Six months into Massoud Pezeshkian’s presidency of the Islamic Republic of Iran, his key economic promises are far from fulfilled. There is a significant disconnect between these promises and the actual performance of his economic team.
During his election campaign, Pezeshkian confidently pledged to address the people’s problems, especially their economic concerns. Yet the collapse of the rial (the Iranian currency), and the deepening recession in industry and manufacturing due to energy shortages, rampant inflation, and declining household purchasing power have all undermined his campaign commitments.
The start of Donald Trump’s presidency in the United States has further exacerbated the climate of economic uncertainty.
In the days before Pezeshkian’s inauguration last August, the dollar, often seen as a barometer of the Iranian economy, was the equivalent of 489,000 rials. Five months after his government was formed, the value of a dollar had surged to more than 800,000 rials.
Pezeshkian has been forced to make several alarming admissions about the nation’s economic challenges and its energy crisis.
“The total amount of money we have in the country is no more than $100 billion,” he warned. “We are facing a variety of issues.”
“There are numerous imbalances in areas such as water, electricity, gas, and the environment, some of which are nearing collapse,” he added. “No matter how hard I try, I cannot find an explanation for such a waste of resources affecting the people.”
While it is true that external factors such as Trump’s election victory and escalating regional tensions involving the Islamic Republic have contributed to the collapse in the currency, a combination of other factors — the underlying weakness of Iran’s economy, the government budget deficit, and poorly timed decisions by Pezeshkian’s economic team in the currency markets — have played a far more significant role.
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Pezeshkian’s economic team, led by Minister of Economy and Financial Affairs Abdolnaser Hemmati, has not only failed to ease the financial strain on salaried and low-income groups, but he has also driven up the prices of goods and services by introducing changes in Iran’s foreign currency markets.
Hemmati and his team have abolished the NIMA foreign currency exchange system and replaced it with a new “commercial foreign currency market” that follows free-market exchange rates.
Launched by President Hassan Rouhani’s administration in April 2018, the NIMA foreign currency exchange system was a platform designed to manage foreign currency transactions and trades in Iran. It was established to assist the country in bypassing sanctions and enhancing transparency in the currency market.
Now, importers who previously obtained foreign currency to import goods, technology, and raw materials through the NIMA system must obtain currency from this new commercial foreign currency market.
Meanwhile, the dollar, which on the NIMA foreign-currency exchange system was worth 500,000 rials, is now worth approximately 680,000 rials on the commercial currency market.
The discrepancy between the two rates points to corresponding price hikes. Given Iran’s reliance on imports, soaring foreign exchange rates have triggered a wave of price increases across various goods and services, impacting both the broader market and domestic industry.
Pezeshkian, in the meantime, has inherited a government budget deficit which, according to the Ministry of Economy, stands at $17 billion.
His administration is also grappling with the country’s most severe energy crisis.
Years of failure by the Islamic Republic to make strategic investments in the energy sector have made it impossible to meet domestic gas demands, despite Iran holding the world’s second-largest natural gas reserves and the fourth-largest oil reserves.
The inability of the gas and petrochemical industries to produce has led to a critical shortage of gas, diesel, fuel oil, and gasoline for domestic use. The failure to provide sufficient fuel to thermal power plants and their low efficiency has also exacerbated the ongoing electricity crisis.
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The government’s short-term approach to the energy crisis has involved large-scale shutdowns, electricity and gas supply cuts in the industrial and agricultural sectors, and power rationing for residential areas.
The Iranian industrial sector, which already suffered frequent power outages during the spring and summer, has faced power and gas shortages for the past four months. These disruptions have led to a significant reduction in production, causing heavy financial losses.
The negative impact of the government’s decisions on the industrial sector is already apparent, with layoffs and reduced output. Experts predict that a severe recession in the industrial and manufacturing sectors will probably occur in the coming months.
Alireza Kolahi, President of the Industry Commission at the Iran Chamber of Commerce, has estimated the financial damage from the recent power cuts to be $5 billion.
Due to sanctions, oil export revenues have sharply declined, and this has been compounded by reductions in production across other sectors of the Iranian economy, further hitting non-oil foreign currency earnings.
Economic analyst Massoud Daneshmand reports a $30 billion shortfall in foreign currency income, indicating that the government’s treasury will probably be increasingly depleted in the coming months.
Economic uncertainty in Iran has deepened with the election of Trump.
Some economic actors have become skeptical about the possibility of a quick agreement between the Islamic Republic and the Trump administration. Others anticipate that the new administration will bring a wave of sanctions and restrictions.
The Islamic Republic has explored alternative ways to bypass sanctions, such as investing in the cryptocurrency market and exempting gold imports from taxes.
At the same time, various officials have expressed a willingness to engage in negotiations with the Trump administration.
Ali Abdolalizadeh, Pezeshkian’s representative overseeing the implementation of the broader maritime development policies, said: “America could invest in Iran once sanctions are lifted. The government’s plan on this issue is entirely transparent, and we are prepared to engage in negotiations.”
“The negotiation process between the two countries will take two to three months to reach an agreement,” Abdolalizadeh added.
In the Islamic Republic’s preferred scenario, if negotiations with the Trump administration were to result in the reduction or lifting of sanctions, Pezeshkian’s government could maintain itself in power for several months.
During this period, oil revenues would gradually resume, and the government could rely on measures such as printing money to address part of the budget deficit and cover essential expenses.
In an alternative scenario, if economic pressures from the Trump administration intensified, negotiations were prolonged, or ultimately failed, the treasury could be even more deeply depleted, exacerbating the energy crisis. Foreign currency earnings would plummet, and the rial could quickly collapse, driving the economy toward disaster.
Iran’s Supreme Leader, Ali Khamenei, has indicated a willingness to reassess the Financial Action Task Force (FATF) Recommendations within the Expediency Council, potentially paving the way for Iran’s removal from the FATF blacklist.
Some analysts suggest that initiating this process signals a shift in the Islamic Republic’s stance, offering a signal to Western nations about the possibility of renewed negotiations with the U.S.
FATF is an intergovernmental organization established in 1989 at the initiative of the G7 to develop policies to combat money laundering and the financing of terrorism.
It operates under the auspices of the Organization for Economic Co-operation and Development (OECD), a global economic organization founded in 1961 with 36 member countries that promote economic development and international trade.
In February 2020, the FATF placed Iran on its blacklist for failing to implement the Palermo Convention, along with the FATF’s recommendations for combating money laundering (AML) and terrorist financing (CFT). This measure restricted Iran’s access to the international banking system.
The United Nations Convention against Transnational Organized Crime (UNTOC), also known as the Palermo Convention, is a multilateral treaty from 2000 that addresses transnational organized crime.
For Iran to revive its economy, it must regain access to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a global financial messaging network, which can only happen if the FATF removes the country from its blacklist.
Iran currently remains on the FATF blacklist, officially referred to as the “High-Risk Jurisdictions, subject to a call for action.”
