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Iran: Currency crunch as sanctions bite

A FEW DOLLARS LESS: The lack of access to dollars has contributed to the depreciation of the rial and led to higher costs of imported products

With Iran facing growing international duress, Tehran’s countermeasures could well intensify the country’s economic problems.


 

The EU implemented a new round of economic sanctions against Iran on July 1. The move is part of an international effort to pressurise Tehran into returning to negotiations on uranium enrichment and to contain Iran’s growing regional ambitions. The Iranian economy has been hammered by sanctions, including US-backed measures. Oil exports and government revenues have dropped, reducing the value of the Iranian rial by half and adding to the country’s chronically high inflation.

The sanctions are designed to prevent Iran from acquiring and using US dollars and, to a lesser degree, euros, both of which are critical for any country participating in the international economy. The lack of access to dollars has contributed to the depreciation of the rial and led to higher costs of imported products and even higher inflation. Iran is attempting to cope with the challenge in several ways, such as instituting a multi-tiered exchange rate system, restructuring domestic subsidies and setting price controls. However, Iran’s countermeasures will likely exacerbate the country’s economic problems, and Tehran will be forced to rely on its security apparatus to enforce unpopular economic policies as pressure mounts.

As a result of the sanctions, Iran’s crude exports in June declined to their lowest level in 20 years. Oil is the primary source of US dollars for Iran, and the export drop has made paying for Iran’s dollar-denominated imports more difficult. Though the government’s foreign exchange reserves are sufficient to cover its immediate expenses, Tehran has taken steps to cut spending.

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