Iran’s economy was already under strain before the US and Israel launched their war on the Islamic Republic. It was grappling with negative growth, soaring inflation and a currency crisis. Those problems have been compounded by strikes on the country’s civilian and industrial infrastructure and the US naval blockade of Iranian ports.
Despite the mounting pressure, Iran’s economy hasn’t reached the point of collapse, when there’s a complete breakdown in activity. The state has a high tolerance for economic pain thanks to decades of experience withstanding war and tough international sanctions.
As a peace deal with the US remains elusive and hostilities with Israel escalate, Iran is testing the endurance of the rest of the global economy with its closure of the Strait of Hormuz, which has roiled the supply of energy and other key commodities.
What were economic conditions in Iran like before the war?
Iranians have for years contended with high inflation, which has made food staples such as eggs, potatoes, rice and meat increasingly unaffordable. People have changed their consumption habits, in some cases replacing red meat and chicken with cheaper alternatives such as soybean meal.
The price increases have been driven by a dramatic decline in Iran’s export revenues and foreign currency inflows since the first Trump administration reimposed tough US sanctions. A tight supply of dollars has eroded the value of the rial and made imports more expensive.
The Iranian government has sometimes exacerbated the problem by trying to forcibly control prices. It’s also been accused of mismanaging the allocation of foreign currency to importers for purchases and presiding over a multi-tiered exchange-rate system that’s prone to profiteering and inefficiency.
The rial’s major crash in December triggered mass protests, which were met with a deadly state crackdown that killed thousands of people. The government has tried to make changes to address the cost-of-living concerns, including replacing the head of the central bank, raising wages for state employees and paying cash subsidies and salaries earlier than scheduled. But stretched state finances have limited the relief it can provide.
Iran’s gross domestic product shrank by 1.5% in 2025, according to the International Monetary Fund, weighed down by the ongoing impact of sanctions and disruption from the 12-day war that Israel launched in June last year.
How has the war made things worse?
The US and Israeli bombardments have damaged infrastructure across the country — from civilian sites such as residential buildings, hospitals and schools, to industrial facilities including gas fields, fuel depots and steelmaking plants. The destruction is by far the most intense in Iran’s history and thousands of Iranians have been killed.
Six weeks of strikes prior to the ceasefire agreed to in April caused around $270bn worth of economic damage, according to the Iranian government. That’s almost as high as Iran’s expected GDP this year, which the IMF estimates will amount to $300bn.
The attacks forced thousands of businesses to close and many haven’t reopened. Daily life mostly ground to a halt during the fighting, resulting in a sharp decline in economic activity. The IMF forecasts GDP will fall by a further 6.1% this year, the biggest contraction in decades.
The rial has come under continued pressure, fueling inflation. The currency hit a record low in May, while year-on-year inflation reached 77%, according to Iran’s central bank. More households have turned to credit in the absence of cash and there’s been a boom in installment plans to pay for essential goods and services such as taxi rides and books.
The war has sparked an unemployment crisis. At least a million jobs are estimated to have been lost since the conflict began, the pro-reform Etemad newspaper reported in May, citing an interview with the deputy minister of labor and social welfare, Gholamhossein Mohammadi. There’s been a surge in the number of Iranians seeking unemployment insurance, according to the country’s leading financial newspaper, Donya-e Eqtesad.
As the war makes Iranians poorer, the UN Development Programme estimates that up to 4.1mn more people could drop below the international poverty line. That’s equivalent to almost 5% of the population.
What’s been the impact of the US blockade?
The US navy has been blockading ships heading to or from southern Iranian ports since mid-April, in an effort to apply economic pressure on Iran to reopen the Strait of Hormuz. This has effectively severed the Islamic Republic’s exports out of the Arabian Gulf, depriving it of revenue from the sale of oil, petrochemicals and industrial products such as steel.
The US maneuver is testing Iran’s ability to keep pumping oil as storage on land and on tankers at sea nears full capacity. The country’s crude output fell to a five-year low in May, according to a Bloomberg survey.
The decline in Iran’s overall exports has further squeezed its foreign-exchange revenue, which is crucial to be able to import goods. Capital Economics said at the end of April that Iran’s accessible foreign currency reserves — those not cut off due to sanctions — were equivalent to no more than three months’ worth of pre-war imports.
As the blockade chokes off inbound shipments as well, grain imports have slumped and manufacturers have reported shortages of some materials, including for products needed to make fresh food packaging.
Are the economic problems from the war just due to external factors?
Iran’s business activity has also been hampered by the state’s internet blackout. Restrictions were imposed after the war broke out and came just weeks after an earlier web shutdown in response to the mass protests.
For the first three months of this conflict, most Iranians only had access to domestically hosted and state-run websites, as well as a few apps, marking the longest nationwide blackout in history. Industry officials warned that this was causing Iranian businesses to lose between $30mn to $40mn a day.
Connectivity was largely restored in late May, according to monitoring group NetBlocks, although it said that services were still being heavily filtered.
Why hasn’t Iran’s economy collapsed?
Iran has decades of experience parrying the impact of trade embargoes, economic isolation and war. It’s adopted various methods to circumvent Western sanctions, including layers of shell companies to obscure business transactions and so-called dark fleets of tankers to export its oil.
The country has endured extended periods of low crude exports before, including during President Donald Trump’s first term in office, when he pulled the US out of the international nuclear deal with Iran and reimposed harsh sanctions.
There is added pressure this time around as the blockade is physically hindering Iran’s ability to send crude to buyers, most of whom are normally in China. But the effect will take time to filter down through the economy. Iran accelerated its oil shipments ahead of the war and earned bumper revenues prior to the blockade due to the jump in oil prices. This should provide a buffer.
The government has implemented protectionist measures to secure the domestic supply of goods. It’s banned the export of many essential items, including all food and agricultural products, as well as some petrochemicals and steel slabs and sheets. The central bank has also said it’s prioritizing the allocation of foreign exchange reserves for the procurement of essential items.
The country has boosted the use of trade routes that don’t rely on the Strait of Hormuz. It’s sent more goods by rail to neighbors such as Pakistan and Afghanistan, while the number of cargo trains going from Xi’an in central China to Tehran has increased. Iran is also leaning more on its northern ports along the Caspian Sea, which have traditionally facilitated trade with Russia.
Iran has had an official policy of “economic resistance” since 2013. This was a doctrine of former Supreme Leader Ayatollah Ali Khamenei, who was killed by Israel in the opening salvo of the war. He wanted Iran to strengthen its domestic production capacity and reduce its reliance on imports to guard against further isolation from the West. There was some progress toward this goal during Trump’s first term, when the disappearance of foreign goods and brands opened the market for Iranian manufacturers.
What challenges will Iran face in recovering from the war?
Reconstruction will be an expensive and years-long process. One of Iran’s demands in peace talks with the US is reparations for the damage and financial cost of the war. It’s highly unlikely that the US will agree to directly pay compensation.
A draft agreement included a post-war international investment fund that the US would help facilitate, according to the New York Times, which cited people briefed on the matter. An Iranian official and one diplomat told the newspaper that the fund could be around $300bn.
Iran is also pushing for sanctions relief, which would ease its economic isolation and boost its recovery efforts. Being able to trade more freely with the rest of the world would allow Iran to reduce its dependence on regional partners.
Is the economic pain a threat to Iran’s government?
The possibility of further civil unrest over economic grievances is very high, according to an assessment by Bloomberg Economics. However, it estimates that the risk of regime instability is only moderate as the Islamic Revolutionary Guard Corps has tightened its grip on power. The war has galvanized public opposition to the US and Israel because of the scale of their bombing campaign, which could overshadow some of the domestic resentment.
