Iran

Growth will remain weak due to international sanctions, subdued internal demand

Economic activity is expected to remain weak in 2026. The escalation of the conflict with Israel and the US in June 2025 exacerbated pre-existing structural and macroeconomic pressures. These include lower oil prices (hydrocarbons account for around 10% of GDP), persistent hyperinflation, high unemployment and long-standing electricity and water supply shortages, all of which were already hindering growth momentum. Moreover, sanction enforcement has tightened progressively since mid-2024 when the US stepped up actions against Iranian oil shipments, shipping companies and sanction-evasion networks, resulting in higher transport and insurance costs, shipment delays and increased oil price discounts. Enforcement intensified further in 2025, amid rising regional tensions, with stricter oversight over maritime logistics, financial intermediaries and trade-finance channels, thereby limiting foreign-exchange inflows. Following renewed diplomatic tensions and snapback of UN sanctions by the E3 (France, Germany and the UK) in late 2025, sanction-related risks have increased again, weighing on confidence, banking relationships and access to external financing, technology and capital goods. Following the mass demonstrations that began in late December 2025, the Iranian rial lost further ground on the parallel market, falling to around IRR 1.47 million per US dollar by mid-January 2026 from around IRR 0.8 million a year earlier. The sharp currency depreciation trend is set to intensify inflationary pressures and further trim household purchasing power, which will place heavy pressure on private consumption (around 50% of GDP). The outlook will weigh on investments (around 30% of GDP).

Inflation is expected to continue to skyrocket on back of the sharp rial depreciation against the US dollar and money printing. Tighter sanctions will further limit Iran’s access to capital inflows, adding to exchange-rate pressures and pushing up prices, particularly for imported goods and fuel. Monetary policy is likely to remain restricted by fiscal, commercial bank and social financing needs, as well as broader institutional factors, thereby limiting the authorities’ ability to contain inflation. At the same time, recent adjustments to fuel pricing, including higher charges for high-consumption users and restrictions on access to subsidised exchange rates, form part of broader efforts to contain the fiscal cost of universal subsidies by improving the manner in which they are targeted. They are expected to add moderately to inflationary pressure in the near term.

Persistent dwindling of the current account surplus, and a widening budget deficit

Iran’s external position is expected to weaken further despite the fact that its current account remains slightly in surplus. Lower oil prices and tougher sanctions are set to weigh on oil export revenues (around 55% of total exports). Although crude oil production proved to be relatively resilient in 2025 and was estimated at around 3.2 million barrels per day (b/d) in late 2025, the outlook remains uncertain amid intensifying sanctions and limited prospects for sanctions relief. Any more OPEC+ production cuts would likely add to downward pressure on global oil prices and further dent Iran’s oil revenue potential. Unlike crude oil, Iran’s gas exports are structurally limited and largely restricted to pipeline deliveries to Türkiye, Iraq and Armenia. Non-oil exports (mainly petrochemicals, metals/minerals and agricultural products) will decline owing to security issues such as tighter security controls at ports and border crossings, shipment delays, higher insurance and transport costs, and persistent energy and water shortages. Demand for imports will remain sluggish due to foreign exchange shortages and rial depreciation. Limited access to the international payment and banking system will also continue to drag on import volumes, although essential imports—particularly fuel—are expected to remain hefty on back of restrictions to the country’s domestic refining capacity. At the same time, Iran’s extremely limited access to external financing and the ban of accessing frozen foreign assets held abroad continue to drag on FX inflows. The situation is compounded by capital flight which has accelerated since 2025.

Tighter international sanctions are expected to place an extra drag on oil revenues. Meanwhile, fiscal expenditures, mainly in the shape of social spending and public-sector wages, are likely to keep on the high side amid ongoing social pressures, implying that any fiscal adjustment would most likely come at the expense of capital and discretionary spending. As a result, adjustment efforts are expected to take the form of cuts or delays in investment spending rather than reductions in current expenditures. At the same time, rising defence and security needs, together with weak economic activity that is thwarting tax collection, are likely to push the fiscal deficit even wider.

Severe political and social risks amid escalating geopolitical tensions

Tougher sanctions, skyrocketing inflation and a plunging rial have weighed on living standards. The situation has largely contributed to geographically widespread social protests that started in late December 2025 and spilled over into January 2026. Social unrest has been countered with a harsh security response, while the risk of tighter sanctions has added to the prevailing political and economic uncertainty. The scope for economic reform is narrow, as maintaining short-term stability is likely to remain a priority. Overall, domestic political dynamics, compounded by sanctions-related constraints, are expected to continue to drag on policy implementation and economic confidence over the medium term.

Prospects for renewed diplomatic engagement between the US and Iran appear limited in the near term as their positions on key issues have further diverged. The US has continued to signal tougher sanctions and stricter conditions related to Iran’s nuclear and missile activities, while Iranian authorities have indicated little willingness to resume talks with either the US or European counterparts, and has furthermore scaled back cooperation with the International Atomic Energy Agency. While channels for future engagement may not be fully closed, a meaningful diplomatic breakthrough remains unlikely given the current conditions. Relations between Iran and Israel continue to be extremely strained and harbour a significant risk of renewed escalation, including direct strikes and retaliation, possibly with US participation. Iran’s regional relations are complex, with limited diplomatic outreach in some areas, but significant trade and finance connections alongside ongoing geopolitical frictions. While engagement with certain Gulf countries has improved, relations remain sensitive to shifts in the regional security environment. Iran maintains an active regional posture, including through partnerships with state and non-state actors in Iraq, Lebanon and Yemen, which continues to shape its relations with neighbouring countries. Overall, the risk of periodic escalation remains high, which could weigh on confidence and the economy.

Last updated: January 2026