Iran’s Inflationary Quagmire: Economic Challenges and Potential Instability

Iran’s inflation rate in the previous Persian year (March 2022-March 2023) reached an unsettling 45.8 percent, the state-run Statistical Center of Iran reported this week. The country’s economic plight, combined with the nationwide protests that began in September 2022, places the clerical regime in an increasingly precarious position.

Tehran’s decision to stop publishing detailed inflation data suggests the government is concerned about the alarming inflation rate. Still, the numbers available from the Statistical Center indicate a persistently high monthly inflation rate of 3.7 percent in April.

The situation is further exacerbated by Iran’s non-oil goods trade data, which show a trade deficit of $6.5 billion. While Iran’s oil exports will cover this gap in the non-oil trade, the data suggest that Iran’s imports have become increasingly expensive, adding to the country’s inflationary pressures. The reports that Tehran has spent $140 billion of its $150 billion sovereign wealth fund, the National Development Fund, add to concerns in the market about the government’s access to hard currency. The elevated exchange rate between the Iranian toman and the U.S. dollar, hovering between 50,000 to 56,000 toman per dollar, makes imports costlier and further fuels inflation.

Fuel is a key area of concern, as the rapid increase in consumption may be surpassing, and by some estimates might have surpassed, production — a disparity that is likely to widen during the summer months.

Meanwhile, several factors are creating an arbitrage opportunity for fuel smugglers to buy fuel in Iran and sell it in neighboring countries: The increased dollar exchange rate has substantially reduced the dollar price of fuel in Iran; Iran subsidizes fuel, while many of its neighbors do not; and Tehran fixes the rial price of fuel every few years, increasing the value of subsidies the government offers as the rial loses value.

Furthermore, as the government increasingly faces a budget deficit, raising fuel prices becomes an attractive option to balance the budget. However, such a decision could incite another round of protests, reminiscent of the unrest experienced in September 2022, November 2019, and December 2017.

Iran’s economic predicament is a multifaceted challenge, with mismanagement, sanctions, and domestic revolutionary sentiment all playing a role in fueling instability. In this complex environment, Tehran’s leadership needs to recognize the interconnected nature of these issues and act accordingly.

This entails addressing the root causes of inflation, which is a partly political endeavor, and finding sustainable solutions that do not merely shift the burden onto the Iranian populace. This means adopting sound monetary, fiscal, domestic, and foreign policies that provide a stable environment for economic growth.

Yet four decades of the Islamic Republic’s history show that Tehran is unwilling or unable to engage in meaningful reform. Accordingly, another confrontation is likely between the regime and the disillusioned people who want to overthrow it.

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). Follow Saeed on Twitter @SGhasseminejad. For more analysis from Saeed and FDD, please subscribe HERE. FDD is a Washington, DC-based, non-partisan research institute focusing on national security and foreign policy.