The impact of international sanctions on Iran's economy with an emphasis on the role of the National Development Fund: DSGE model approach

This study examined the impact of economic sanctions on the Iran economy concerning the role of the National Development Fund. Different shocks were examined as sanction channels, such as oil exports, non-oil exports, and imports. To get the result, the dynamic stochastic general equilibrium (DSGE) model has been used by considering the effect of sanctions and highlighting the impact of the National Development Fund. The empirical model of Bayesian was used based on the new Keynesian approach and seasonal time series data for the period of 2004-2020. The impulse response function (IRF) results show that oil export sanctions reduce oil exports, National Development Fund reserves, and the Fund's private sector facilities. The decline in oil revenues also leads to a decrease in the Fund's allocation of resources to both the private and public sectors. Furthermore, the imposition of oil sanctions reduces the private sector's capital account, given the effective role of the government in Iran's economy. However, sanctioning non-oil exports raises the real exchange rate and the final cost of exporting, ultimately increasing inflation. Although the depreciation of the country's currency increases the exports of some goods, the final cost of exporting also rises. Nevertheless, the private sector's net debt to the Fund is set to increase despite the rise in exports. This is because increased exports reduce the private sector's ability to repay the Fund, compared to the effects of inflation and the cost of exporting. Additionally, the sanction on importing intermediate and capital goods is expected to increase private sector debt to the Fund due to the decline in production. The increase in debt due to the sanction on imports of intermediate goods is more significant than the increase in debt due to the sanction on imports of capital goods. Economic sanctions, whether on exports or imports, have a volatile effect on the exchange rate, while also leading to a one-time increase in producers' costs due to the need for raw materials, intermediate goods, and imported capital. Therefore, they make the economy both recessionary and inflationary (Nademi et al., 2016). The imposition of financial and oil sanctions on Iran's economy has further worsened its economic conditions and reduced the role of the National Development Fund in the country. In general, the Iranian economy is expected to deteriorate due to the imposition of economic sanctions on both the export and import sectors. On the one hand, there has been an increase in government consumption expenditure and budget deficit, leading to a rise in withdrawals from the Fund, as a result of the fall in oil revenues. On the other hand, there has been a reduction in facility payments to the private sector through a reduction in Fund income, resulting in a decrease in private sector investment and output. Sanctions on non-oil exports and imports will increase private sector debt to the Fund due to the effect of the reduction in production. In practice, the role of the National Development Fund in the economy will be diminished and reversed, and it will no longer be able to help the production sector in increasing production. There is an inflationary effect on the economy when the government withdraws more from the Fund and its debt to the Fund increases.