Economic Fallout
There’s no question that sanctions imposed during the Ahmadinejad administration were bad for Iran’s economy – it’s just difficult to trace and to quantify. Iran’s gross domestic product contracted from a high of $600 bln in 2012 to a low of $385 bln in 2015. In 2017, two years after the signing of the nuclear deal, Iran’s GDP had grown to $440 bln, largely on the back of oil sales. Of course, the fluctuation of the price of oil affects these figures, and the lag between the imposition of sanctions and the reporting of GDP data makes it difficult to pin down the exact date on which things turned south. But turn south they did, much as they are now.
The rial’s rate of depreciation was similar to the current rate of depreciation. In 2012, the rial lost over two-thirds of its value, the same rate of loss that it has experienced so far in 2018.
The exchange rate fell from roughly 10,000 rial to the dollar to about 36,000 by the end of the year. Over the course of just one week, it fell from 25,000 to nearly 40,000. The primary cause of the decline was falling demand for Iranian exports – which resulted in falling demand for the rial – as well as limited access to global financial markets and, therefore, to foreign currency.
The government responded, to no avail, by restricting foreign exchange trading and creating an official exchange rate. The government then allowed importers in Iran to purchase critical goods like medicine and certain types of food at the official exchange rate, making these goods cheaper for importers. But it had to pay the difference using its foreign reserves, a policy that was unsustainable.
Iran has responded to the recent plummet in the rial’s value in a similar fashion. It curbed foreign exchange trading and set an official exchange rate of 42,000 rials to the dollar. One difference, however, is the depths of the rial’s fall this year. Today, the currency is hovering around 100,000 to the dollar. Earlier this week, Iran eased foreign currency rules in the hopes that it would stem the fall of the rial and limit its use of foreign reserves.
At first blush, Iran’s current foreign reserves may not seem particularly vulnerable. According to the International Monetary Fund, at the end of 2017, Iran had approximately $120 bln in foreign reserves, equal to roughly 15 months’ worth of imports. (Given the rial’s decline, that figure is likely lower now.) The IMF also noted that many of these reserves may be located outside of the Iranian banking system, in affiliated foreign banks that conduct transactions on behalf of Iranian institutions, limiting the country’s access to the funds. (When the sanctions were lifted, Iran was able to access approximately $100 bln in frozen foreign assets.) According to a Reuters report, which cited anonymous bankers familiar with the Iranian financial system, Iran’s foreign reserves might actually be between $35 bln and $55 bln.
Iran has faced serious inflation before as well. Ahmadinejad tried to spark domestic investment by making credit cheap – by putting a cap on interest rates that banks could charge borrowers. As the rial fell, and prices increased, the real interest rate (that is, the interest rate adjusted for inflation) fell into negative double digits as inflation exceeded 40%.
But one difference between then and now is that the Iranian economy was growing before 2010, which made it better able to withstand high inflation and a declining currency. In 2008, GDP per capita was the highest it had been since 1974-77.
Investment was being used to purchase capital equipment, a sign that people believed the economy was on the upswing. Compare that to today, when Iranians are desperately seeking fixed assets – such as cars and property – as a way to hedge against the depreciating rial and their dwindling savings.
In 2010, when one set of U.S. sanctions were implemented, Iran was coming out of a period of relative growth. But today, Iran is facing serious economic pressure, and it has been for nearly a decade, a brief period of sanctions relief notwithstanding.