Yes, Iran’s Economy Is Suffering—But It’s Not All About the U.S.

How Will Iranians Respond to the Currency Crisis?

Iranian President Hassan Rouhani addresses the Innovation and Industry Forum during an official visit in Bern, Switzerland, July 2018. Denis Balibouse / REUTERS

Iran’s currency, the rial, has lost two-thirds of its value in the last six months, much of it after the United States formally withdrew from the nuclear agreement in May. In Washington, the fall of the rial is widely seen as a consequence of U.S. sanctions and a sign of economic collapse that could bring down the Iranian regime. While the first claim is generally true, it is overstated, and the second is based on false assumptions.

Although U.S. President Donald Trump has hurt the Iranian economy, the unexpected depth of the rial’s decline owes less to U.S. policy than to poor decision-making in Tehran and structural weaknesses in Iran’s economy. A proper understanding of the factors that deepened the crisis suggests that the country’s acute hardships may ease or disappear as Iran adjusts to the new situation. Iran’s foreign exchange market needs to be understood on its own terms in order to avoid the common mistake of equating the fall of the rial in the free market with economic collapse, rising poverty, and increasing protests that can weaken the regime.

Did Trump Cause the Crisis?

In the months after January 2016, when the JCPOA went into effect, the optimism in Tehran was palpable. European executives filled five-star hotels in search of investment opportunities, and airport taxi services upgraded their fleets to better suit their foreign customers. During the Iranian fiscal year in 2016–17 (March 2016 to March 2017), Iran’s economy grew by 12.5 percent, even with some U.S. sanctions still in effect.

But by mid-2017, it became increasingly clear that the JCPOA was “on life support” and that Iran would not renegotiate the deal. The specter of sanctions took the wind out of the economy’s sails. Even before Trump announced that he would abandon the JCPOA, Western executives began packing their bags. For large international companies, the risk of losing access to U.S. markets far outweighed uncertain profits in Iran. Gross fixed capital formation fell, GDP growth slowed, manufacturing output dropped,

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