Iran’s economy is heading into a period of sharp deterioration following the March war, with mounting pressure from inflation, currency depreciation and damage to key industries raising the risk of a broader crisis.
Over the next two to four months, Iran’s economic conditions are expected to continue deteriorating sharply, with high inflation, rising unemployment, falling real incomes, and significant stress across key industries, the external sector, and the financial system, amounting to severe stagflation.
The economy entered the recent war from a weak starting point, and the combined effects of war-related damage, financial strain, and policy responses are likely to intensify these pressures.
Under a continued ceasefire, the deterioration is expected to be gradual but persistent; under a strictly enforced naval blockade, the adjustment is likely to be faster and more severe, with risks of very high inflation and broader economic disruption.
However, hyperinflation and full economic collapse are less likely in the next two to four months. An effectively enforced blockade, combined with military operations focused on reopening and securing the Strait of Hormuz, will push Tehran to the edge of economic collapse.
Starting point: A weak economy before the war
Iran entered the war from an already fragile position. By late 2025, inflation was elevated above 50 percent, the rial had lost substantial value, and the banking system was under visible strain, notably by the collapse of Bank Ayandeh. These pressures had already reduced household purchasing power and severely weakened business activity.
The continued depreciation of the currency, which saw the rial lose more than 20 percent in less than 20 days by the end of 2025, and worsening economic conditions contributed to widespread unrest across the country, which was ultimately suppressed. This left the economy highly vulnerable even before the war began.
Impact on income-generating industries
The war has directly affected Iran’s main sources of export revenue. Damage to industrial infrastructure—especially in petrochemicals and metals—has disrupted sectors that generated roughly $25–30 billion in exports in 2024 (petrochemicals: $13–17 billion; metals: $12–13 billion).
Production in these sectors is now constrained by:
- Physical damage to facilities, and utility infrastructure
- Shortages of inputs and spare parts
- Limited access to financing and foreign exchange
Even partial restoration of operations is expected to take time, and exports from these industries are likely to decline sharply in the near term.
Spillovers to other sectors are also significant. In the agriculture sector, fertilizer shortages and disrupted logistics are expected to reduce output. Heightened uncertainty, combined with likely shortages of steel and possibly cement, is contributing to a significant slowing of activity in the construction sector, particularly in private projects. The auto sector is also likely to suffer a setback due to the lack of steel and aluminum.
Internet blackout and business disruption
Domestic policy responses have added further strain. The widespread internet blackout has severely disrupted economic activity, especially small and medium-sized businesses reliant on digital platforms.
According to NetBlocks, the economic cost of internet shutdowns in Iran has been estimated to be at least $37 million per day during recent outages.
The blackout has:
- Disrupted online sales and payment systems
- Interrupted supply chains and coordination
- Reduced access to information and markets
These effects extend beyond online businesses and have slowed activity across the broader economy.
Financial system stress
The financial system, already under pressure before the war, is facing increased risks. The collapse of Bank Ayandeh in December 2025 highlighted underlying vulnerabilities in the banking sector. Other large banks were already under strain prior to the conflict.
Current conditions may lead to:
- Reduced lending as banks conserve liquidity
- Increased risk of bank distress if access to funding tightens
- Potential loss of confidence affecting deposits and payment systems
The disruption of the private trade credit system—often based on post-dated checks—has further constrained business financing. Recent signals from the judiciary suggesting reduced legal consequences for unpaid checks have weakened enforcement, discouraging sellers from extending credit and further restricting transactions.
Impact on households
Households are expected to reduce spending significantly. Private consumption accounts for roughly 50 percent of the economy, so this contraction will have broad effects.
Key drivers include:
- Rising prices and declining real incomes
- Increased uncertainty leading to precautionary saving
- Reduced access to credit
- Wealth effect due to declines in asset values, particularly equities in sectors affected by the war and the closure of Tehran Stock Exchange.
These factors point to rising unemployment, a notable decline in private consumption, and a broad and significant decline in living standards.
Economic conditions over the next 2-4 months
Scenario 1: Continuation of ceasefire with the US and Israel
Under this scenario, large-scale hostilities do not escalate further, and oil exports continue, although under constraints. However, petrochemical and metals exports remain significantly disrupted due to infrastructure damage and ongoing restrictions on trade and financial channels, including limited access to regional intermediaries such as the UAE.
In this environment:
- Oil revenues continue to provide limited foreign currency inflow
- Inflation remains around current high levels due to currency weakness and supply disruptions
- Industrial activity remains below capacity
- The banking system remains under pressure but avoids immediate systemic collapse
Economic conditions continue to deteriorate, with persistent pressure on household incomes and employment. The rial is likely to remain under depreciation pressure, sustaining elevated inflation in the 50-60 percent corridor. Resource allocation is expected to be heavily tilted toward military rebuilding—particularly missile and defense capabilities—while remaining funds are directed toward essential imports such as food and medicine.
Scenario 2: Rigorously enforced naval blockade
Under this scenario, a naval blockade is strictly enforced following recent actions by the United States administration. Iran would be largely unable to export oil through the Persian Gulf, with only limited alternative channels (such as “ghost fleet” activity) available.
In this case:
- Foreign currency inflows drop sharply
- The rial depreciates further, leading to a rapid acceleration in inflation
- Imports become severely constrained, limited to mainly essential goods
- Industrial activity declines further due to lack of inputs and financing
- Pressure on the banking system intensifies as liquidity conditions worsen
The loss of oil export revenue significantly weakens the government’s ability to stabilize the economy. Note that the “ghost fleet” overseas is likely to continue generating revenue for the next two to three months.
However, if the blockade is expected to continue, the government will ration this revenue for the near future. Inflation would rise sharply but most likely will not break the 100 percent ceiling, and the risk of broader economic breakdown increases, particularly if access to foreign currency becomes severely limited.
As in the first scenario, despite the dire economic situation, the government is expected to prioritize military spending to rebuild defense capabilities and prepare for future conflict.
Remaining resources would be directed toward securing basic goods such as food and medicine. Under a strict blockade, however, even if essential goods remain available, high inflation and rising unemployment would leave many households unable to afford them, sharply reducing living standards and intensifying public discontent. Even so, a full-scale economic collapse or hyperinflation is not expected within the next two to four months.
Scenario 3: Naval blockade plus major military operation in Iran's south
Under this scenario, strict enforcement of the naval blockade is coupled with a major military operation focused mainly on the south of Iran to reopen and secure the Strait of Hormuz.
Such an operation would render Iran not only unable to export oil but would also disrupt most of its trade through the Persian Gulf, including the import of food and other essential goods.
Securing basic goods would become extremely difficult for the government, which would be diverting its limited resources toward active military confrontation. Most economic activities are likely to come to a halt as inputs become extremely scarce and uncertainty rises sharply.
Inflation would spiral out of control, prompting the government to impose stricter limits on the payment system to prevent hyperinflation. These measures would, in turn, hinder economic activity even further. A full economic collapse within two to four months would not be inevitable, but it would remain a distinct possibility.
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