Hyperinflation, Sanctions Put Pressure on Iranian Regime

Iran’s government has no good options to fight the depreciation of its currency.

View of Tehran, Iran, July 8, 2010
View of Tehran, Iran, July 8, 2010 (Nima Hopographer)

Pressure on the Iranian regime is mounting as the country’s currency is losing its value at record pace. Sanctions against the Islamic republic, which Western nations suspect is developing a nuclear weapons capacity, have caused the rial to collapse, sparking protests in the streets.

The government has responded by cracking down on demonstrations and shuttering Tehran’s foreign exchange black market. The depreciation of the rial continues, however, which could have political ramifications shortly.

Intended effect

“The sanctions are waging a war of attrition with the Iranian people,” says Farnaz Amini who is a PhD candidate at Claremont Graduate University and a contributing analyst for the geostrategic consultancy Wikistrat. She wonders how much longer the government, which derives most of its legitimacy from expensive welfare programs, can control the situation.

What’s certain is that the sanctions “are having their intended effect,” she says.

If one of the goals of the sanctions is to create an environment conducive to mass revolt, there would not be a better time than in the weeks ahead.

It may be a matter of weeks before demonstrations spread because that’s how long it now takes for prices to double in Iran.

Inflation

Steve H. Hanke, a Johns Hopkins University professor and senior fellow at the libertarian Cato Institute, estimates that inflation has reached nearly 70 percent. The official exchange rate against the United States dollar hasn’t shifted so much but “the official and black market rates have increasingly diverged since July 2010,” he writes.

The rial‘s death spiral is wiping out the currency’s purchasing power. In consequence, Iran is now experiencing a devastating increase in prices — hyperinflation.

Government subsidies, which Iran’s poor rely on, can’t possibly keep up with the rising costs of food and fuel without making the problem worse. If the state prints more money to finance expenditures, inflation will only rise faster. But short of acquiescing to Western demands to have the sanctions lifted, that’s the only policy at Iran’s disposal to try to prevent mass unrest in the short term.

Leave a reply