Iran’s Inflation Rate in 2022 Will Depend on Fate of Nuclear Negotiations

Iran’s annual inflation rate in 2021 was 43.4 percent, according to the Statistical Center of Iran, but President Ebrahim Raisi is determined to reduce inflation in 2022, since high inflation harms the economy and may foment political unrest. Tehran’s ability to control prices depends on several factors, but the critical element is U.S. sanctions, which have limited the regime’s access to hard currency and global trade.

At 43.4 percent, the 12-month average inflation rate for 2021 was 12.9 percentage points above its 2020 level of 30.5 percent. The global recession of 2020 and the pervasive inflation of 2021, both caused by the COVID-19 pandemic, played a role in the volatility of inflation rates across the globe and in Iran specifically.

However, inflation in Iran has diminished somewhat over the last few months because of multiple factors, including looser U.S. sanctions enforcement and higher Iranian export revenue. Nevertheless, the improving trend makes the Raisi administration hopeful that the worst inflation may have passed. Raisi has made controlling inflation a pillar of his economic policy and has accordingly submitted a contractionary budget to the Majles, or parliament.

Still, Tehran’s ability to curb inflation in 2022 rests primarily on the fate of the ongoing nuclear negotiations, which could lead to the lifting of U.S. sanctions, and on the regime’s fiscal and monetary discipline. The sanctions affect inflation through several channels. First, sanctions reduce Iran’s ability to export goods and generate revenue. Second, sanctions make Iran’s imports more expensive. Third, they reduce Tehran’s access to its export revenue and currency reserves.

Furthermore, if sanctions remain in place, they signal further trouble ahead, adding to inflationary expectations in the market. The Raisi administration may be able to improve inflation slightly in the short term by addressing other factors that push prices up. But without fixing the sanctions problem, inflation will remain high.

Having the fiscal and monetary discipline to follow a contractionary policy can help curb inflation. To advance such a policy, Raisi can limit spending, cut Iran’s fiscal deficit, and refrain from suppressing interest rates. Nevertheless, this task is easier said than done, as it could trigger a recession and would put Raisi at odds with powerful pressure groups, constituencies, and ideological forces. In so doing, it could create political unrest. Navigating this maze requires political skills and technocratic competence that Raisi and his team probably lack.

For example, one way to narrow the deficit is to increase tax revenue, yet taxing an already impoverished population is both difficult and dangerous. Furthermore, key sources of potential revenue are effectively off-limits, since major politically connected players in the economy pay little to no tax. These players include various foundations such as Astan Quds Razavi, which Raisi himself used to run. The president, who probably would like to succeed Iran’s 83-year-old supreme leader, Ayatollah Ali Khamenei, is unlikely to challenge key figures and institutions and force them to pay their taxes.

If Raisi fails to secure full or partial sanctions relief and does not follow disciplined fiscal and monetary policies, inflation will likely remain above 40 percent. Alternatively, if he manages to secure complete or partial sanctions relief and follows a contractionary policy over the next year, he can reduce inflation by the end of 2022.

For now, Raisi seems to be trying to impose monetary and fiscal discipline and use sanctions-busting schemes to dampen inflation. But the fate of Iranian inflation in 2022 is ultimately in Khamenei’s hands. He alone will decide whether to strike a deal with Washington that places meaningful restraints on Tehran’s nuclear program in exchange for sanctions relief.

Saeed Ghasseminejad is a senior advisor on Iran and financial economics at the Foundation for Defense of Democracies (FDD), where he contributes to FDD’s Iran Program and Center on Economic and Financial Power (CEFP). For more analysis from Saeed, the Iran Program, and CEFP, please subscribe HERE. Follow Saeed on Twitter @SGhasseminejad. Follow FDD on Twitter @FDD and @FDD_Iran and @FDD_CEFP. FDD is a Washington, DC-based, non-partisan research institute focusing on national security and foreign policy.