Iran’s foreign exchange reserves have gone through major fluctuations in recent decades due to economic sanctions, oil price shocks, and domestic policy shifts. With reserves standing at $133 billion as of August 2023, Iran holds the 26th largest reserves globally. However, reserves remain below their potential given Iran’s economy and resources.

Introduction

Foreign exchange reserves are assets held by a nation’s central bank in foreign currencies. Reserves provide backing for liabilities and influence monetary policy. They also buffer against external shocks like currency crises. For resource-dependent economies like Iran, forex reserves offer insulation from commodity price volatility.

Iran’s reserves come largely from oil export earnings, given crude accounts for 80% of its export revenues. With the world’s 4th largest proven oil reserves, Iran has major potential to build reserves. However, sanctions over Iran’s nuclear program have throttled oil income and reserves accumulation.

OPEC quotas, domestic spending, and broader economic policies also impact Iran’s reserves holdings. Finding the right balance between spending oil income domestically versus saving in reserves has been an ongoing challenge.

With sanctions easing on the horizon, Iran has chance to revert to its historically high reserves levels. Stronger reserves would support financial stability and growth. But reserves management remains crucial.

Historical Background

In the 1960s, Iran’s reserves stood around $200 million. Reserves surged in the 1970s as oil prices spiked, reaching $12 billion by 1976. The 1979 revolution disrupted this growth trajectory.

During the 1980-1988 Iran-Iraq war, reserves dwindled to under $1 billion as oil earnings dropped. But reserves rebounded to over $10 billion by 1991 after the war ended. High oil prices in the 1990s and 2000s propelled reserves past $100 billion by 2008.

However, reserves fell sharply to $50 billion by 2013 due to sanctions. The 2015 nuclear deal lifted sanctions and reserves doubled to $100 billion by 2017.

But reserves declined again to $90 billion in 2019 when the U.S. exited the nuclear deal. Reserves plunged to a 50-year low of $4 billion in 2020 as sanctions on Iranian oil exports tightened.

Since then, reserves have stabilized around $130 billion. But historically, reserves have fluctuated widely with economic shocks and policy shifts. More stable reserves growth requires optimizing contributions from oil exports.

Sources of Reserves

Oil Exports

Fluctuations in Iran’s reserves closely track its crude exports. Oil sales abroad earned Iran an average $50 billion annually from 2011-2018. These oil export proceeds account for the bulk of its reserves.

Enhanced reserves management requires strategies to maximize earnings from oil exports. Finding ways to boost oil sales despite sanctions can provide financing to rebuild reserves. Even as sanctions ease, prudent oil revenue management will help reserves last longer.

Diversifying exports beyond oil also reduces reliance on crude income. But for now, oil exports influence reserves the most.

Other Exports

Besides oil, Iran also earns foreign currency exporting petrochemicals, metals, minerals, and agricultural products. But these exports pale in comparison to oil, averaging under $20 billion annually. Normalizing trade relations would expand non-oil exports and reserves contributions.

Remittances

Iranians working abroad send home remittances that support external accounts. However, remittances via formal channels equal only around 1% of GDP or $5 billion annually. Increasing remittance inflows requires Iran to integrate further with the global banking system.

Foreign Investment

Foreign direct investment (FDI) into Iran also provides foreign currency that can expand reserves. But due to sanctions and unfavorable business conditions, FDI averaged just $1.4 billion from 2011-2020. Attracting higher FDI through reforms would support reserves growth.

International Loans

Iran’s reserves also grow through loans from foreign creditors like Russia and China. For example, Iran negotiated a $5 billion loan from Russia in 2020. But heavy reliance on loans boosts external debts. So while helpful in the short-run, loans don’t resolve the roots of Iran’s reserves challenges.

Reserve Holdings Composition

In terms of assets, around 80% of Iran’s reserves are held in foreign securities like bonds and deposits. This includes holdings of U.S. Treasuries.

The rest are physical assets like gold. Iran holds around 10% of its reserves in gold, valued at over $10 billion. This provides a buffer against currency fluctuations and sanctions.

Iran’s reserve composition is considered cautious and risk-averse. It favors safe liquid assets that can be quickly converted into foreign currencies if needed. With sanctions easing, Iran may take on more return-generating reserve assets. But the priority is still stability.

Reserves Management

Iran’s reserves are managed centrally by the Central Bank of Iran (CBI). Reserves policy is focused on balance of payments stability and defending the rial’s value. This involves frequent foreign exchange interventions by the CBI to smooth volatility.

The CBI closely regulates cross-border capital flows to prevent large drains on reserves. It imposes strict controls on importing goods like cars that require large foreign currency payments. Reserves preservation takes priority over free external transactions.

Criteria for reserves adequacy differ globally, but 20% import coverage is a common benchmark. By this metric, Iran’s reserves remain deficient, covering under 5 months of imports. Reaching 20% coverage would require reserves doubling from current levels.

Reserves Level Targets

In 2012, Iran set a reserves target of $150 billion and over $200 billion by 2025. This aimed to provide a buffer against oil shocks and sanctions of 5-6 months imports. However, reserves fell far short of these targets as sanctions battered oil exports.

Rebuilding to the $200 billion target remains a realistic goal for Iran. But it requires reservoirs to rise 15% annually through 2025. Steady gains of this magnitude are only feasible if sanctions lift and oil exports recover.

Even if the nominal target isn’t met, higher reserves are essential. $100 billion provides only 3 months import coverage today – well below prudent levels for Iran’s economy. Reserves of $200 billion would support more responsive monetary policies.

Challenges to Reserves Accumulation

Sanctions

U.S. secondary sanctions blocking Iran’s oil sales abroad remain the largest drag on reserves growth. Until these sanctions are removed and oil exports ramp back up, reserves will stay constrained. Sanctions have cut Iran’s reserves accumulation capacity by over 90% since 2018.

Falling Oil Prices

Depressed global crude prices also sap Iran’s capacity to earn foreign currency. Breakeven oil prices for Iran’s budget balance are around $95 per barrel. With oil prices below $100 in 2022, Iran struggles to export profitably after sanctions. Volatility in oil markets damages reserves stability.

Government Spending

High domestic spending also diverts potential reserves savings. Around 50% of Iran’s budget is currently funded by oil revenues rather than taxation. Curbing expenditures would allow more oil proceeds to flow into reserves. But politically, expenditure cuts are difficult.

Currency Depreciation

As the rial weakens against the dollar due to inflation, larger amounts of local currency are needed to maintain reserves valued in foreign currencies. This erodes purchasing power. Stronger monetary policy is needed to stabilize the rial and minimize reserves erosion.

Rebuilding Reserves

With the right policies, Iran could potentially double its reserves over 5-10 years. Key steps include:

  • Lifting oil export sanctions to boost inflows
  • Enforcing lower budget deficits to free up oil revenues
  • Attracting higher remittance and FDI inflows
  • Keeping interest rates higher to stabilize the rial
  • Diversifying exports and taxes to reduce oil dependence
  • Allocating more oil income directly into reserves

Gradually easing capital controls can also accelerate reserves accumulation. Allowing controlled outflows forces the economy to become more competitive, boosting hard currency earnings.

Reserves Outlook

Iran’s reserves face major uncertainty in coming years. Full sanctions relief would drive reserves higher. But if sanctions persist, reserves could keep falling.

Other swing factors include oil prices, economic reforms, trade normalization, and regional stability. A constructive outlook would see reserves recovering past $200 billion by around 2030.

But reserves remain vulnerable to external shocks. Over-dependence on oil and an inefficient economy undermine reserves stability. To reach its potential, Iran needs proactive economic reforms coupled with consistent reserves policies.

Conclusion

Foreign exchange reserves are vital for Iran’s economic sovereignty and resilience. But reserves have repeatedly whipsawed with changing oil fortunes and sanctions. Rebuilding reserves requires optimizing oil export earnings, while also diversifying Iran’s export economy. With constructive policies, reserves could again rise to historic highs. But reserves management remains crucial to securing Iran’s economic future.