How the Iranian regime drove inflation up and the Riyal down by wrecking the nuclear talks
The country’s economy is in freefall, with the Iranian currency Riyal at a low point, and inflation out of control
Andrew R.
February 2022

The Iranian regime continues to behave as if it were under siege, its focus riveted to its nuclear program, which it sees as a means to gain concessions from the major powers. Foreign policy influence completely takes priority; meanwhile the country’s economy is in freefall, with the Iranian currency Riyal at a low point, and inflation out of control.

The recent nuclear talks between the P5+1 (UN Security Council's five permanent members -- China, France, Russia, the United Kingdom, and the United States plus Germany) and Iran held in Vienna in December 2021 serve to prove this point. Right at the start, they were rocked by Iran’s declaration that it would increase its process of uranium enrichment, the Guardian reported.

The result was a dramatic drop in the value of the riyal, boosting Iran’s already skyrocketing inflation. The Iranian riyal was selling for as much as 302,200 rials to the US dollar on the unofficial market on December 5, up from 294,000 the day before, according to Reuters. The level was last seen in October 2020, when the rial crashed to record-low prices against the dollar. The Iranian riyal is currently the weakest circulating currency in the world, as of January 2022, with one dollar worth 291,556 riyal at this writing.

But the government could change its focus for the sake of an economic recovery. After the JCPOA, Iran’s economy enjoyed a modest recovery. Then its GDP per capita halved from when the Trump administration withdrew from the nuclear deal and reimposed sanctions to last year, according to the World Bank. Inflation has risen, as the value of the riyal declines. The World Bank expects Iran’s public debt to surpass 50% of GDP this year.

But, with the value of the riyal declining, and prices of global goods rising, one would expect action on inflation by the Iranian government. In November, the government said that overall inflation over the prior 12 months was 44.4%. Food and beverage prices rose particularly high, up by 59.6%, according to analyst Henry Rome. The classic tactic to combat inflation is for the central bank to raise interest rates. But the key interest rate for the riyal is 18% at present, among the highest in the world, so the central bank is powerless to take action. Meanwhile, foreign exchange reserves are melting down, at $12.2 billion in January 2022, according to the International Monetary Fund. Reserves are at a dangerously low level and analysts say that it is only oil sales to China that are staving off a currency crisis. The government is running out of dollars to share with oil importers, and that means they purchase greenbacks on the open market, pushing the riyal lower.

The current financial position of the government is so vulnerable that President Raisi has instructed all government entities to sell off their excess assets.

Hardline Iranian regime ignores the economic consequences

President Ebrahim Raisi has promised to create 2 million jobs in Iran, but the government has no resources to support job creation, while businesses are struggling to stay afloat as the value of the riyal declines and inflation makes the cost of raw materials unaffordable.

Poor management of the economy has led to 50% of the population living below the poverty line. Iranians have taken to the streets repeatedly in recent months, demanding better living conditions and building pressure on Raisi’s government to come to an agreement with the p5+1 and reopen the economy – sanctions have even closed the banking system to international dealing.

“The economic populism of President Raisi has thus far yielded no material fruits whatsoever for the population despite the new hardline elite’s unprecedented access to the country’s wealth and resources.,” writes Ali Fathollah-Nejad, senior Research Fellow with the Afro-Middle East Centre, Johannesburg.

Why does the Iranian regime continue to focus on its nuclear threat, when the consequences to the country’s economy are disastrous?

Some analysts blame Iran’s Supreme Leader Ali Khamenei for doggedly resisting increasing pressure for the government to mitigate the hardline stance at the nuclear talks and take action on the economy.

Khamenei reportedly will not accept a settlement at the nuclear talks. He shrugs off the economic distress, and is expected to refuse any compromise. Analysts predict that this will lead to an economic catastrophe for the Iranian nation.

Khamenei’s intransigence has led the current government to bring the economy to a standstill – some say that the government cannot take charge of the economy under these conditions.

Support from Khamenei prevents any possible reform of the major economic entities in the country, all of which are state-controlled. The largest of these is the state-owned National Iranian Oil Company (NIOC) followed by the economic empire of the Islamic Revolutionary Guards (IRGC), which is estimated to account for up to two-thirds of GDP and is assigned continually increasing funds by the government.

These along with the ‘bonyads,’ massively wealthy religious foundations, are at the center of a web of corruption which has created a number of new millionaires at the time when the country’s middle class has almost disappeared.

Khamenei’s rapport with these state-controlled entities and the ‘bonyads’ was signalled by his support for Raisi, who led the Bonyâd-e Âstân-e Qods-e Razavi, the wealthiest of these organizations, from 2016 to 2019.

It is perhaps no surprise that a politician with this background is unlikely to initiate economic reforms on the scale that Iran needs. It is far easier to keep the spotlight on the drama of the nuclear accords, than it would be to create a fair and just economy in Iran.

Leaks from the Islamic Republic of Iran’s Government Agencies