Iran's economy faces further difficulties amid conflict

Inflation in Iran had already climbed to nearly 50% by February before the conflict erupted, and it has since worsened. The country is now facing one of the decade’s most severe economic-social crises as GDP growth stalls near zero, inflation surges, and geopolitical and social tensions rise.

Economic slowdown and accelerating inflation

IMF estimates indicated real GDP grew 0.3% in 2025, down from 3.7% in 2024 and 5.3% in 2023. Before hostilities, inflation was close to 50% in February. After more than five weeks of fighting, economic problems have intensified, with a new inflationary spiral affecting essentials and other consumer goods.

Prices have risen across a wide range of items, including food, beverages, medicines, and diapers, as well as meals at upscale restaurants in Tehran. In Tehran’s outskirts, Amir (40) told AFP that bread prices jumped from 700,000 rial to 1 million rial (about $0.75). A friend reportedly paid 180 million rial for a cancer drug, previously 3 million rial. The famous Dobar cafe in central Tehran reportedly raised prices by 25% across all items in a single day. Even in the northwest, where imports are usually abundant from Turkey, some products rose up to threefold, according to a 50-year-old woman interviewed by AFP.

Currency depreciation and higher-denomination notes

Given the rapid inflation, Iran’s central bank issued a 10 million rial banknote last month, the highest denomination in circulation. A month earlier, it introduced a 5 million rial note, reflecting currency depreciation since last year’s conflict with the US and Israel.

Jobs, business closures, and household strain

As households’ budgets are squeezed, unemployment is rising. The war has forced many firms to close, pushing workers into precarious employment or uncertain pay. Markets nationwide shortened operating hours, construction firms laid off workers, and many of those affected were migrants from Afghanistan.

“When the conflict began, job opportunities became scarce and people stopped building,” said Faizullah Arab, a 23-year-old painter returning from Afghanistan. “Business owners have left the country, so business activity stopped,” added Walijan Akbari, a 42-year-old worker.

Those reliant on the internet or e-commerce also face hardship as Iran’s domestic network remains limited during the conflict. A 35-year-old finance professional in Isfahan said: “I am truly worried about our future, especially the economy. Mass layoffs, widespread closures... everything is unsustainable.”

Sector risks and banking concerns

Airstrikes on Iran’s steel sector and petrochemical and oil foundations are likely to have long-term effects on the economy. Adnan Mazarei, a former IMF official for the Middle East, warned that the banking system remains a concern, noting that “before the conflict, banks were already fragile with weak balance sheets.” He said the sector would face further shocks as consumers and businesses struggle to repay debts.

During the conflict, ATM withdrawals have been restricted to curb large withdrawals, though cards and online banking generally remain operational. The recent collapse of Ayandeh Bank, one of the country’s largest private banks, was cited as an example of the sector’s vulnerability.

Potential policy pressure

Mazarei suggested Iran may need additional relief packages, or that the central bank could be pushed to print more money. He said that would expand the money supply and could push inflation higher.

Hà Thu (AFP)