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

Purpose: The negative effect of oil shocks on the economy is one of the main problems faced by oil-exporting countries. These countries have many energy resources, but they have to sell their raw materials and may eventually fall victim to the Dutch disease due to the lack of development. In addition to suffering from Dutch disease, Iran is under international sanctions for more than 40 years. The sanctions against Iran date back to 1979 and include a combination of many different types of sanctions. In 2006, the United Nations Security Council imposed various arms and technology trade sanctions on Iran in response to the threatening trends in the development of Iran's nuclear capabilities. The US expanded its sectoral sanctions against Iran in 2007-2008. In 2012, Obama’s Administration deepened these sanctions by imposing severe financial sanctions on Iran, effectively cutting Iranian banks off from the global financial system. This, in turn, halted the country's oil exports and deprived the economy of significant revenues. These sanctions were further expanded in scope in 2013. In 2018, Trump’s administration unilaterally put Iran's economy under "maximum pressure" by re-imposing US sanctions after a brief period of multilateral sanctions relief related to the implementation of the 2015 Joint Comprehensive Plan of Action (JCPOA). Establishing and operating national development funds is a mechanism to reduce the negative impact of oil revenue volatility on the domestic economy. In addition to contributing to economic stabilization and intergenerational savings as well as protecting the domestic economy from the possible negative effects of natural resource revenues, these funds seek to invest financial resources and achieve higher returns (Sayadi, 2013). Additionally, they allow for the smoothing of government spending and investment, as surplus resources are accumulated in the funds in response to positive events and injected into the economy in response to adverse events (Bastani et al., 2016). At the beginning of the establishment of the National Development Fund in Iran, it was decided that, after deducting 14.5 percent of the oil company's share and 3.5 percent of the oil-rich regions' share, 20 percent of the foreign exchange earnings from oil and gas exports would be deposited in the fund's account. This amount would be increased every year. However, due to the sharp decline in the oil revenues in 2014 and the needs of the government, this trend was not continued (Norouzi et al., 2019). In this context, this paper begins by reviewing the role of economic sanctions as a random shock to the Iranian economy, emphasizing the role of the National Development Fund and the stochastic-dynamic general equilibrium model. Next, Bayesian methods are used to examine their impact with the data from 2012 and 2018, when sanctions against Iran were at their most severe. In a developing country like Iran, which faces economic sanctions and Dutch disease simultaneously, the importance of this issue is enormous.
Methodology: A new Keynesian stochastic dynamic general equilibrium model for the oil-exporting open economy is the subject of this section. The model includes households, labor market, firms, government, oil, national development fund, and foreign trade. The model parameters were estimated using the Bayesian method. The Central Bank of Iran (CB) and the Statistical Center of Iran (SCI) were the primary data sources for our quantitative analysis of the period of 2004-2020. The analysis focused on time series of available macroeconomic variables such as GDP, migration, exports, imports, and exchange rates. Seasonally adjusted quarterly data were also used from 2004Q1 to 2020Q4. They included de-trended data (Hodric-Perscott filter) on GDP, capital stock, government consumption, and private consumption.
Findings and Discussion: Based on the variance decomposition results, among different shocks of sanctions, the share of the shocks caused by sanctions is different. The non-oil export sanctions have had the greatest impact on real wages, inflation, employment, exchange rate, and total production. After that, the embargo on the import of intermediate goods and capital is in the next rank of influence on these variables. Also, the assets of the National Development Fund have been more affected by non-oil exports and imports. This proves that the resources returned to the fund by the private sector and governments have changed and actually decreased, which is due to the increase in sanctions. On the other hand, a large part of the oil revenues have not been deposited in the fund. Furthermore, the IRF data indicate that the oil export sanction has reduced the reserves of the National Development Fund as well as the Fund's facilities to the private sector. This has occurred by reducing its exports. There will be an increase in the government consumption expenditure when these sanctions are in place, indicating that a larger share of oil revenues is being spent on government consumption rather than on contributions to the Fund. Indeed, the falling oil revenues reduce the National Development Fund, resulting in fewer facilities granted by the Fund to the private sector (Sayadi & Bahrami, 2014). As a consequence, private-sector investment has declined. Despite the existence of the National Development Fund, after ten periods of fluctuation, it has returned to equilibrium.
Conclusions and policy implications: Economic sanctions have worsened the economic conditions of Iran and ultimately caused the reduction and reversal of the role of the National Development Fund in the country. In general, the imposition of economic sanctions on both export and import areas will worsen the situation of Iran's economy. On the one hand, the decrease in oil revenues has caused an increase in the government's consumption expenditures and budget deficit. It causes an increase in the fund. On the other hand, the imposition of this embargo on the oil sector by reducing the income of the fund has caused a decrease in the payment of facilities to the private sector; therefore, the investment of the private sector has decreased, and the amount of production has been affected too. The imposition of sanctions on non-oil exports and imports has caused an increase in the debts of the private sector to the fund due to the effect of reduced production. In order to manage the crises caused by sanctions in the short term, the governments have no choice but to withdraw from the development fund, so the majority of the fund's resources are allocated to expenses and the budget deficit.