Hassan Rohani will take office next week as president of Iran. Many assert that the international sanctions regime has so damaged the Iranian economy that, rather than captain a sinking ship, Rohani will change Iran’s course. Not so fast.
There is no doubt sanctions have altered the modus operandi of finance and commerce in Iran. The most obvious impact has been on the rial, which has lost more than half of its value against the dollar since July 2010. This has brought about severe inflation, which, by our estimate, briefly reached hyperinflation levels of 62.8 per cent per month in October 2012. Although the authorities report a current annual inflation rate of only 35.9 per cent, official Iranian statistics should be taken with a pinch of salt. We estimate the current annual inflation rate to be 68.3 per cent, based on calculations using changes in the black-market dollar exchange rate.
Even though Iran’s economy is contracting and under enormous pressure because of sanctions, it is much more elastic than most people surmise. Tehran holds enough foreign reserves to cover its imports for 10 months – one of the healthiest import cover levels of any emerging economy. The fiscal deficit is relatively small and public debt is less than 10 per cent of gross domestic product.