As Iran and the United States continue their negotiations, hopes for an understanding have become more cautious than they were last week. While the possibility of an agreement has not disappeared, the diplomatic environment has become more difficult and the chances of an immediate breakthrough appear lower.
Even so, the prospect of a deal remains economically important. If negotiations eventually lead to an agreement and sanctions are eased, Iran could gain access to greater oil revenues, frozen foreign-exchange assets and potentially new opportunities for investment and trade.
But sanctions relief alone would not resolve Iran’s long-standing economic problems. Instead, it could provide a valuable window for reforms. Whether that opportunity is used effectively could determine whether a future agreement produces sustainable growth or merely repeats a familiar economic cycle.
A Familiar Cycle
Iran’s economy has repeatedly moved between periods of foreign-exchange abundance and economic instability. The problem has not been sanctions alone, but also the way oil revenues have traditionally been managed.
When oil revenues rise, government spending tends to increase rapidly. The injection of foreign currency into the economy strengthens the real exchange rate, making imports cheaper relative to domestic production. Over time, this can weaken the competitiveness of Iranian industries, encourage import dependence and contribute to deindustrialization.
When oil revenues later decline, or sanctions restrict access to foreign currency, the same structure works in reverse. Government spending is difficult to reduce, budget deficits widen and inflationary pressures increase. Currency depreciation then adds another layer of instability.
Instead of addressing the underlying problems, policymakers have often responded with price controls, multiple exchange rates and other administrative measures. Such policies can create rent-seeking opportunities and make economic policymaking less predictable.
The result is a cycle in which periods of oil windfalls are followed by rising government spending, and periods of falling oil income are followed by inflation, currency instability and recession.
The Choice Ahead
If negotiations eventually produce an agreement and Iran gains access to additional foreign-exchange resources, policymakers will face a crucial choice.
One path would be to use the additional resources for structural reforms, infrastructure, productivity and productive investment. The other would be to increase current spending, distribute resources quickly and use the new financial space to generate short-term economic relief.
The second approach could provide immediate benefits for households after years of inflation and declining purchasing power. But it would also risk reproducing the same structural problems.
Economists argue that without meaningful domestic reforms, Iran’s long-term growth rate could remain around 1-2%. With an agreement combined with structural reforms, however, the economy could potentially move toward much higher growth, including rates of around 8% annually.
Such a transition would take time. This is particularly important because the public may expect an agreement to produce immediate improvements in living standards. In reality, even if a deal is reached, the effects of years of economic imbalances, war-related disruptions and uncertainty would not disappear overnight.
Managing this gap between public expectations and economic reality would therefore be critical.
A Window for Reform
A possible agreement could provide an opportunity to begin reforms that have been repeatedly postponed. A similar opportunity emerged after the 2015 nuclear agreement, but political considerations prevented many structural reforms from moving forward.
Today, Iran faces interconnected imbalances in public finances, the banking system, energy, pension funds and natural resources. These problems cannot be addressed through isolated measures. They require a coordinated reform strategy.
One logical starting point would be the foreign-exchange market. Greater stability and movement toward a unified and flexible exchange-rate system could reduce uncertainty and help establish a more realistic reference rate for the economy.
This would also make it easier to address energy pricing. A credible exchange rate is an important foundation for determining the real cost of energy and reducing distortions in the sector.
Fiscal reform would have to follow. Greater budget transparency, reducing off-budget mechanisms, limiting monetary financing of deficits and relying more systematically on debt instruments could help reduce pressure on the central bank and create conditions for banking-sector reform.
Longer-term reforms would also be needed in pension funds, natural-resource management and productivity.
Managing Oil Wealth
Perhaps the most important institutional reform would concern oil revenues.
Iran’s experience shows that the central problem is not simply dependence on oil, but the direct transmission of oil-income fluctuations into the government budget and the wider economy.
A strengthened oil stabilization fund could help break this link. Under such a system, only a predetermined portion of oil revenues would enter the annual budget, while excess revenues would be saved or invested.
Such a mechanism could reduce the impact of oil-price fluctuations, strengthen macroeconomic stability and allow the government to plan beyond short-term political cycles.
The idea is not new. An oil stabilization mechanism was included in the original version of Iran’s Third Development Plan, but subsequent changes weakened its original role.
The current diplomatic process therefore presents an important economic test, even if an agreement remains uncertain. If negotiations eventually succeed, sanctions relief could give Iran valuable breathing space. But breathing space is not the same as reform.
The decisive question would be what Iran does with that opportunity.
If new oil and foreign-exchange revenues are used mainly to finance higher spending and short-term relief, the country could return to the same cycle of inflation, currency instability and weak growth. If they are used to strengthen institutions, investment and economic stability, a future agreement could become the starting point for a different growth path.
In that sense, the most important test may begin after any agreement is reached.
