The Fate of the Economy if the Trigger Mechanism is Activated
The fate of the economy if the trigger mechanism is activated, according to Iran Gate, comes amid escalating tensions between the Islamic Republic of Iran and the West following the news of Tehran enriching uranium to 84%. Rafael Grossi has once again traveled to Iran. Some analysts believe this visit is an attempt to halt Tehran’s nuclear activities and prevent further efforts to activate the trigger mechanism. Now, there is concern about what will happen to Iran’s economy if the trigger mechanism is activated.
Evidence from Tehran’s nuclear activities indicates an increased risk of Iran’s nuclear file being transferred to the UN Security Council. In this case, naturally, UN sanctions will return, and Iran’s economy will face much more serious crises.
However, some believe that the visit of the Director-General of the International Atomic Energy Agency to Tehran is an effort to reduce tensions and prevent Iran’s file from being transferred to the UN Security Council.
But many believe that if these efforts prove fruitless, we should expect threats against Tehran to escalate, including the return of all UN sanctions against Iran. This could have widespread consequences for the country’s economy, affecting everything from the currency market to household livelihoods and increasing unemployment, making the already dire economic situation even more difficult for the people.
Currency Market
Some believe these pressures have been a major cause of the currency rate jumps over the past week. However, if these pressures increase and the likelihood of activating the trigger mechanism strengthens, there will certainly be expectations of a more significant and widespread increase in the dollar rate. Experts predict that if the trigger mechanism is activated in the remaining days of 2022, the dollar could be traded in the range of 70 to 75 thousand tomans in the spring of 2023.
Exports and Imports
Naturally, with intensified sanctions, the engine driving international trade will stall. This engine, which until 2021 continued to operate in a limited manner, now shows signs of stopping this year. If the trigger mechanism is activated, even the small amount currently in circulation will be lost. In this case, and with the halt of exports, the country’s foreign exchange earnings will decrease to an unprecedented level.
If such a scenario is executed, the country’s imports will certainly be affected, as the foreign exchange needed for imports is currently supplied from the NIMA currency market. This market’s suppliers are exporters who have borne the burden of poor international relations policy during the sanctions period.
The first impact of this will be seen in people’s livelihoods and the prices of essential goods. As without the necessary foreign exchange for importing food and medicine and reduced supply of these items in the market, even if we do not face shortages or famine, we will witness further price jumps for these goods.
Inflation
The government has always resorted to borrowing to cover budget deficits in response to declining revenues. The administration of Ebrahim Raisi has shown no hesitation in doing so. However, if sanctions intensify and foreign exchange revenues decrease again, initially, the monthly liquidity growth will increase from 3% to 5%, and in some more pessimistic scenarios, to 6%.
If such events occur in the country, we should expect inflation to jump from the current 45-50% range to 70-75% in 2023. This jump naturally means an even greater increase in living costs due to the devaluation of the rial, putting more pressure on the people.
Economic Growth
The thirteenth government initially claimed an economic leap, with some even talking about achieving 8% economic growth without needing the JCPOA. However, things progressed in a way that, despite 50% inflation, the country’s economic growth at its highest was 3%. But if we see the return of UN sanctions with the activation of the trigger mechanism, even this flimsy economic growth, which is false and due to inflationary jumps, will not be repeated. Instead, we should expect negative growth and, at best, zero economic growth in Iran.
Capital Flight
A series of disasters in Iran’s economy has led to capital outflows exceeding $12 billion annually under the Raisi administration. Now, it is estimated that if international pressures intensify due to the activation of the trigger mechanism, the capital flight market from Iran could become even hotter.
If the inflation rate continues to increase at the current pace and the production market is deprived of its current trickle, we should expect the capital formation rate to reach about twice the current level. In other words, if more than $12 billion is currently leaving the country, with the return of UN sanctions and the scenario mentioned, we should expect an outflow of more than $20 billion from the country. This outflow will be accompanied by the flight of human and cultural capital from the country and will not be limited to a $20 billion damage over one year.
