The Iranian Rial has remained a great controversy among investors, economists, and politicians for quite some time now. There are lots of questions about the causes for such a drastic depreciation of the Rial against the U.S. dollar and what impacts it has carried on Iran. In this article, however, the focus will be on why the Rial of Iran continues to fall, looking at the economic, political, and international forces behind its steady decline.
A Brief Overview of the Iranian Rial
The unit of account of the Islamic Republic of Iran is the Iranian Rial (IRR). Sometimes, it has registered immense change in value over several years with instances of decline rates. Unlike other major world currencies, the Rial is not anchored to another currency, hence making it particularly susceptible to both external and internal forces.
The Rial suffered an even sharper decline in the last decade; it reached an exchange rate of approximately 32.000 IRR per USD in 2015, The exchange rate has further escalated to over 756.000 IRR for a single USD by December 2023. These are apparent because of the instability of the political and economic conditions of Iran.
Key Factors Behind the Depreciation of the Iranian Rial
This inability is most probably the reason behind the Iranian Rial’s continued depreciation, which has been aided by other factors, some of them being; These are domestic economic policies, international sanctions, political instabilities, and that almost the entire Iranian economy relies on oil exports. It will be useful to take a closer look at each of these factors.
- Economic Sanctions
It is estimated that the war, jointly with the economic sanctions which have been placed by the United States and other countries of the Western world on Iran as a country, has greatly contributed to the depreciation of the Iranian Rial. These sanctions have turned the screws on Iran’s capability to conduct international business, especially in the energy line. At the same time, the use of international counterparts by banks in Iran had been limited, which has made it much harder for the country to obtain the money necessary for its imports and investments.
Sanctions on Oil Exports
Oil has always been Iran’s main source of foreign exchange, and the Iranian economy has relied on it for a long time. However, the sanctions that have been placed on Iran’s oil sector, especially those that were placed after the U.S. withdrawal from the JCPOA in 2018, have made it very difficult for Iran to export its oil to the international market.
Sanctions especially those targeting Iran’s oil exports have for years lowered Tehran’s oil earnings hence its ability to procure foreign currency. Lack of foreign currency constrains the control of exchange rates and hence the depreciation of the Rial as a result of scarce foreign currency.
Restrictions on Banking and Financial Transactions
But the country’s banking and financial systems are also being targeted by sanctions other than those on the oil sector. Global banks are inclined to refrain from any deal with Iran due to the certain penalties from the Western countries. That is why foreign capital is not available for Iran, and this, in turn, affects its ability to stabilize the national currency. - Inflationary Pressures
Another determinant that impacts the value of Iran Rial is the rate of inflation. In the last few years, the inflation rate has been relatively high in Iran and this has led to a great extent to the erosion of the Rial.
Impact of Inflation on Currency Value
As a result of high levels of inflation, a currency value is bound to reduce. Iran has had some problems with inflation for years already. According to different sources, the inflation rate in Iran was estimated to be at a level of 50 percent in 2022. As a result, inflation on prices has risen significantly, leaving a rise in the prices of goods and services, rendering a small wage rate and depreciation of the Rial.
Iran, being a weak economy, faces factors such as Imported prices due to the devaluation of the national currency, Government expenditure, and structural problems that affect inflation. The standard of living raises the cost of products, and the value of the currency falls as the purchasing power of the Iranian currency decreases.
Government Spending and Monetary Policy
Inflation has also been attributed to its government fiscal policies which are not healthy for Iran’s economy. Due to economic penalties and political upheavals, the Iranian authorities have raised spending, especially expenditure subsidies and social benefits. This expansionary fiscal policy known to overcome the stringencies of economic difficulty often results in increased rates of inflation.
Also, the Central Bank of Iran has time and again printed more money to fund government expenditures is also true. Such a creation of money supply outside the productive capacity of the economy leads to pressures of inflation and thus devalues the Rial. - Political Instability
There is political instability that has led to the depreciation of the Iranian Rial. There were these political issues in Iran years: internal unrest and international conflict. These political factors make up an insecure environment for investors hence resulting in insecurity in the currency.
Internal Unrest and Protests
The internal problem of Iran has involved protests, strikes, and demonstrations, which have been cyclical in the Islamic Republic. However, these protests were mainly due to economic reasons, such as the high unemployment rate, inflation, and corruption. Thus, the issue has reached another stage of instability in the country as a result of the government’s aggressive reaction to these protests, as well as the resulting negative investment outlook in the country.
Speculation that investors in Iran start pulling out their money back due to one reason or another fuels the rate where the Rial is concerned because this leads to less demand and hence depreciation.
Tensions with the West
Some of the main reasons behind the depreciation of the Rial are animosity between Iran and Western nations, especially the U.S. The JCPOA was an agreement signed by Iran and the European Union, plus Russia and China, to normalize the Iranian export of oil in return for the alleviation of sanctions that affected the country’s export capabilities and creditworthiness. This uncertainty leads to reduced FDI in Iran, hence reducing the value of the Rial, as the figure below illustrates.
In addition to the economic measures and geopolitical risks, which prevent Iran from entering the regional armed conflicts and resulting in tensions with most of its neighbors, create difficulties for foreign investors in the assessment of the future stability of the Iranian economy. As such, the Rial does not have much people’s confidence in its future value to this date. - Oil Dependency
The major source of income for Iran is oil; it is very dependent on it, and it is vulnerable to fluctuations in the price of oil in international markets. High oil prices take more money in the coffers and the Rial may be stronger with high oil prices in the international market. But when the prices of oil, Iran’s major exportation product, decrease, they are forced to devalue their foreign exchange reserves the Rial.
Volatility in Global Oil Markets
But the Rial has depreciated in recent years, while not simply as a result of the wild swings that have marked global oil markets. The truth is Iran has been extremely sensitive to reductions in oil prices resulting from excessive supply or sluggish demand in major oil-importing countries.
Due to a decrease in oil income, the Iranian government is under pressure to devalue the currency to preserve its foreign currency and manage deficits. On the other hand, for instance, should the prices of oil increase, Iran would observe a momentary appreciation of the Rial, only to be followed by deteriorating structural problems in the country’s economy. - Structural Issues within the Iranian Economy
The economy of Iran faces several structural problems that have not ceased to discourage the value of the Rial. The three socio-economic challenges include a persistently high unemployment rate, low FDI, and reliance on obsolete sectors.
Low Levels of Foreign Investment
Iran’s limited foreign investment has its roots deeply rooted in sanctions and the country’s political and economic instability. There’s a reason why most foreign investors are reluctant to invest in Iran, and it’s mostly because of the extreme level of uncertainty surrounding the economy. Due to a lack of FDI, Iran’s economy has not been able to diversify or develop itself; hence, it weakens its position to maintain the value of the country’s currency.
Corruption and Mismanagement
Other factors that have affected the growth of Iran are political and economic corruption as well as mismanagement. The ineffectiveness of SOEs, allied with corruption in government, has resulted in inefficiency, faulty investment of resources, and poor management of the economy. Those structural problems are what keep re-emerging to complicate the crisis as the Rial and Sap attempt to fix the currency.
Can the Iranian Rial Recover?
Even though the Iranian Rial appears to be steadily deteriorating, some possibilities exist where this currency has the potential to climb back up again. However, such outcomes mostly assume major diplomatic developments, economic shifts, and modifications in Iran’s internal political situation.
The Role of Diplomacy
The analysis of potential factors leading to the Rial’s appreciation involves diplomacy considerably, thus concerning sanctions being removed going forward. Since the past few years, the US-led Western countries have placed sanctions on Iran, and that has limited the country’s capability to fund, invest, trade, and integrate with the global economy. This is largely due to the most vital parts of the economy, especially oil, banking, and finance, among others. Should Iran be in a position to work out a new deal with the Western countries, then the cited measures would be eased or lifted. This, in turn, would enable Iran to engage in more activities with other countries in the global economy.
The relaxation of the sanctions regime would open floodgates of FDI since investors and companies around the world would have higher trust in the capability, efficiency, and stability of the Iranian economy. It would also require more so if the economy were to be diversified away from the current overreliance on oil export. If foreign currency reserves rise and capital forms started pouring into Iran, the Iranian government would have enough capital reserves to restore faith in the Iranian currency and curb the inflationary forces. The freeing of the sanctions can also help Iran fully embrace the international trade and economic integration agreement, as economic integration can provide Iran with stability and gradual ways to recover the Iranian Rial.
Domestic Economic Reforms
Domestic economic reforms may be another important factor altogether to the recovery of the Iranian Rial. A series of weaknesses have marred the Iranian economy: poor management of state-owned enterprises, corruption, and excessive dependence on oil exports. For the government to be able to stabilize the Rial, it needs to be focused on economic reforms that will change the composition of the economy and reduce the deposits to the oil sector. The creation of other sectors, such as technology, manufacturing, and agricultural sectors, may be needed to relieve Iran’s dependence on the uncertainty of oil market prices and their possible exhaustion. It will be able to lower its vulnerability to external shocks with a more secure and diversified economy, which will also remain stable in its currency.
Combating and containing the currently rampant corruption and inefficiency problems within the government and state-owned enterprises would also go a long way in changing Iran’s economic prospects for the better. Policies that aim at cutting down on inefficiency and improving accountability and governance might result in higher investor confidence and better standards of growth. Such changes would effectively mean that the appropriate resources are delivered in the right quantity and qualities for productivity and economic growth. After all these arguments, if the domestic economic reforms are properly implemented, our Iranian economy would be more stable, with a higher value for Rialriyal, and have less impact on inflation.
Conclusion
The Iranian Rial continues to decline as a result of several internal and external forces that include economic sanctions, inflation, political instability, and the Iranian overdependence on oil exports. While there is an opportunity for investment in Rial, then it is a highly risky affair for most of the investors.
Several factors will, of course, determine the destiny of the ‘Rial’, including the level of diplomatic gains, changes in the economic policies at the domestic level, and volatility of international oil prices. Until these factors come to rest, the Iranian Rial is expected to continue to come under downward pressure within the global market.