Iran’s Currency Crisis Is About More Than U.S. Sanctions

Iran’s ongoing currency crisis is often attributed to U.S. sanctions, but the roots of the rial’s steep decline go much deeper. While sanctions have undoubtedly exacerbated the issue, the problems within Iran’s economy are multifaceted, involving chronic fiscal mismanagement, inefficient banking systems, and internal political dynamics. 

These elements, combined with Iran’s political isolation, have led to a profound loss of public trust in the rial, causing severe economic instability. Lets explore the underlying causes of Iran’s currency crisis, the effects of domestic policies on the rial, and what would be required to restore stability and confidence in Iran’s economy and currency.

Internal Mismanagement and Economic Isolation

The Iranian economy has been plagued by systemic issues that predate U.S. sanctions. Since the Islamic Revolution in 1979, Iran has struggled with chronic double-digit inflation and substantial economic instability. While the effects of U.S. sanctions have certainly intensified the crisis, it’s important to understand that the country’s economic policies have played a significant role in the rial’s dramatic devaluation.

• Chronic Inflation and Expansionary Monetary Policies: A major issue is the Iranian government’s reliance on expansionary monetary policies to finance its deficits. This has led to rampant inflation, often exceeding 40% annually, which erodes the value of the rial and decreases purchasing power for ordinary Iranians. Over the years, the Iranian government has resorted to printing more money to meet its fiscal needs, particularly ahead of elections when the pressure to boost spending is high. This short-term solution exacerbates inflationary pressures, further devaluing the currency.
• Economic Isolation and Lack of Global Integration: Another critical factor is Iran’s economic isolation. While sanctions certainly play a role, Iran’s self-imposed isolation through its resistance economy strategy has limited its ability to engage meaningfully with the global market. The country’s focus on self-sufficiency has hindered foreign investment, trade opportunities, and the integration of modern technologies that could help diversify its economy. The result has been stagnation, with key sectors, including manufacturing and services, failing to grow at a sustainable rate. This isolation has deprived Iran of the benefits of global economic participation, leading to an over-reliance on oil revenues and contributing to the rial’s instability.

Rial Collapse Linked to Domestic Spending

At the heart of Iran’s currency crisis lies the government’s fiscal mismanagement and unrestrained domestic spending. While sanctions have severely impacted oil revenues, domestic policies have worsened the situation, creating a vicious cycle of inflation, devaluation, and economic stagnation.

• Massive Budget Deficits: Iran has been running persistent budget deficits for years, with government expenditures consistently outpacing revenues. The fiscal gap has been largely financed through borrowing from the Central Bank of Iran (CBI), increasing the money supply, and triggering inflation. The government’s reliance on oil revenues, now diminished due to sanctions, has left it unable to fund its deficits sustainably. This has forced authorities to liquidate public assets and engage in short-term fiscal stimulus measures, which have only further devalued the rial.
• Government Spending and Inflationary Pressures: Government spending has not been strategically directed towards economic growth or diversification. Instead, fiscal resources have been used to support inefficient state-owned enterprises and military expenditures, often at the expense of vital sectors like healthcare and infrastructure. As public spending rises, inflation follows, leading to skyrocketing prices on goods and services. For example, consumer prices surged over 53% year-on-year in early 2025, with essential items such as food and tobacco seeing increases of more than 70%. This inflationary environment accelerates the depreciation of the rial, making it even more difficult for the population to maintain their standard of living.

Banking System Failures and Inflation

Iran’s banking sector is another key factor in the currency crisis. The country’s financial system has been crippled by inefficiencies, poor governance, and the inability to integrate with international financial networks. This has made it extremely difficult for the central bank to stabilize the rial and manage the country’s monetary policy effectively.

• Central Bank Financing and Lack of Trust: The Central Bank of Iran (CBI) plays a central role in managing inflation and controlling the money supply. However, the CBI has been forced to indirectly finance the government’s budget deficits, exacerbating inflation and currency devaluation. Iran’s banking system is also fraught with inefficiencies, such as poor management and an inability to attract foreign investment. The lack of transparency and trust in the system has led many Iranians to seek alternative investment vehicles, such as foreign exchange markets and gold, further driving the depreciation of the rial.
• Sanctions and Financial Isolation: Sanctions targeting Iran’s financial institutions have cut the country off from the global dollar liquidity pool, which has further deepened the currency crisis. With limited access to international capital markets, Iran has been forced to rely on informal financial channels for trade and capital flows, exacerbating currency shortages. The country’s failure to attract foreign investment has only worsened the situation, leaving Iran to grapple with a system that is both inefficient and untrustworthy.

Iran’s Struggle With Transparency and Reform

One of the most significant obstacles to resolving Iran’s currency crisis is the lack of transparency and meaningful reform in the country’s economic policies. Despite periodic attempts at stabilization, the government has largely relied on short-term fixes rather than addressing the root causes of the rial’s collapse.

• Opaque Financial Management and Corruption: Iran’s economic management is plagued by a lack of transparency and widespread corruption. The government’s failure to disclose key economic data or publish accurate financial reports has left both domestic and international investors skeptical about the country’s economic future. The opaque nature of financial management has also contributed to public distrust, as Iranians are increasingly wary of government policies that appear to prioritize political interests over the long-term health of the economy.
• Resistance to Structural Reforms: There is also a resistance to implementing the structural reforms needed to overhaul the economy. Policymakers have often opted for repression, such as cracking down on currency speculators, rather than addressing the deeper issues that underpin the currency crisis. This approach has failed to restore confidence in the rial and has hindered efforts to stabilize the economy. Political infighting and a lack of consensus on how to proceed have left the country stuck in a cycle of crisis management, with no clear path forward.

Can Iran Rebuild Its Currency Trust?

Rebuilding trust in the rial will require comprehensive economic reforms that go beyond the relief of sanctions. While sanctions relief would certainly help, it is unlikely to result in long-term currency stabilization without significant changes in Iran’s domestic policies. The country must address its fiscal imbalances, improve its banking system, and increase transparency to rebuild investor confidence.

• Key Reforms for Currency Stability: To restore confidence in the rial, Iran needs to:

• Implement fiscal discipline by reducing budget deficits and curbing reliance on the central bank to finance government spending. This would help control inflation and stabilize the currency.
  
• Reform monetary policy by strengthening the central bank’s independence and improving transparency. This would help regulate the money supply and reduce volatility in the exchange rate.
  
• Introduce structural reforms to combat corruption, improve governance, and open the economy to foreign investment and trade. This would help Iran integrate more fully into the global economy, creating more opportunities for growth and currency stability.
  
• Geopolitical Considerations:  While sanctions relief is a necessary step, it must be accompanied by substantial internal reforms to create sustainable economic conditions. Geopolitical détente could ease tensions and improve economic prospects, but without meaningful domestic change, any gains from sanctions relief would be short-lived.

Final Word: 

Iran’s currency crisis is not merely the product of external pressures, but a reflection of long-standing internal mismanagement and policy failures. While U.S. sanctions have undoubtedly worsened the situation, they are not the root cause of the rial’s decline. To rebuild trust in the rial and restore economic stability, Iran must address its fiscal imbalances, improve transparency, and enact the structural reforms needed to create a more open and resilient economy. 

Until these changes are made, the rial’s future remains uncertain, and the country will continue to struggle with the deep-seated issues that have kept its economy in a perpetual state of crisis.