What are the effects of foreign policy developments on the economy? Why are inflation and market volatility persisting?
These questions have constantly occupied the minds of many Iranians, investors and economic players. Although inflationary expectations declined for a short time, objective guarantees to solve the problems of sanctions and improve relations in the international arena are needed for the trend to sustain.
Last month, senior Iranian officials (not only government officials) came to the conclusion that they should try to resolve the country’s international and regional issues. The problem is that the authorities were late in coming to this understanding. Now they wish to establish proper relations with the world, which conclusion could have been reached two years ago, during the previous government, Vahid Shaqaqi-Shahri, an economist, prefaced his article for the Persian daily Ta’adol with this note. A translation of the text follows:
De-Escalation: First Condition for Improving Economy
Nevertheless, people have paid the price of this delay and are enduring financial pressures. During this period, Iran’s economy and people lost many economic opportunities.
At least under US President Joe Biden, it would be easier to reach stronger agreements and get rid of sanctions by solving foreign policy problems and reducing tensions. Those who care about the country had spoken of these necessities a long time ago, but no one paid attention. All in all, after a long delay and incurring huge costs, the establishment has realized that the first condition for improving the economy is de-escalation.
This new understanding has led to discussions on improving relations with the Arab world [especially the UAE and Saudi Arabia] in recent months and the need for easing tensions with Egypt was underscored.
Basically, the initiative of solving problems with neighbors and Arab countries has been prioritized.
I believe that the policy of improving regional and international ties is being adopted in institutions outside the government realm. I remember the answer former foreign minister, Mohammad Javad Zarif, gave when asked about his share in drawing regional and global strategies. “Zero,” he responded.
Iran’s new approach is to take relations with the Arab world [and then the West] seriously. Regarding the nuclear agreement, a step-by-step policy has been taken; it includes one step from Iran and one step from the other side. For now, these events have reduced inflationary expectations.
Upcoming US Elections and Domestic Economy
But the main issue is that presidential primary elections are about to start in the United States.
Most representatives of US Republican party are against Iran. Even Florida’s Governor Ron DeSantis, a candidate in the 2024 presidential election, is more radical than former president, Donald Trump. In fact, all four Republican candidates (Nikki Haley, Mike Pence, DeSantis and Trump) have different radical views about Iran.
The Iranian government has started implementing the de-escalation policy with the Arab world, as well as with Europe and the US. However, Iran will be one of the important issues in the US election debates.
These developments will an effect on Iran’s economic conditions, especially inflationary expectations. Positive and negative news trigger fluctuations in Iran’s economy on a daily basis. This is not suitable from an economic point of view because it creates a state of expectation that fuels recession.
In fact, this trend will give way to deeper recession and we will not see a sharp increase in prices in the short run. People will not buy goods and investors will wait to see how future trends pan out.
The recent rise in prices stems from recent fluctuations in the foreign exchange market and are gradually manifesting themselves in different economic sectors. Lack of investments and recession in production will lead to a shortage of supply and goods.
The shortage of supply will aggravate in some sectors and this will lead to excess demand and price increases. In general, Iran’s economy is in a state of uncertainty, as investors will vacillate until the state of relations with the West and neighbors is determined.
