Sanctions on Iran force interest rates higher

Iranian President Mahmoud Ahmadinejad addresses the UN General Assembly last September. (UN)


Iranian President Mahmoud Ahmadinejad has apparently agreed to increase the Islamic Republic’s interest rate to 21 percent, causing the populace of his country to become increasingly worried about the economy and the toll on future income. It appears that the sanctions imposed by world leaders are having an effect—although Ahmadinejad denies the squeeze.

According to various sources, the sanctions are supposed to bring Iran’s oil industry to its knees. Not so! Countries such as Sri Lanka, China, Japan, Italy, South Korea, Spain, Greece, Turkey, and South Africa have remained aloof and refused to join the United States and European Union in banning the import of Iranian crude. These countries import their petroleum at a ratio of anywhere from 10 percent to 100 percent.

The pinch, however, is being felt in the area of foreign currency sales. According to Iran’s IRNA news agency, Ahmadinejad has upped interest rates on bank deposits to “up to 21 percent.” Iranians have been instructed to buy dollars only when traveling.

Hoarding US currency had become de rigueur in aristocratic circles in the country. It was the currency to covet, but no longer. Now it will be at a premium, and it will require government permission to purchase dollars. Ahmadinejad has acknowledged—albeit subtly—that the sanctions have seriously worsened the value of the Iranian rial. One anonymous Iranian politician depicted the current economy as the worst since the Iran/Iraq war.

Raising the interest rates in Iran resembles the tactics of the Jimmy Carter administration to curb run-away inflation. Under his governance, the Federal Reserve continued to raise interest rates to double digits. It was great for job creation, but prices were so high the newly hired could not afford to purchase goods and services. The result was what came to be known as “stagflation.”

The countries that joined forces to impose sanctions on Iran did so in hopes of restricting the amount of currency available to purchase the materials and expertise needed to continue its nuclear pursuits. The weaker rial triggered a run on gold and foreign currency and further exacerbated the problem, as Iranians withdrew savings in order to make their purchases.

Iran’s economy has been further destabilized. People such as students, medical patients, and business owners seeking to purchase dollars or other foreign currencies will be forced to prove need before a supply is made available. Raising the interest rate is a risky move on Ahmadinejad’s part, as inflation continues to rise despite the increase. It puts his leadership position in the upcoming March elections at risk in a parliament already critical of the despotic president.