Ali Hashemifara
As a consequence of the memorandum of understanding recently signed between Iran and the US, three major economic commitments are expected to be fulfilled: the release of Iran’s frozen assets, the issuance of waivers for Iran’s oil exports and a $300 billion investment in the country’s reconstruction. These commitments, however, may not improve Iran’s macroeconomic indicators, at least in the short run.
The Central Bank of Iran has announced that the first $12 billion of the frozen assets will be released shortly and will be spent on importing essential goods such as food, medicine and household items. This may reduce the unusually high prices seen in recent months due to supply shocks and shortages caused by the war. Additionally, imports could increase sharply in the short term, given the significant decline in imports since March. Therefore, the approximately $15 billion worth of annual imports of essential goods is likely to be distributed unevenly across quarters, with the next quarter potentially experiencing slightly lower inflation but substantially lower output. However, the deflationary effect of these imports is expected to be temporary. The unfreezing of Iranian assets is also unlikely to affect exchange rate movements, as the assets are already denominated in US dollars and will be spent on dollar-denominated goods.
Overall, the restrictions imposed on the use of the unfrozen assets may have little or no long-term effect on the domestic economy.
Somewhat surprisingly, the easing of US sanctions, including the immediate waivers for Iranian oil exports, is also unlikely to have a significant macroeconomic impact. With the waivers in place, banking transactions and insurance services can become more direct, transparent and less costly, allowing the government to receive substantially higher oil revenues. The government could then use this revenue to narrow its budget deficit, which is projected to exceed 6% of GDP. This may reduce the government's reliance on borrowing from the Central Bank in the coming year. However, it will not change the monetary base and is unlikely to slow the growth of the money supply or inflation. This is because the deficit will be financed by an oil industry that employs the same number of workers and operates with the same technology and productivity levels. In other words, the additional oil revenue may not be absorbed through supply-side improvements, resulting in broadly unchanged inflation.
Therefore, unless the budget deficit is reduced through fiscal reforms, while taking into account the massive wartime borrowings, inflation is likely to remain above 39% in 2026. The government could also use the additional oil revenue to finance imports. This would be less inflationary, but only over the longer term.
Lastly, the $300 billion allocated to Iran’s economic development and reconstruction, while badly needed, is neither sufficient nor immediately available. Although many sources estimate the direct and indirect war damage at around $270 billion, others argue that the true figure is considerably higher. Even if the proposed $300 billion in foreign direct investment proves sufficient, reconstruction is expected to take time. The process may also proceed deliberately to avoid an uncontrolled surge in investment and an overheating of aggregate demand. Nevertheless, this investment could strengthen the rial and create employment opportunities as reconstruction gets underway.
While this memorandum represents a valuable mutual understanding, its economic benefits for Iran are unlikely to materialize in the short run.
