Iran's Economy Is on the Verge of Collapse

Many economics experts believe that Iran is entrenched in a financial death spiral.

Officials within the regime of the Islamic Republic of Iran (IRI) claim that the gravity of economic crisis there is overstated.  Furthermore, Islamist regime-sponsored lobby factions in the United States, such as the National Iranian American Council (NIAC), argue that fiscal predicaments the country is facing are consequences of malign U.S. policies toward the Iranian regime, including the enforcement of crippling economic sanctions.  The truth is, precarious economic circumstances in Iran have been primarily – if not exclusively – triggered by a plethora of iniquitous economic policies adopted by the regime.  This is evident by various indicators.

The conversion rate of Iranian rial (IRR) to foreign currencies is one of the most important tools by which the country's economic well being can be gauged.  The IRR has lost its value by nearly 70% since April 2018, a month before U.S. president Donald J. Trump reimposed sanctions on the Iranian regime over its rogue nuclear activities. 

A graph showing trends in the value of the Iranian rial over a three-year period.  Notice the steep decline beginning in April 2018.

In order to uncover the reasons behind the pervasive devaluation of Iran's currency, it is important to examine key factors that influence the exchange rates.  There are at least 7 factors that influence the value of any foreign currency, including the U.S. dollar (USD): inflation rate, interest rates, the country's current account, public debt, terms of trade, political stability, and rents (a to f).

Key factors that influence national currency value.

Inflation Rate

Fluctuations in the rate of inflation strongly affect national currency value and conversion rates.  The lower the inflation, the higher the value of a country's currency, and vice versa.  Depreciation of national currency leads to an increase in interest rates at banks and financial institutions.  According to Professor Steve Hanke, an American applied economist and a distinguished professor at Johns Hopkins University, Iran's annual inflation rate on September 20, 2018 was 283%.

Iran's annual inflation rate, measured for  09/19/2018.

Interest Rates

Interest rates behave parallel to inflation rates.  This means that the higher the profit rates, the higher the national currency value is.  A prerequisite for a positive correlation is if a country can attract foreign capital.  At present, large companies and enterprises are reluctant to invest in Iran because of the regime's hostile policies and militant activities.  Subsequently, Iranian banks and financial institutions that have not been able to absorb foreign investments are compelled to raise their capital by lending with high interest rates and brokerage.  This is turn creates a vicious cycle in which high interest rates also increase the rate of inflation – what we are seeing now.  According to Hanke's analysis, from July 26 to July 29, 2018, the inflation rate increased from 151% to 203% – a 52% increase in the inflation rate in just three days.

Fifty-two-percent increase in inflation rate in just three days.

Country's Current Account

This includes the total number of trades – such as export, import, debt, etc.  The deficit in the current account is due to the surplus in imports over exports, which is one of the main factors behind the devaluation of national currency.  According to the statistics by the IRR Central Bank, there was a significant depreciation in the country's account during a five-year period from 2012 to 2017.  For example, oil revenue dropped from a surplus of 25 billion USD in 2012 to approximately 14 billion USD in 2017.  Moreover, the total exports of goods and services in 2012 was 69 billion USD, which decreased to 52 billion in 2017.

Public Debt

As public debt grows, foreign investments that could absorb this deficit decrease.  This will lead to an even higher inflation rate.  Noting this debt, international investors will not accept the risk of remaining in the Iranian market.

According to the Research Center of the Islamic Consultative Assembly, the public debt by the end of June 2017 was 6,250 trillion IRR.  "Today, liquidity is more than 16,000 trillion IRR, which is greater than the Gross Domestic Product," claims Mohammad Hossein Farhangi, a member of this assembly.  However, a review of government financial performance in April 2017, compared with April 2013, shows significant growth in the Iranian government's debt indicators.  The most significant changes in the economic records of the government are 174% growth in liquidity and 134% growth in government's debt to banks.  Current conditions manifested by the abandonment of foreign investor companies, high inflation rates, and the fall in the value of the IRR against the USD all indicate that the amount of government debt has risen sharply over the past year.

Terms of Trade

Related to current accounts and balance of payments, terms of trade is the ratio of export to import prices.  A country's terms of trade improve if its export prices rise at a greater rate than those of its imports.  This results in higher revenue, which causes higher demand and an increase in the value of the country's currency and, subsequently, a more favorable exchange rate.  From 2014 to 2016, the terms of trade ration decreased by almost 50% – that is, from 400 in 2014 to 200 in 2016.  In the first eleven months of 2017, non-oil exports reached 41.6 billion USD and imports 47.6 billion USD.  This in and of itself indicates the fact that the regime shaped a dismal economy in Iran, well before President Trump's decision to decommission the Joint Comprehensive Plan of Action, known commonly as the Iran nuclear deal.  

Political Stability

The more politically stable a country is, the more attractive it will be for foreign investors.  According to the Fragile States Index 2018 data, Iran ranks 52nd among 178 countries with respect to political instability, between Cambodia (ranked 53) and Papua New Guinea (ranked 51).  The regime has adopted a policy of regional hegemony, funding terrorist factions including Hezb'allah, Hamas, Islamic Jihad, the Houthis, Hashd Al-Shaabi, and the Taliban.  It instigates conflicts in Yemen, Syria, and Iraq.  Last but not least, it abuses human rights inside Iran.  In addition, mass protests against the regime have created uncertainties at a global level as to how long the regime will survive.

During the protests, within a week, the value of the IRR fell by more than 30%.  This means that within a week, the Iranian people became 30% poorer.  On Sunday, July 29, the price of the U.S. dollar was 100,000 IRR, and on the same evening, the dollar reached 112,000 IRR.  At one point, within only a few hours, the IRR fell by 12%.

Economic Rents

Economic rent is the amount of money earned that exceeds what is economically or socially necessary. Left unchecked and unregulated, it can contribute to rising inflation.  On July 29, 2018, the official exchange rate was 44,030 IRR per 1 USD, while each dollar was traded on the black market for about 112,000 IRR.  Those who used government USD rents gained 154% profit in just a blink of an eye.  A few months ago, a member of the Islamic Consultative Assembly announced that 30 billion USD had exited the country without a trace or explanation.  This is a significant amount of currency that left the country while millions of Iranians live in absolute poverty.  These rents and the generation of astronomical profits for certain individuals linked to the regime leadership are another factor contributing to the rise in inflation and the depreciation of the national currency.

Economic rent has contributed to rising Iran's inflation rate.

In conclusion, it must be said that over the past four decades, the IRI regime has driven Iran's economy to the brink of collapse, and the use of sanctions will only speed this downfall. 

Babak Vaziri is an Iranian sociopolitical activist and blogger based in Iran.  Sina Nahavandi is an Iranian sociopolitical activist and blogger based in the United States.  Andi Frouzèche is a French-Iranian attorney, sociopolitical activist, and blogger based in France.  For more information about Iran, you can follow Babak Vaziri on Twitter @Babak_1992.