It is no secret that the previous U.S. administration turned a blind eye to Iran’s oil exports to China, allowing Tehran to generate substantial revenues—$53 billion in 2022 and $54 billion in 2023. This leniency may have been politically motivated, serving as a countermeasure to the voluntary production cuts by OPEC+ countries, which drove up energy costs for the U.S. economy. However, the current administration has taken a more aggressive stance, following in the footsteps of the Trump administration’s 2018 sanctions policy. This escalation includes sanctions targeting Iranian officials, oil companies, and entities operating tankers registered under foreign flags. The tightening of sanctions is expected to continue until a new agreement is reached, covering three key areas: Iran’s nuclear program, its ballistic missile capabilities, and its regional alliances.

A Nation Under Pressure

Iran’s economy is once again in the spotlight, not only due to external sanctions but also because of structural weaknesses that have left it in dire need of investment. The impact on ordinary Iranians is severe, with declining living standards exacerbated by inflation and economic stagnation.

Geopolitical tensions play a crucial role in Iran’s economic trajectory. Conflicts with regional adversaries, particularly Israel, and uncertainty surrounding Washington’s next moves have created an atmosphere of instability. Western sanctions have deprived Iran of foreign investment for decades. Even during the brief window of the 2015-2018 nuclear deal, foreign capital did not flow in at full scale due to the deal’s phased implementation.

Iran’s economic challenges are deeply entrenched. Inflation has consistently exceeded 30% annually for several years, eroding purchasing power and straining household finances. A depreciating currency and sluggish economic growth have further darkened Iran’s economic outlook.

Internal pressures are mounting, with budget deficits, electricity shortages, and pervasive corruption adding to the crisis. The effects are visible on the ground—per capita GDP has declined, and economic forecasts predict further contraction this year due to U.S. measures.

Resilience Amid Hardship

Despite these difficulties, Iran’s economy has demonstrated resilience. The services sector, which accounts for more than 50% of GDP, remains a key employer. Meanwhile, the oil sector, buoyed by increased exports in recent years, has provided some relief. However, youth unemployment remains a significant concern, far exceeding the relatively stable general unemployment rate. These dynamics suggest that while certain sectors continue to function, the broader economy faces significant hurdles.

The Core Drivers of Instability

Inflation remains the Iranian government’s most pressing challenge. Driven by chronic budget deficits, subsidies, and currency depreciation, inflation is further exacerbated by underinvestment in infrastructure—particularly in the electricity sector, where power shortages have resulted in economic losses. Additionally, Iran’s financial sector remains severely underdeveloped due to its isolation from the global financial system. Corruption has further weakened both the public and private sectors, hindering sustainable growth.

Iran’s Economy by the Numbers

From a macroeconomic perspective, Iran’s economy grew by approximately 4% in local currency terms over the 12 months ending March 20, 2024. However, when measured in U.S. dollars, the economy’s nominal value has stagnated, with per capita GDP declining from $4,741 in 2022 to $4,501 in 2023.

For the current fiscal year ending March 20, 2025, inflation-adjusted nominal growth is projected at just 2%, with nominal GDP expected to fall below $400 billion due to ongoing internal and external pressures.

Iran’s economic imbalances stem from a combination of subsidy policies, mismanagement, inefficiency, electricity shortages, a weak financial sector, and persistent budget deficits. However, economic diversification has played a role in maintaining resilience. The services sector remains dominant, contributing over 50% to GDP, while the oil sector’s share has risen to 16%—a significant increase from 2023. The industrial and mining sector accounts for approximately 17%, while agriculture has seen a decline as many producers exit traditional farming.

Employment data from Iran’s central bank shows that the services sector dominates job creation, employing 52% of the workforce, compared to 34% in industry and 14% in agriculture. A clear trend of rural-to-urban migration has emerged. Official unemployment has fallen to 7.9%, yet youth unemployment remains alarmingly high, exceeding 20%.


Illustration 1: The Iranian Economy in Numbers

Meanwhile, inflation continues to be Iran’s most persistent economic threat, averaging 30% over extended periods. If left unchecked, inflation could push the economy into a downward spiral that will be difficult to reverse. The root cause remains the government’s chronic budget deficit, exacerbated by subsidy programs that inflate public spending beyond revenue capacity, leading to insufficient investment in critical infrastructure.

Pathways to Recovery

For Iran to correct its economic trajectory, several key steps are necessary:

Diplomatic Resolution of Sanctions – Engaging in diplomacy to ease sanctions would stabilize international economic relations and attract much-needed capital investment.

Subsidy Reform – Restructuring subsidy programs to reduce budget deficits while ensuring support for the most vulnerable populations.

Economic Diversification – Expanding investment in key sectors such as oil, digital industries, and infrastructure to foster sustainable growth.

Regulatory and Political Reform – Enhancing legal and administrative frameworks, strengthening judicial independence, and improving governance to boost investor confidence.

Geopolitical tensions remain a significant risk factor. The ongoing friction between Iran, the U.S., and Israel casts a shadow over economic recovery, despite reformist inclinations within Iran’s leadership. The ultimate question is whether Iran is willing to make geopolitical concessions to re-integrate into the global economy.

Is Tehran prepared for such a shift?