UN sanctions on Iran to add inflationary pressure as currency crisis deepens

Move will affect business and consumer sentiment

A clothing stall in Tehran. Iran has been struggling with soaring inflation for years. AP

Iran's already-reeling economy is set to deteriorate further as inflationary pressures mount and its currency continues to lose value against the US dollar after the UN reimposed sanctions on Tehran.

The sanctions took effect on Saturday after Britain, France and Germany launched the snapback process at the UN last month, claiming Tehran had failed to adhere to a 2015 treaty regulating the country's nuclear energy programme.

From an economic standpoint, the sanctions include a freeze on selected Iranian assets around the world and a travel ban on Iranian individuals and entities. Countries are authorised by the UN to inspect consignments carried by Iran Air Cargo and the Islamic Republic of Iran Shipping Lines.

Iran's currency, the rial, which has been wobbling since the European trio launched the snapback sanctions process, has continued its decline. It was trading at more than 1,131,000 to the US dollar on the parallel market on Sunday, according to Bonbast.com, which monitors unofficial exchange rates.

Tehran has been struggling with the currency crisis for several quarters, as its economy has struggled under US sanctions.

In August, an Iranian parliament economic commission backed a move to remove four zeroes from the rial to make trading simpler. The move requires approval from higher authorities.

The drop in the rial is expected to further exacerbate inflation in the country, said Esfandyar Batmanghelidj, founder and chief executive of the Bourse & Bazaar Foundation think tank.

"The rise in the free market exchange rate and the growing spread between that and the regulated rate used by Iranian importers and exporters will add inflationary pressure," he said.

In the short to medium term, the outlook for the Iranian rial does not look good and the currency is expected to remain in a freefall against the greenback "without a massive central bank intervention", Alex Vatanka, senior fellow at the Middle East Institute, told The National.

"But Tehran’s reserves are thin, meaning only short-lived stabilisation is possible."

Households, in the meantime, will have to cut consumption, and businesses will rely even more on informal markets to meet their needs as the rial dips further, inflation climbs higher and imports get costlier, he added.

Inflationary pressure

Consumer prices have been steadily rising, with the inflation rate up more than 42 per cent annually last month, the latest report from the Statistics Centre of Iran said.

The International Monetary Fund expects Iran’s inflation rate to rise to 43.3 per cent this year, from 32.6 per cent last year, before slightly easing to 42.5 per cent this year.

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"The main driver of inflation in Iran is the ongoing pressure on the balance of payments," Mr Batmanghelidj said. "Iran earns less from imports than it needs to meet domestic demand for imports and to fund the government budget."

It is not yet clear if snapback sanctions will make this problem worse but Iran’s oil exports are unlikely to fall significantly, he said.

"China has a strategic interest in continuing to buy Iranian oil even in the face of UN sanctions," Mr Batmanghelidj added. "This may mitigate the impact of the new sanctions on inflation."

Iran has remained defiant, with Foreign Minister Abbas Araghchi saying "the Iranian people will not give in to bullying".

The UN's "invocation of the so-called snapback mechanism is nothing but a blatant abuse of process", he said on X on Sunday. "Terminated sanctions cannot be revived and any attempt to do is null and void."

Growing strains

Iran's economy has already been suffering under the extraneous sanctions reimposed by the US in 2018 after US President Donald Trump, in his previous term, withdrew the US from the nuclear deal. The sanctions are yet to be removed. The country is also on the Financial Action Task Force's blacklist.

"The US sanctions reimposed by Trump in 2018 are far broader and more restrictive than the UN sanctions now in effect," said Mr Batmanghelidj.

"The new measures don’t represent a major change in Iran’s ability to engage in global trade. But there will be an impact on business and consumer sentiment – the path to a new diplomatic agreement and broad sanctions relief just got a lot more difficult."

The Iranian economy contracted by 0.1 per cent in the first quarter of the calendar year that started in late March, the SCI said. It was the first time in four years that the agency reported economic contraction.

The IMF forecasts Iran’s economic growth will flatline at 0.3 per cent this year, down from 3.5 per cent last year. It is forecast to expand 1.1 per cent next year, IMF data indicates.

"For the last 15 years, Iranian economic policy has focused on weathering the sanctions without actually making deep transformations to the Iranian economy – the push for a 'resistance economy' was a superficial project," Mr Batmanghelidj said.

As Iran finds itself under UN sanctions again, without a clear pathway to new negotiations, policymakers in Tehran will need to ask themselves how best to retool the country's economy to respond to sanctions as a permanent state of affairs, he said.

"There are lots of ideas about this among Iranian economists and business leaders. For example, there are calls to embrace industrial policy but the political consensus needs to catch up."

Reputational risk

According to Mr Vatanka of the Middle East Institute, although the snapback sanctions will add "marginal new pressure", the real damage for Tehran is "reputational and legal, making global companies and banks even more reluctant to deal with Iran".

"Asset freezes and travel bans won’t cripple the economy but will deepen elite isolation, complicate financial maneuvering abroad, and drive wealth further underground," he said.

Iran can survive and "muddle through for years with oil smuggling" and regional trade even with UN and US sanctions in place.

However, "real growth requires easing of sanctions through diplomacy with Washington, not just symbolic defiance of European demands", Mr Vatanka added.