While political instability dominated headlines in the Middle East, the Iranian rial quietly devalued by 35% against the dollar at local currency exchange bureaus during a four-month period. Continued devaluation increases the likelihood of further instability in the region
- Iran’s fragile economy will bend rather than break for the time being, but the devalued rial will place pressure on consumers that are already struggling to afford staple goods as a result of high inflation rates
- The Iranian rial’s steep depreciation is a result of effective sanctions preventing hard currency from flowing into Iran, exacerbating the current account deficit
- The result is more pressure on the system, which increases the likelihood of instability in Iran and the Middle East
Sanctions and political tensions underline a dreary economic outlook
- Increasing trade isolation: Iranian officials are finally admitting the toll of sanctions on the economy. An EU crude embargo and tighter US sanctions will worsen the situation
- Rising political tensions: The alliance of bazaar merchants, hard-line clerics, and Revolutionary Guard commanders will continue to marginalize Ahmadinejad and his allies ahead of the parliamentary elections in March 2012
- Dwindling foreign currency reserves: While the size of Iran’s foreign currency reserves is unclear, money in circulation increased by 20% in the 2H 2011. This is an indication that Iran is struggling to fund monthly cash payments to citizens that are meant to soften the blow of subsidy rollbacks
- Accelerating inflation growth: CPI is officially 20%, but prices are likely increasing by much more especially food and fuel prices due to the subsidy rollback initiative and tightening sanctions
- Eroding consumer and private sector confidence: Typically resilient Iranian consumers and merchants appear to be losing patience with the current economic conditions
- The government was forced to halt all direct official sales of gold as customers queued in long lines to swap their hard currency
- The rising cost of raw materials will further damage confidence in the economy
Iran’s economic volatility has regional and international implications for 2012
- Iran’s foreign policy will remain erratic: Ahmadinejad’s recent flirtation with conciliatory rhetoric will stand in stark contrast to Supreme Leader Ayatollah Ali Khamenei’s strategy to meet a “threat with a threat”
- Escalating tensions with Gulf Arab countries: Saudi Arabia and other GCC countries blame Iran for stoking popular unrest in the region. Their support for tougher Western sanctions will escalate tensions
- Danger of regional conflict: The fall of Syria’s regime, a key Iranian ally, would upset the regional status quo and could set off a proxy war in Syria or Lebanon
- Oil price volatility: More effective international sanctions would place upward pressure on global oil prices, though further deterioration in the eurozone could act as a counterbalance
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