye of their government, many of those converting funds tended to bring their money into neighboring Afghanistan for conversion, sometimes with the aid of Afghan middlemen known as hawalas in exchange for a 5%-7% cut. Because monitoring of the flow of money in and out of Afghanistan is poor, the amount of Iranian cash exchanged in Afghanistan is unknown, but it is estimated that some US$4.6 billion in converted funds were flown out of Kabul Airport in 2012 for safe keeping in other countries, primarily in the United Arab Emirates.
Again, given the opaque nature of the centuries-old hawala system, the extent to which these underground conversions are still taking place is unknown. However, it is clearly understood that the COVID-19 pandemic has impacted the hawala network as it has dried up cross-border trade across the Middle East and forced the closure of the small shops and businesses which once facilitated this informal banking system.
Another rush to convert took place in April 2018, when the U.S. sent strong indications that it was preparing to withdraw from JCPOA. These conversions took place largely in Iran itself where crowds of people, panicked about the rial’s recent decline, flocked to banks and other financial establishments across the country to convert their cash into foreign currencies. Banks and exchange vendors soon began to run out of U.S. dollars and some suspended exchange services altogether. The Iranian government moved quickly to crack down on this run on the banks. It prohibited the holding of more than 10,000 dollars or euros outside of banks, under penalty of prosecution and sent police to round up unofficial money-changers at the bazaars. The New York Times and the Financial Times reported that some seeking to buy U.S. dollars expressed a desire to escape coming inflation by not only securing foreign currency, but withdrawing their funds from the banks entirely and storing them at home.
While some inflation-related bank withdrawals have been reported during the COVID-19 pandemic, there have not been the type of massive ‘runs on the banks’ as in the past. Instead, bank loans, particularly for businesses, have become more common. Iran’s banks lent out some US$64.2 billion in the last Persian year (March 2020-March 2021), a 96% increase over the year before.
Social Action
When faced with particularly severe inflation which degrades standards of living and restricts access to basic provisions, Iranians, particularly in urban areas, have on several occasions, including in and since 1979 responded to poor economic conditions with large-scale contentious social action.
Some notable examples of inflation-linked demonstrations in Iran over the past 30 years include:
o 1990
In 1990, strikes and demonstrations erupted across Iran, particularly among working-class urban residents whose quality of life was rapidly being eroded by inflation. At this time, the government’s development plan had yet to produce significant results while food and housing prices had skyrocketed over the preceding six years. Between 1984 and 1990, rents in Tehran’s working-class areas increased 134% while, across the country, required deposits went up 900%. Rising housing and food prices were responsible for numerous major demonstrations in Tehran and Isfahan in the summer of 1990. Moreover, in January and November of that year, large strikes broke out at the National Shoe Factory and among public school teachers in Yazd, Shiraz and Isfahan as workers became fed up with stagnant wages as costs of living soared.
o 1993-95
As inflation rebounded following the failure of the First Development Plan in 1993, more sporadic demonstrations broke out across Iran’s cities. These protests, particularly those in the city of Mashhad where demonstrators occupied police stations, led to the Islamic Revolutionary Guard Corps and the Law Enforcement Force of the Islamic Republic of Iran (NAJA) taking up more active roles in suppressing public protests.
o 2009
Inflation arguably played a role in the massive demonstrations which broke out across Iran in June 2009. Incumbent President Mahmoud Ahmadinejad was declared the winner of that month’s presidential election by a nearly 30 percentage point margin over reformist candidate Mir Hossein Moussavi. As accusations of irregularities such as unusually fast tabulation and certification of election results and the barring of observers at polling stations, began to emerge, demonstrators took to the streets across Iran challenging the outcome of the election in what has been described as the “most significant threat to the regime’s grip on power to date.” Security forces reacted swiftly, killing between 25 and 100 protestors and arresting 2,500 between June 13 and June 19. Inflation lent credence, in the minds of many demonstrators, to charges that the 2009 election had been rigged. At the time of the election, Ahmadinejad’s policies had caused a 14-year record increase in inflation, with unemployment also on the rise. These economic factors, coupled with the unusually large size of Moussavi’s rallies in battleground districts suggested that Ahmadinejad’s landslide victory could not have been achieved legitimately. Other analyses however, suggest that Ahmadinejad still had strong support among the urban poor and rural residents, whose votes may have granted him a legitimate victory.
o 2017-2018
The wave of popular demonstrations that washed over Iran and captivated the world in the waning days of 2017 perhaps more clearly than any other post-1979 movement highlights the link between inflation and social unrest in Iran. In 2017, a disease outbreak among chickens caused the price of eggs to increase 50%. This price hike accompanied other spikes in the price of milk and meat, as well as stubbornly high unemployment and proposed tax increases.
Small demonstrations began in Mashhad, Iran’s second largest city, on December 28th and quickly spread across the country, popping up in no less than 100 cities. In all, it is estimated that tens of thousands of people demonstrated between December 28th and the movement’s effective end on January 9, 2018. Though the protests initially focused on the economic situation of the country, they quickly took a political turn. Many blamed the economic situation on the government, which demonstrators noted was spending heavily on military and financial aid to allies in Syria, Lebanon, Yemen and the Gaza Strip. Early chants of “Where’s my paycheck,” and “The people are begging,” were soon joined by “Leave Syria,” “[Supreme Leader] Ali [Khamenei] should be ashamed” and “Death to Rouhani.”
Though authorities initially dismissed the protests as the work of “counter-revolutionaries,” they soon cracked down. Across the country, it is estimated that 25 people were killed and about 4,000 protestors were arrested over the course of the unrest.
o 2019
The re-imposition of U.S. sanctions on Iran in 2018 had a very quick and devastating impact on the country’s economy. In response to falling revenues and a rapidly depreciating currency, in November 2019, Iran’s Supreme Council of Economic Coordination, headed by President Rouhani, Chief Justice Ebrahim Raisi and then Parliament Speaker Ali Larijani, agreed to slash fuel subsidies. This caused gas prices to rise from about US$0.24 per liter in 2018 to US$0.36. Furthermore, private vehicles would be limited to 60 liters (16 gallons) of fuel a month, attempts to purchase more would result in additional fees.
The price hikes and resulting inflation sparked massive nationwide protests beginning on November 15, 2019. Across Iran, demonstrators decried the new policies. They marched and blocked roads while calling for fuel boycotts and the resignation of President Rouhani and other key government figures. Authorities were ruthless in their crackdown. Amnesty International reports that over the first three days of the protests, the period of greatest popular activity, security forces killed at least 304 protestors, including 12 children. Reuters reports that according to its sources, the death toll may actually have been over 1,000.
o 2020-2021
Beginning in the summer of 2020, a wave of senior citizen-led protests broke out across Iran. Retirees are decrying the “astronomical inflationary pressures” which exist in the current economy and are depleting the value of their pensions. In addition to failing to adjust pensions for inflation, the government has also hitherto failed to properly allocate some US$80 billion earmarked by law for retiree pensions.
These demonstrations tend to feature rallies in front of the Parliament building in Tehran and before government buildings in other major cities such as Tabriz, Mashhad and Isfahan. In January 2021, movement leaders issued a statement demanding, among other pension reforms, that pensions be increased by 50% to counter spiraling inflation.
It is important to note that the COVID-19 pandemic has likely limited the public’s ability to engage in these types of social actions. The government has issued periodic bans on public gatherings. Moreover, regardless of state policy, large demonstrations pose a very real risk of spreading the virus, which may well be on the mind of retiree activists in particular. Had the pandemic not occurred, inflation-related protest movements might have been much larger and more widespread, as in the past.
How Does Tehran Plan to Combat Inflation in the Coming Years?
Re-imposition of U.S. sanctions has made Iran’s decades-long struggle with inflation exponentially more difficult, given that economic growth, a strong currency and expansion of domestic productive capacity are essential to keeping inflation in check. Opportunities for this have been limited, as Iran’s export revenues have plummeted 78% since 2018, and many foreign investors—including many who had previously pledged to defy U.S sanctions such as the French oil giant Total, and China’s state-run oil company— have been shying away from doing business with Iran.
In the immediate aftermath of the U.S. move, Iranian leaders responded by throwing ever-increasing support behind the so-called “resistance economy.” Under the ‘resistance economy’ model, proposed by Ayatollah Khamenei in 2012, Iran would insulate itself from the global economy through import-substitution industrialization, import bans, protectionist tariffs, greater emphasis on intra-national as opposed to international trade, reducing dependence on oil exports and keeping Iranian money out of multinational banks.
In June 2018, Tehran banned the import of 1,339 consumer goods including various home appliances, textiles, footwear and furniture which officials assert could be produced locally. Furthermore, it announced plans to revitalize gold and copper mines across the country as a means of “increasing employment, creating added value for local communities, and ultimately achieving the goals of a resilient economy.” Domestic demand for precious stones in Iran has increased 200% since May 2018 and officials estimate that the country has some 340 metric tons of gold along with large deposits of zinc, copper and iron yet to be exploited.
How Successful Have These Measures Been?
Iran’s economic responses to U.S. sanctions have had some successes, evidenced in part by the country’s ability to buck global trends and achieve modest economic growth in 2020.
The Ministry of Industry, Mining and Trade announced in February that its import ban on over a thousand consumer goods has saved Iran some US$5.8 billion over the past year. The Ministry also reports significant increases in domestic production of household consumer goods. Between March 2020 and January 2021, there has been a 30% increase in the domestic production of refrigerators and freezers over the previous year, a 53% increase in production of washing machines, 44% increase in the production of television sets and a 23% increase in vehicle production. The Ministry announced moreover that Iranian manufacturers have successfully indigized the knowledge for manufacturing 70-75 percent of the country’s home appliance needs, and that restrictions on importation of industrial parts and manufacturing equipment has saved the country an additional US$2.2 billion.
In January 2021, the Chairman of the Iranian Textile Exporters and Manufacturers Association announced that due to the exit of many foreign brands and Tehran’s restrictions on textile imports, domestic clothing production grew by 70% between March and November 2020. According to the country’s Customs authority, Iranian garments are still exported to nearly 30 countries including Kuwait, Australia, Germany, Japan, Nigeria, Pakistan and Denmark. Production of Iran’s iconic handwoven carpets has also expanded, increasing by 34% This industry is credited with creating over 190,000 new jobs.
Tehran’s plans to revitalize some dormant mines has also borne some fruit. The head of Iranian Mines and Mining Industries Development and Renovation Organization announced in November 2020 that the country had successfully revived more than 300 shuttered mines since 2019, and intends to revive some 672 mines in the coming year. The revived mines will produce key industrial minerals such as chromite, manganese, hematite, and dolomite, iron ore, copper, and construction stone.
What May the Future Hold For Iran’s Economy and Inflation?
Though Tehran’s initiatives may have helped avert the economic collapse proponents of sanctions in the U.S. hoped would occur, analysts doubt that such measures will be enough to generate meaningful economic growth or substantively check inflation in the near future. Iran’s economy is projected to grow by 2.5% in the current Persian year (March 2021-March 2022), and by 2.1%, the following year. Even if these predictions come to pass, it may mean little given that the economy has shrunk by nearly 20% since 2017.
Moreover, the World Bank warns that for Iran in the coming years, “inflationary pressures are expected to remain high due to economic uncertainties.” In addition to the impact of U.S. sanctions on Iran’s economy, the pandemic has caused demand for Iran’s non-oil exports from its closest geographical and geopolitical partners (Iraq, Afghanistan, China and the United Arab Emirates), to nearly halve in the past year. Despite the ongoing development and distribution of multiple COVID vaccines, it remains unclear when the economic impact of the pandemic will fully dissipate.“Fiscal constraints” are also liable to “limit the scope” of Tehran’s future economic and pandemic-related initiatives. Inflation is expected to grow by about 27% in the current Persian year, and by an additional 24% the following year.
With presidential elections coming in June, the new Iranian administration will have two options in combating inflation. The first would be to make a deal with the United States which relieves Trump-era sanctions. Analysts note that “the lifting of U.S. sanctions would have a large positive economic impact,” for Iran’s economy, an impact which could prompt strong economic growth and inflationary reduction in the coming year and beyond. Unfortunately, as AIC has explained in previous reporting this year, ongoing political dynamics in both Washington and Tehran indicate that a quick reversal of U.S. sanctions is by no means a foregone conclusion, even with the end of the Trump Administration.
The other path for Iran’s incoming leaders would be to continue pursuing the ‘resistance economy’ model which has already borne some economic fruit. It must be remembered however that recent growth has failed to significantly curb inflation and, at the rates of growth Iran is currently experiencing, and is currently projected to experience in the near future, it may take the country at least a decade to even reach its 2017 economic levels.
