The Economic Sanctions and the Iranian Exchange Rate Crisis of September–December 2012

Abstract:

The signing of the “Iran Threat Reduction and Syria Human Rights Act of 2012” by President Barak Obama on August 17, 2012 resulted in a massive depreciation of the Iranian currency, the rial, by December 2012. The news of new sanctions on the petroleum and financial sectors of the Iranian economy was taken as a “Sudden Stop” in capital inflow into the country and was a “displacement,” which led to the currency crisis.

In this article #within the framework of the Minsky's theory of financial fragility of the market economies #we discuss the details of the currency crisis after the imposition of economic sanctions against Iranian petroleum and banking sectors #and the Iranian government's anti-speculative and stabilization policies. The article adds to our stock of knowledge of the occurrence currency crisis despite substantial foreign reserves holding of the Iranian banking system.

Keywords::

• currency crisis
• economic sanctions
• financial fragility
• sudden stop
• inflation

JEL Classification Codes::

• E4
• E5
• F5
• N2

Notes

1 The new economic sanctions in 2012 not only caused rial depreciation in the currency market and subsequent devaluation by the Central Bank of Iran, but also caused a drop in the GDP. The new sanctions reduced Iran's oil exports and cut the petroleum output about forty percent. The reduced petroleum output and exports caused a seven percent drop in the GDP. It should be noted that the non-oil GDP in the same year had a robust growth rate.

2 The National Development Fund is a fund organized and owned by the Iranian government with the goal of saving Iranian government's foreign currency earnings for use for investment and economic development.

3 According to the data by the CBI, the total foreign liability of the Iranian banks was 856,845.8 billion rials during the fourth quarter of 2012. With the average annual rial-dollar exchange rate of 26,214 rials per dollar, the dollarization liability figure is $32.67 billion.

Additional information

Notes on contributors

Abdol S. Soofi

Abdol S. Soofi is at the University of Wisconsin, Platteville.

Seyed Shamseddin Hosseini

Seyed Shamseddin Hosseini is at the Allameh Tabatabaei University, Tehran, I.R. Iran. The authors are grateful for helpful comments received from Professor William Waller on the earlier draft of this article.