Iranian Rial plunges to historic low

Iran’s currency, the rial, has plunged near historic lows as the threat of direct confrontation with Israel looms, raising concerns about soaring inflation and adding pressure on the government to manage its economic challenges.

With inflation hovering around 40% over the past five years, the government has little room to maneuver on economic issues, compounded by a massive budget deficit. US sanctions imposed in 2018 have significantly cut Iran's oil export revenues, which typically account for about half of the government’s budget.

This year, the government faces a budget deficit exceeding $14 billion according to the minister of economy, out of a total budget of roughly $40 billion. One way to deal with the deficit is to raise income, however, despite maximizing oil exports to its sole buyer, China, revenues are falling 26% short of estimates. 

Another source of income would be taxes, but the government has already increased taxes last year and it cannot raise more revenue in this way while the economy remains stagnant.

Another likely solution is to borrow more funds from the central bank, but that would mean printing more money, which will fuel higher inflation. The extensive borrowing in recent years has resulted in a staggering liquidity level of 83,540 trillion rials (approximately $139 billion), which has doubled since 2021. This surge in liquidity has contributed to an annual inflation rate exceeding 40% in recent years.

Reducing expenditures could help lower the budget deficit, but it's a difficult task in a state-controlled economy where the private sector has largely vanished from major industries. Loss-making government factories and companies rely heavily on state financing and subsidies to stay afloat. Without this support, they would be forced to close, further exacerbating unemployment in an already high-inflation environment.

Corruption among government insiders is also a heavy burden, woven into the fabric of the political and economic system. Former officials and pundits who are allowed to speak raise the alarm, but the ruling system is unable to make fundamental changes without democratic accountability.