ECONOMIC LENS
Inflation risks, economic stability: Lessons from past policy failures
By Mohammadreza Hosseini Aliabad
Researcher in int’l economics
Iran’s economy has been grappling for years with persistent inflation, declining purchasing power and instability in the foreign exchange market. Under such circumstances, concerns about the possibility of a severe inflationary crisis are no longer merely media speculation or exaggerated warnings. They warrant closer economic scrutiny and a reassessment of the country’s policy direction. The fundamental question is whether the continuation of current trends could bring Iran closer to the kind of inflationary crises experienced by some other countries.
The experience of countries that have faced severe inflationary crises, like Venezuela, shows that hyperinflation rarely results from a single factor. Instead, it typically emerges from a combination of structural weaknesses and policy failures. Heavy dependence on volatile oil revenues to finance public spending, a weakening productive base, persistent fiscal deficits, excessive monetary financing of government expenditure, institutional instability and declining public confidence in the national currency were among the main factors behind the country’s prolonged economic deterioration. When monetary policy becomes a means of financing government deficits and fiscal discipline gives way to money creation, inflation can evolve from an economic challenge into a broader crisis affecting household livelihoods and social stability.
Iran’s economy also faces several challenges, including fiscal deficits, imbalances within the banking system, monetary expansion, foreign exchange constraints, uncertainty surrounding the investment climate and substantial dependence of public revenues on oil-related resources. Together, these factors have placed sustained pressure on macroeconomic stability. In such an environment, depreciation of the national currency does more than push up prices. It also fuels inflationary expectations, shortens businesses’ planning horizons and encourages households to protect their savings through foreign currencies and gold.
However, comparisons between Iran and countries such as Venezuela must take into account differences in their productive structures, industrial capacities, economic composition, institutional conditions and geopolitical circumstances. Predicting that Iran will inevitably follow the path of countries that have experienced similar economic policy failures would therefore be analytically unjustified. The more important task is to identify the economic mechanisms that can deepen instability and increase the risk of serious monetary crises.
One of the most damaging consequences of persistent inflation is the gradual erosion of household purchasing power and productive capacity. When incomes fail to keep pace with rising prices, the middle-class contracts, poverty expands and inequality in access to economic opportunities intensifies. At the same time, producers who cannot reliably anticipate future costs become less willing to make long-term investments. This can lead to lower productivity, weaker domestic production and greater dependence on imports, potentially creating additional inflationary pressures and reinforcing existing economic imbalances.
Addressing these challenges requires fundamental policy decisions that go beyond temporary price-control measures. Reforming the budget structure, reducing the dependence of recurrent government spending on volatile revenues, containing fiscal deficits, strengthening the independence and credibility of monetary policy, addressing banking sector imbalances, improving the business environment, promoting competitive domestic production and enhancing public financial transparency should all be central priorities.
Furthermore, reducing political and economic uncertainty and providing a credible, predictable outlook for investment are essential to achieving sustainable macroeconomic stability.
Ultimately, a severe inflationary crisis is not an inevitable outcome for Iran. Nevertheless, the experience of other countries offers important lessons about the consequences of unsustainable economic policies. Economies generally exhibit multiple warning signs before entering periods of hyperinflation. The central issue, therefore, is not simply to compare countries, but to understand how a lack of fiscal discipline, monetary stability and public confidence can impose costs on society far greater than those associated with necessary economic reforms. For Iran’s economic policymakers, pursuing difficult but essential reforms remains a more sustainable course than allowing persistent inflationary pressures to deepen.