July 25, 2024

Iran: Impact of Economic Sanctions

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By: Muktha Prasannan, Research Analyst, GSDN

Iran: source Internet

Since January 1984, Iran’s economy has been under various US economic sanctions of increasing scope and intensity. The sanctions progressively increased in scope, encompassing a complete embargo on all bilateral trade, beginning with a prohibition on the sale of American weapons and dual-use technologies and investment, and were extended to secondary boycotts, penalizing foreign companies investing in Iran’s oil and gas sector. United States imposed restrictions on activities with Iran under various legal authorities since 1997, following the seizure of the US embassy in Tehran in which hostages were taken. These sanctions were lifted after the hostages were released. The third set of sanctions was enforced in December 2006 in accordance with UN Security Council Resolution 1737, following Iran’s defiance of UN Security Council Resolution 1696, which called for the country to cease its uranium enrichment program.

The official aim of the sanctions is to force Iran to comply with international rules over its disputed nuclear program. The US Department of State Office of Economic Sanctions, Policy and Implementation is responsible for enforcing and implementing a number of US sanctions programs that control access to United States regarding businesses that conduct specific business operations in Iran. Initially, the sanctions were intended on investments in oil, gas, and petrochemicals, exports of refined petroleum products, and business dealings with the Islamic Revolutionary Guard Corps (IRGC). Over the years, sanctions have seriously impacted on Iran’s economy and population.

Significant unilateral (from 2018 to the present) and multilateral (from 2006 to 2016) sanctions campaigns have targeted Iran. The nation’s economic performance has suffered greatly as a result of these sanctions. Iran is subject to the strictest sanctions in the world, which are layered and cover Iranian sectors, entities, and individuals in relation to human rights, terrorism, and nuclear proliferation. Numerous detrimental macroeconomic effects, such as sharp currency devaluations, significant trade and budgetary deficits, high inflation, and rising rates of poverty, have been brought about by or made worse by these sanctions. Due to the broad nature of the sanctions, Iranians’ right to health, education, and other human rights aspects have been adversely impacted. Iran has not been able to effectively lessen or withstand the sanctions economic pressures.

Between 1984/85 and 1988/89, there was an average annual rate of decline in real GDP of about 2%, but the primary cause of this decline was the percentage decline in the annual value of oil exports during that time, not any other factor, including the limited sanctions. The estimated effect of sanctions on Iran’s real GDP, using counterfactual analysis, is estimated to be between 17 % and a maximum of 19 % for the first three to four years after the sanctions (2012–2015). Iran’s GDP remained below its counterfactual two years following the withdrawal of nuclear sanctions between 2015 and 2017. To comprehend the ways in which the Iranian economy has reacted to sanctions pressure, it is essential to identify the sectoral and firm-level effects of sanctions. Breakdowns in supply chains are the most visible sectoral effects of sanctions. Sanctions placed on Iran had made it more difficult for Iranian firms to maintain reliable supply chains.

In March 2012, the Iranian financial sector was denied access to SWIFT messaging service and the European Union froze the assets of Iran’s central bank, thereby denying Iran access to a secure international payment system. In its nearly 40-year history, Swift had never cut off a nation before this incident. This was in addition to the 2012 oil embargo. In an effort to cut off the Iranian financial sector’s ties to the US and the global financial system, the US imposed a series of sanctions in late 2011, which were followed by the EU sanctions. EU had imposed sanctions on certain Iranian companies, freezing their assets and suspending economic activities. Sanctions on financial sector had blocked Iran’s access to global banking system and prohibiting from partaking in international transactions. As a result, foreign banks and businesses were forced to decide between doing business with Iran and the US. Sanctions have hindered Iran’s ability to obtain goods required for the energy and oil industries, forcing many oil companies to leave the country, and decreased access to technologies that would have increased oil production. Additionally, a lot of foreign businesses have been hesitant to work with Iran out of concern that they would lose access to more lucrative Western markets. In addition to limiting export markets, the sanctions have increased the cost of repatriating oil earnings in convoluted ways that avoid the sanctions, which has decreased Iran’s oil revenue.

The Joint Comprehensive Plan of Action [(JCPOA) (2016–2017)] greatly reduced the severity of the sanctions, which had increased during the Mahmoud Ahmadinejad administration and Iran’s nuclear programme. However, in 2018, the Trump administration’s decision to reimpose economic sanctions and withdraw from the JCPOA caused the sanctions to increase once again. The immediate adverse impact on the Iranian economy were declining GDP growth and oil production, depreciation of Iranian rial, and rise in inflation. Exports and imports dropped down sharply after the sanctions were reimposed. Besides oil, Iran’s industrial metals which was a large source of the country’s export revenue, were also sanctioned. IMF estimates suggest Iran fell into a trade deficit of $3.45 billion in 2020. The country had a trade surplus of $6.11 billion in 2019, according to the IMF. On a large scale the external economic pressure along with internal economic mismanagement and corruption had led to decrease in GDP; resulted in high inflation rate and unprecedented reduction in national currency value. More than 42% of the Iranian population are living in below poverty line.

Iran’s military budget fluctuated throughout the various sanction periods and forms. They demonstrate that a greater short and long-term decline in military spending is linked to an increase in the severity of sanctions. Additionally, it was discovered that the multilateral sanctions had a statistically significant negative impact on Iran’s military spending. Iranian government modified its military budget in response to sanctions. It might not always be the case to make a negative adjustment, though. This is dependent upon how much the income effects of sanctions outweigh the effects on security. In the event that the financial consequences of the sanctions outweigh the security risks, the nation’s militarization could potentially rise. Sanctions may compel the state to divert its meagre funding from non-military (health, education, and culture) to military initiatives since they raise the target nation’s security risks well beyond income reductions. This resource reallocation may leave it challenging to invest in the nation’s healthcare system and enhance the welfare of its workforce.

The devastating consequences of the sanctions had affected all the aspects of healthcare delivery in Iran, restricting the availability of critical medicines and medical devices and adversely impacted the primary healthcare, treatment of complex disease including cancer; medical tourism and medical education and research. Sanctions had led to the interruption in pharmaceutical industry, resulting in shortage of medical drugs and supplies. This had turned the drug companies in obtaining less reliable and low-quality materials, leading to decreased efficacy and unexpected toxicity. Drug shortage has compelled the patients and clinics to turn to black market, at times with tragic side effects as blindness. Certain lifesaving drugs had been vanished from the legal market like lyophilized coagulation factor VIII concentrate for hemophilic patients. With the exponential inflation and significant devaluation of currency, resulted in reduced public access to health care. The sanctions have also diminished the accessibility of vital health maintenance, such as childhood vaccines and anti-rejection drugs for transplant patients. The prices of goods have been doubled from the original price which has added catastrophic expenditure on families and endangering health of patients, as well as widening the gap and tension between the socio-economic classes.

The sanctions caused an overall contraction in Irans manufacturing employment growth rate. In 2011, the manufacturing industry made up 92% of all imports and 19% of Iran’s non-oil GDP. The primary purpose of imports into the manufacturing sector is to provide capital and intermediate items that enhance local output. 16% of all jobs in Iran were in the manufacturing sector. Various industrial sectors are more or less vulnerable to a trade shock. However, the effect on employment is contingent upon how trade restrictions are interpreted by each sector. In some sectors of the economy, the imposition of sanctions may have caused imports and exports to be diverted to other markets where there are still unofficial financial channels and it is more difficult to enforce sanctions compliance. Domestic manufacture might take the place of imports in sectors where deflection is expensive. When it comes to imported inputs, this might result in input autarky or a total stop to production. Therefore, we take advantage of the different ways that different sectors have responded to the trade shock and calculate the proportional short-term job gain or loss in those areas.

It’s crucial to remember that the efficacy and impact of sanctions may alter over time and are often influenced by developments in international relations, diplomacy, and geopolitics. Furthermore, sanctions may harm civilian populations more than their intended targets, leading to unexpected repercussions. Furthermore, policymakers and experts disagree on whether sanctions are effective in accomplishing their objectives.


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4 months ago

Usually I do not read article on blogs however I would like to say that this writeup very compelled me to take a look at and do so Your writing taste has been amazed me Thanks quite nice post

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