As the US-Iran ceasefire deadline nears, Tehran’s economy faces a turning point, burdened by war and increasing structural stress. And the impact could reverberate across the Gulf.
Years of isolation combined with the heavy toll of the current conflict have pushed the country’s financial systems to the brink, casting a shadow over the region’s longer-term economic stability goals.
The International Monetary Fund, in its latest report last week, said that Iran’s economy will shrink by 6.1 per cent this year, before rebounding to 3.2 per cent growth in 2027. So, what’s next for the country’s economy?
Mohammad Farzanegan, professor of Middle East economics at Philipps-Universität Marburg, the Centre for Near and Middle Eastern Studies in Germany, said that while the IMF’s forecast contraction in gross domestic product per capita is substantial, this is not unprecedented.
“Iran experienced comparable declines during the 2012 sanctions episode and again in 2018 following the reimposition of US sanctions after the Joint Comprehensive Plan of Action. These episodes suggest that the economy has some adaptive capacity, particularly through trade reorientation, diversification of partners and routes, and greater reliance on informal and semi-formal channels,” he tells The National.
However, the current shock is more complex, he adds. “In addition to sanctions, the economy is now facing war-related disruptions, damage to infrastructure, and constraints on digital connectivity.”
Iran’s economy was weakened by years of sanctions, so the war has intensified problems rather than created a totally new crisis, not to mention the huge financial damages.
Early estimates indicate that Iran has reportedly suffered about $270 billion in direct and indirect damages since the start of the war on February 28, according to media reports, quoting Iranian government spokeswoman Fatemeh Mohajerani.
Iran will need to spend extensively to repair the damaged infrastructure, including airports, bridges and refineries, but the challenge is if the country has the buffers to deal with that.
The country has “limited financial buffers” and will be likely to rely more on internal adjustment and selective external partners than broad international aid, according to Alex Vatanka, a senior fellow at the Middle East Institute in Washington. “The scale of damage is enormous and will take years to recover from,” he tells The National.
Echoing similar views, Mr Farzanegan said external support is likely to be “limited and selective” under current geopolitical conditions, and that meaningful reconstruction would require at least partial easing of sanctions to enable access to international finance, technology, and investment.
“Large-scale reconstruction requires access to finance, foreign exchange, and imported capital goods. Iran enters this phase with limited fiscal space, restricted external borrowing capacity, and continued sanctions, which significantly constrain its ability to fund reconstruction at scale,” he said.
Energy impact
Iran’s oil sector has also been hit hard with the US blockade now in place at the Strait of Hormuz, as well as attacks on its energy infrastructure.
The Middle East conflict could cost the region as much as $58 billion in repair costs for energy-linked infrastructure, with oil and gas facilities alone accounting for up to $50 billion, a report by Rystad Energy found. The estimate marks a sharp increase from the research firm’s initial $25 billion forecast a few weeks ago, reflecting a broader scope of damage before the April 8 ceasefire between the US and Iran.
“The [oil] sector has taken hits, but Iran has experience operating under constraints and using alternative channels, so partial recovery could be relatively quick, though full normalisation will take much longer,” said Mr Vatanka.
A prolonged, fully effective blockade is difficult to sustain, but even temporary disruptions at the Strait of Hormuz can significantly constrain Iran’s export capacity and increase costs, according to Mr Farzanegan.
“In the short run, Iran may partially adjust through alternative channels and informal networks, but these are unlikely to fully offset large-scale disruptions,” he said, adding that if export routes remain restricted, Iran would need to reduce production, which can create technical challenges for oilfields.
Currency in free fall
Iran’s currency, which has also been in free fall, could stabilise somewhat if the war ends, but underlying structural weaknesses mean inflation will likely remain high and volatile, said Mr Vatanka.
Inflation is projected by the IMF to approach 70 per cent in 2026, reflecting both supply disruptions and persistent monetary imbalances, according to Mr Farzanegan. “The exchange rate is closely tied to these dynamics. Even if active fighting stops, a fragile ceasefire is unlikely to restore confidence; uncertainty itself can sustain pressure on the currency,” he said.
“Looking ahead, the key constraint is foreign exchange supply. If oil and petrochemical exports remain disrupted, the state’s capacity to provide hard currency will weaken, while precautionary demand for foreign assets will increase. This combination would put renewed depreciation pressure on the rial and feed back into inflation.”
Wider Gulf impact
Prolonged economic destabilisation in Iran would increase uncertainty across the Gulf region, affecting trade, energy markets, and investment sentiment, according to Mr Farzanegan.
From that perspective, there is a shared interest in preventing a drawn-out economic crisis, although whether this translates into financial support remains uncertain.
For the Gulf, the sentiment, meanwhile, has been one of resilience, that it will be able to withstand the shock and come out the other side. However, many countries in the region are expected to recover from the Iran war by next year if the conflict ends soon, as per industry forecast.
While the long-term outlook is shrouded in uncertainty, discussions in Washington recently during the IMF and World Bank's spring meetings point to what is being described as an “asymmetric shock”.
“Overall, expect a prolonged period of low growth and adaptation – an economy under pressure but continuing to function through workaround networks rather than breaking down outright,” said Mr Vatanka.
