Why Iran’s Economy Failed?
Iran’s economy stands at a precarious juncture, facing a complex interplay of internal deficiencies and external pressures. This analysis delves into the primary drivers of Iran’s economic instability, from the impact of international sanctions and domestic policy failures to the potential for future recovery amid shifting geopolitical landscapes. By examining these factors, a clearer picture emerges of Iran’s economic trajectory and its implications for regional stability.
The Crippling Impact of Sanctions and Geopolitical Tensions
The re-imposition of U.S. sanctions following the withdrawal from the Joint Comprehensive Plan of Action (JCPOA) in 2018 has had a devastating effect on Iran’s economy. The sanctions, designed to exert “maximum pressure,” have significantly curtailed Iran’s oil exports, its primary source of revenue. According to the Carnegie Endowment for International Peace, Iran’s oil exports plummeted from 2.6 million barrels per day (bpd) in May 2018 to between 600,000 and 700,000 bpd (Ghodsi & Fathollah-Nejad, 2020). This drastic reduction in export revenue has strained Iran’s hard currency reserves, leading to a substantial trade deficit.
The consequences of these sanctions are far-reaching:
Currency Devaluation: The Iranian rial has experienced significant depreciation against the U.S. dollar, exacerbating inflationary pressures and eroding the purchasing power of ordinary Iranians.
Reduced Trade: Sanctions have hindered Iran’s ability to engage in international trade, limiting access to essential goods and technologies.
Economic Contraction: The World Bank forecasts that Iran’s economy will contract by 5.3 percent, further diminishing its economic output (Ghodsi & Fathollah-Nejad, 2020).
In addition to sanctions, geopolitical tensions have further destabilized Iran’s economy. For example, resolutions by the International Atomic Energy Agency (IAEA) against Tehran’s Non-Proliferation Treaty (NPT) Safeguards Agreement have triggered capital flight and currency depreciation, mirroring patterns observed after previous IAEA resolutions (Ghodsi & Fathollah-Nejad, 2020).
Domestic Policy Failures: A House Divided
While external pressures have undoubtedly contributed to Iran’s economic woes, internal policy failures have compounded the problem. Misguided subsidy policies, mismanagement, corruption, and a lack of investment have created significant imbalances in the Iranian economy.
Key issues include:
Budget Deficits: Recurring budget deficits have forced the Iranian government to borrow from the banking sector and increase the money supply, fueling inflationary pressures.
Energy Crisis: Years of underinvestment in energy infrastructure have led to frequent electricity shortages, disrupting industrial production and economic activity. As reported by Clingendael, disruptions to the production, transmission, and distribution of electricity cost the Iranian economy an estimated $224 million per day (Khajehpour, 2025).
Inefficient Subsidies: Iran’s extensive energy subsidies, which accounted for more than 27% of its GDP in 2022, have created economic distortions and disincentivized energy efficiency (CaspianReport, 2024).
Sources of Resilience: A Glimmer of Hope
Despite the numerous challenges, Iran’s economy has demonstrated some degree of resilience. The service sector, for instance, has emerged as a key driver of economic activity, contributing over 50% to the overall GDP (Khajehpour, 2025). Additionally, unexpected growth in the petroleum sector through increased exports has contributed to job creation.
Other sources of economic resilience include:
Economic Diversification: The shift towards a service-based economy has created employment opportunities and reduced reliance on oil revenues.
Strategic Partnerships: Agreements with countries like Russia, such as the Iran-Russia strategic partnership, offer potential economic momentum, particularly in the transit sector (Khajehpour, 2025).
Potential Transformations and Obstacles
To navigate its economic crisis, Iran must undertake significant transformations. These include:
Diplomatic Engagement: Achieving a diplomatic settlement with the United States to alleviate the impact of sanctions is crucial. The new Iranian government has openly advocated for diplomatic engagement with Washington.
Subsidy Reforms: Implementing meaningful subsidy reforms to reduce the financial burden on the treasury without triggering social unrest is essential. Creative approaches, such as allocating a set amount of gasoline to each citizen, are being considered (Khajehpour, 2025).
Digital Economy: Promoting digitalization to dematerialize economic activity and reduce economic imbalances requires removing regulatory and political obstacles that hinder the growth of the digital sector.
However, these transformations face significant obstacles. Potential escalations with Israel, uncertainty surrounding U.S. foreign policy, and domestic resistance to reforms all pose challenges to Iran’s economic recovery.
Conclusion
Iran’s economic crisis is a complex issue rooted in both external pressures and internal deficiencies. While international sanctions and geopolitical tensions have significantly impacted the economy, domestic policy failures have exacerbated the problem. To achieve sustainable economic recovery, Iran must pursue diplomatic engagement, implement structural reforms, and embrace digitalization. Only through concerted efforts on multiple fronts can Iran navigate its economic precipice and secure a more stable and prosperous future.
References
CaspianReport. (2024, February 12). Why Iran’s economy is shutting down. YouTube. https://www.youtube.com/watch?v=0qMDM4Y4Hwo
Ghodsi, M., & Fathollah-Nejad, A. (2020, December 1). The Geopolitical Roots of Iran’s Economic Crisis. Carnegie Endowment for International Peace. https://carnegieendowment.org/sada/2020/12/the-geopolitical-roots-of-irans-economic-crisis?lang=en
Khajehpour, B. (2025, February 11). Approaching the precipice: Near-term prospects of Iran’s economy. Clingendael. https://www.clingendael.org/publication/approaching-precipe-near-term-prospects-irans-economy
