What are the Economic Consequences of the New U.S. Strategy Towards Iran's Sovereignty?

Although much of the content of Donald Trump's speech and the White House statement regarding his announced strategy was more or less clear beforehand, the Tehran currency market reacted psychologically even a few days prior to this announcement, causing the value of the dollar to rise above 4,000 tomans. In the days following Trump's speech, however, the Iranian currency market calmed down as the Iranian government managed to control the market's volatility—at least temporarily—by injecting oil dollars. Otherwise, the continued rise in the dollar's price was likely. There were other reasons, in addition to this currency injection by the government, that prevented further and prolonged tension in the currency market. First, a significant portion of Trump's speech had already been anticipated by market players, and thus the effects of the new strategy had already been absorbed in the currency and other financial markets. Second, although Trump's tone regarding the U.S. government's program towards Iran can be described as harsh, its intensity was less than expected, as the U.S. government is currently not withdrawing from the JCPOA and is only placing conditions on it. Additionally, the U.S. government and the Treasury Department announced that they did not designate the Islamic Revolutionary Guard Corps as a foreign terrorist organization. While Iranian financial markets have appeared calm in recent days, it is expected that economic actors, including merchants, investors, banks, and insurance companies, will become more cautious following the announcement of Washington's new strategy, as the perception of political risk in Iran on the international stage has increased. This will impact the inflow and outflow of capital to Iran, as well as the imports and exports of the Iranian economy—albeit with some delay. The real consequences of any international political tension, although slow to emerge, follow psychological shocks. Psychological shocks come and go quickly, but the real economic consequences of any international political tension, although they appear later, are more lasting. Washington's new strategy and Iran's political risk In the current situation, it seems that—even without any practical action from Washington—the international atmosphere regarding Iran has become more tense. This development initially has a negative psychological impact on the behavior of international economic actors and countries that were hopeful about engaging and cooperating with Iranian economic actors due to the implementation of the JCPOA and the promises of the government. The increase in the risk of international tension regarding Iran is not the only consequence of Washington's recent positions; it is also expected that economic variables such as the government budget, foreign trade, international payment balance, and ultimately economic growth and the value of the national currency will also change as a result of increased political risk. This psychological effect will also have real consequences, and with the potential hesitation of investors and their reduced willingness to cooperate economically with Iran and invest in the country, the government's promises to expand cooperation with economic actors from other countries and attract foreign investment will be called into question. Thus, the meaning of the increased political risk of tension between the U.S. and Iran is that Iran's foreign trade will become slower and more expensive, and Iranian merchants and investors will not be able to take advantage of various international benefits. The fragile state of Iran's government budget in the face of international tensions The change in Washington's strategy occurs at a time when the economic situation, especially the Iranian government's budget, is not favorable and lacks the capacity to withstand international tensions and shocks. The oil market still does not have much elasticity for increased demand and further exports of Iranian oil, and thus the government's revenue sources remain limited and inelastic. In contrast, expenditures, especially current and rent-seeking expenditures, are always on the rise. For this reason, Iran's budget is unbalanced. This lack of balance can be observed in the budget situation over the first five months of this year. The latest statistical summary from the Central Bank of Iran, which pertains to the month of Tir this year, indicates that in the first five months of this year, budget revenues could not cover all its expenditures, and the government's budget deficit is estimated to be around 47 trillion tomans. Of course, this figure only includes the apparent budget deficit of Iran, and there are other hidden deficits within the figures. Recently, the Speaker of Parliament stated, 'In the 2017 budget, we had a budget deficit of about 40 to 50 trillion tomans, which was covered with participation bonds.' Since the Iranian economy is state-centered, externally oriented, and inward-looking, any external tension—regardless of the rapid negative psychological effects on the behavior of economic actors—will negatively impact the balance of Iran's budget. This budget deficit is not surprising; it was predictable during the budget preparation last year due to its optimistic nature. Therefore, it should be expected that the budget deficit will be greater than this, and other indicators confirm this. The most important indicator that displays the budget deficit is the increase in government borrowing from the Central Bank and the increase in liquidity, which has risen by nearly 24 percent in the first five months of this year compared to the same period last year. This increase in liquidity has implications and risks regarding increased monetary inflation and consequently a decrease in the value of the national currency, of which we have recently seen a glimpse, and perhaps if it were not for the injection of oil dollars by the government into the currency market, the value of the national currency would have decreased further. Although this budget data only includes the budget for the first five months of this year—and does not encompass the entire year—it nevertheless indicates the increasing trend of the government's budget deficit, which does not seem to be stopping. Conclusion Since the Iranian economy is state-centered, externally oriented, and inward-looking, any external tension—regardless of the rapid negative psychological effects on the behavior of economic actors—will negatively impact the balance of Iran's budget, as these tensions raise the costs of risk for Iran, affecting the process of imports and exports of goods and services or the outflow of capital from Iran's economic environment, disrupting the balance between government budget revenues and expenditures, and increasing its deficit. This will lead to a further decrease in the value of the currency and, of course, imported inflation, negatively impacting investment, economic growth, and employment.