Sanctions, Wars and Prospects for the Iranian Economy

The economic challenges facing the Iranian economy have acquired new dimensions since the wars following the Israeli attack on Iran in June 2025, the further US-Israel attacks in February 2026 and the continued US-Iran conflict over control of shipping in the Persian Gulf. This paper begins with a historical overview of the Iranian macro economy since the establishment of the Islamic Republic of Iran following the February 1979 Revolution, with particular emphasis on the evolution of output, inflation and the exchange rates. It then examines the current economic conditions and discusses possible developments and commensurate policy responses. Our central scenario is a relatively positive one, in which military engagement ends and is replaced by a state of non-aggression, a continued hostile truce. In these circumstances, with appropriate policies, inflation may be reduced from its recent high levels with modest expansion of output. However, there are more negative scenarios that involve continued military engagement and a siege economy. There is concern in Iran that inflation, which has been persistent and tending to rise over time, will take off into hyperinflation. We examine this possibility, bearing in mind the resources (domestic and international) required to finance the massive reconstruction program needed to repair the wartime damage.