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The economic roots of Iran's protests

2026-01-13 10:31:12Aktualitet SHKRUAR NGA REDAKSIA VOX

The economic roots of Iran's protests

The protests that erupted in Tehran on December 28 and quickly spread throughout Iran were sparked by one concrete cause: the collapse of the national currency, the rial.

Currency devaluation in Iran is never simply a technical issue; it immediately translates into rising prices and a loss of purchasing power, especially given the fact that many salaries are set only once a year.

In December, as the rial depreciated by 16% – bringing the total decline to around 84% over the past year – food inflation reached 72% on an annual basis, almost double the average of recent years.

These developments are the result of decades of economic isolation. Starting in 2011, sanctions on Iranian oil significantly reduced foreign exchange earnings and slowed economic growth from 5–9% per year in the early 2000s to less than 3% thereafter.

The loss of oil revenues created chronic budget deficits, which the government financed largely through money printing, fueling inflation.

The economic situation worsened further last year, when sanctions escalated into open conflict. Although the 12-day war with Israel and the United States in June 2025 caused limited physical damage, it exposed Iran's vulnerability to unexpected escalations.

This undermined the regime's claims that the situation was under control and significantly increased the perception of risk. Investment, already insufficient to offset the depreciation of the rial, fell further due to fears of further attacks by Israel and the US.

Iranian President Masoud Pezeshkian's push to implement long-overdue economic reforms added to the pressure. The proposed budget for the Iranian new year (which begins on March 20, 2026), submitted to parliament in November, was more austerity than expected.

Taxes were projected to increase from 42% to 57% of government revenue, due to the expected decline in oil revenues.

Meanwhile, public sector wages were set to rise at less than half the government’s projected inflation rate for next year, around 46%. Although parliament later softened the blow – by cutting the proposed VAT from 12% to 10% and doubling wage increases – the message of austerity had already been delivered.

Austerity measures are difficult to accept in any society, but they become politically explosive in a country where corruption is seen as widespread and where citizens are constantly confronted with open displays of luxurious wealth.

The sense of inequality is further reinforced by the distorted system of many exchange rates in the economy.

When oil exports fell from over two million barrels per day before 2011 to only about 300,000 barrels in 2019, the government began distributing some of the scarce foreign exchange at highly subsidized rates, with the aim of protecting the population from the consequences of sanctions.

But this system quickly turned into a mechanism for abuse and capital flight: many beneficiaries did not use the funds for imports of essential goods, but for luxuries, trips abroad, or reselling foreign currency on the open market.

Later, the government created managed foreign exchange markets, where licensed exporters could sell their foreign exchange earnings to importers, under state supervision and at rates between the subsidized and market rates. However, it was reluctant to completely eliminate the multiple exchange rate system, fearing a backlash from influential traders who benefited from the privileges.

Pezeshkian, however, decided to take this step. The attempt to eliminate one of the most visible sources of corruption in Iran angered entrenched interests, which may have contributed to the initial strike by merchants in Tehran’s Grand Bazaar – the spark that ignited the mass protests.

Even if this strike was politically motivated, as reformers often accuse conservative rivals of sabotaging changes, the protests quickly escalated into a crisis so deep that both sides are now searching for a way out.

The challenge is as much economic as it is political. The government’s efforts to raise revenues, narrow the budget deficit, and reduce reliance on money creation may, in the long run, reduce inflation. But in the short term, the reforms come with real costs. Removing foreign exchange subsidies immediately raises the prices of some goods, fueling inflation and putting additional pressure on the rial.

To compensate families, the government has launched monthly transfers of ten million rials per person (about $7, or about $40 in purchasing power parity terms). The payments have already been deposited to about 80 million beneficiaries, excluding only the richest ten percent. But it remains unclear whether this will be enough to quell the protests.

The goals of the latest nationwide uprising – the “Women, Life, Freedom” movement of September 2022 – were clearer. Spurred on by the killing of 22-year-old Mahsa Amini by the morality police, the protests were brutally suppressed. However, they are widely considered to have achieved at least one goal: weakening the enforcement of the hijab law. Today, more and more Iranian women and girls choose not to wear it in public.

In contrast, the benefits of Pezeshkian's reforms are uncertain, expected to emerge only in the long term, and difficult to explain to a population battered by years of economic instability. The Iranian government cannot credibly promise exchange rate stabilization or curbing inflation in the near future.

The only step that could bring relatively quick economic relief – and to which the government could realistically commit – would be to stop hostilities with Israel and the US. But this may be even more difficult for the Iranian leadership than compromising on the implementation of the hijab.

In any case, ordinary Iranians are deeply skeptical of any promises from Israel, especially after the destruction of Gaza, the occupation of Syria, and the intensive bombing of Iran last year, which reportedly killed over a thousand people. The same distrust applies to the US, which under the presidency of Donald Trump has shown itself to be unreliable even with its closest allies.

The protests in Iran reflect not only economic despair but also the tension between distrust of domestic reforms and fear of external pressure. For this very reason, they may not be easily suppressed. / Source: Project Syndicate / Adapted by Gazeta Si


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