By Ali Hashemifara
Iran faces the persistent problem of rial depreciation due to US sanctions, fiscal imbalances and weakened central bank credibility. The country’s long history of budget deficits and their monetization has increased the supply of rials, while declining foreign direct investment, financial repression and capital flight have reduced the supply of US dollars in the economy. At the same time, the loss of confidence in the rial has increased demand for US dollars. The result is a continuous depreciation of the national currency.
This, however, is only the beginning of a vicious cycle. As the rial depreciates, export prices fall and import prices rise. Iran’s domestic production is heavily dependent on imported machinery, medical and pharmaceutical equipment, and raw agricultural commodities. Higher import prices lead to cost-push inflation, a higher unemployment rate (8% in 2025), structural dislocation and investment uncertainty. More importantly, the very high inflation rate (50.9% in 2025) driven by supply-side pressures lowers real incomes, reduces aggregate demand and creates persistent deflationary pressure across the economy.
To counter this economic stagnation, government spending must increase. The main issue, however, lies in government revenue. The tax base remains limited due to already diminished real incomes, meaning taxation cannot contribute much to rising spending needs. Restricted access to global financial markets also blocks external public financing. Combined with fixed subsidies for energy and consumer goods, as well as high public expenditure commitments, Iran faces a serious budget deficit accounting for more than 4% of GDP. The only remaining option is money creation to keep prices artificially low. This further increases rial supply: too many rials chasing too few dollars, causing another round of depreciation and continuing the cycle.
The Solution
The best solution, undoubtedly, is a political—and perhaps nuclear—compromise: reaching a sustainable deal with the US and regaining access to US dollars, global financial markets and foreign investment. However, even under current sanctions, a policy mix of progressive quantitative tightening (QT), fiscal discipline and stronger non-Western economic ties could provide the most stabilizing buffer in the long term.
The Ministry of Economic Affairs and Finance could issue new government bonds with positive real interest rates and sell them, particularly to depository institutions with the highest levels of unproductive investment. The cash inflows from these bond sales should remain unused domestically until maturity to avoid reversing the policy’s effect.
Government spending must also be reduced. This means gradually reforming oil subsidy programs, limiting non-essential external expenditures and cutting unnecessary projects to prevent further monetization of deficits and excessive money supply growth. These measures may risk an economic slowdown. To offset this, Iran should strengthen economic relations with countries such as Russia, China, Turkey and India—partners that can still channel limited foreign investment into the country.
These policies are difficult to implement, but they may be the right monetary and fiscal decisions to restore discipline to the Iranian economy. There would no longer be “too many rials chasing too few dollars.” Of course, these policies address only one side of the problem: excess rial supply. They do not resolve the limited accessibility of dollars, and they are also politically unpopular.
The final solution still lies in Iran’s financial reintegration with the world, which depends, at least in part, on the easing of US sanctions.
