The Economy of Iran Needs a Monetary Cooldown, not Another Revolution

The Economy of Iran Needs a Monetary Cooldown, Not Another Revolution.

When Mr. Khomeini stepped out of that famous chartered Air France Boeing 747 flight on February 1, 1979 in Tehran, it did not cross anyone’s mind for a second that forty-seven years later, the children of those who so ardently rioted against their banished King, would indeed riot again to have their olden days back. Revolution, they so emphatically hold, would bring those days back. I believe, however, that due to the lasting effect of the enormous monetary aggregate growth of broad money (M3) in the Iranian economy, time-consuming reforms and the de-stabilising nature of revolutions, the solution to the current economic catastrophe is a monetary cooldown, not another revolution. There are peculiar causes of the recent inflation spikes and the depreciated rate of exchange. To those causes and their cures we now turn.

Turning to the recent hyperinflation indicated by a 32.5% increase in the CPI, a reason for such number, is the failure of the Central Bank of Iran to manage the money supply. The narrow monetary aggregate (M1) rose above its historical highs over USD 10 billion in late 2020 as a very lax monetary policy was adopted to avoid recessionary pressure of the COVID-19 pandemic. The growth in the money supply, however, continued and surged sharply to USD 44.1 billion in late 2025 and as a result, the overpowered demand outpaced its available output and led to higher prices. Additionally, the withdrawal of the US from the Joint Comprehensive Plan of Action (JCPOA) in 2018 and the imposition of further sanctions on Iran combined with the protectionist policies of import tariffs and red tapes, drove up the prices of many raw materials, added to the costs of domestic producers and appeared in the form of a cost-push inflation. Of highest importance, however, is the inappropriate deficit-financing used by the Iranian government for decades now to maintain the government expenditure for its public projects. In 2024 for instance, the total government revenue was at 11.6% of Iran’s total GDP, whilst its spending was at 14.2% its GDP, indicating a large deficit gap. To monetise this deficit, the government sold its bonds mostly to commercial banks and at maturity, paid them through either debt rollover by selling even more bonds to the private sector, or instructing its Central Bank to turn on the printing press and create untrue money. Nevertheless, it was people who paid the price through the implicit tax of inflation. To add insult to injury, the Domestic Credit to Private Sector (DCPS) rose to an unbelievable high of over 55% of Iran’s GDP in 2016, whilst being allocated to reportedly inefficient industries and therefore not increasing the output as expected, leading to a credit boom for later years.

Shifting our focus to the extremely low rate of exchange of Iranian rial, I believe that the main issues to be the negative balance of trade, the discouragement of Foreign Direct Investment (FDI) and a substantial flight to sovereign assets. Latest data from the fourth quarter of year 2024 shows that the economy experienced a negative of USD -934 million in its net exports. Once imports exceed exports, the supply of the currency increases more than the demand for it, causing a depreciation in the value of the currency. Although largely masked by the revaluation policies of the Central Bank, the depreciation still has its effect. In addition, due to various economic and political reasons including the abolishment of JCPOA, high economic uncertainty and restrictive government regulations, the FDI was significantly reduced post-2018, weakening the demand for rial as foreign firms stopped investing and thus did not require Iranian currency. The mention of flight to assets is also noteworthy. It has become the norm, for an average Iranian household to firstly have a higher propensity to save than consume, due to the country’s highly unpredictable future and lower real income earnings, and secondly, to buy dollars, property or gold with such savings to be secure against the decreasing internal value of the currency. This puts even more pressure on the already-depreciating rial, as the increased supply of rial in this manner, reduces its scarcity further.

Speaking of the disease, we now turn to the cure. The most indispensable policy I would suggest, is for the government to allow for an independent Central Bank of Iran. The Central Bank should not by any measure and whatsoever be involved in political affairs and constrained by ideological or governmental supervision. If Mr. Khamenei, the Supreme Leader of Iran, does or does not like a high rate of interest to attract hot money flows and increase the value of rial, the decision should be a fully available option to the governor of the Central Bank. If the government runs a deficit and hopes to compensate for it by seeking the gracious splurge of the printing press, the governor should be able to firmly step in and let the President down. Moreover, an independent Central Bank of Iran would reduce the chances of corruption and enables competent governors and policymakers to replace the current incompetent ones who are affiliated by the government. Also, the Central Bank must take on a nominal anchor to which it would be held accountable. This can reduce uncertainty, restore targeting measures and prevent excessive consumer savings. Nationalised automobile, energy and transport companies must be privatised again and the government must reduce its improper intervention for its so-called “protection of the domestic innovation”. Of course, the terms of a US deal for a re-negotiation at whatever cost must be accepted in order to cease the sanctions. A very effective proposition I would make, is that the Central Bank can offer credit easing for the foreign firms to incentivise FDI further after the removal of US sanctions. The growth of money supply must also

be deliberately diminished. I have no doubt, with these reforms stated herein, Iran will see its economy rehabilitated.

To close the discussion, I would like to emphasise for those readers who may deem I am a proponent of the Islamic Republic, that I am not. The word Islamic Republic is impossible in essence. Republics are based on the freedom of voting. If people do not vote for Islam, as it is now the case, then how can this political structure survive? I, however, as mentioned in my opening lines, do not see another revolution as a good alternative. There are costs involved in revolutions. Implicit, they will only be realised later.