In its most concise definition, political economy refers to the consequences of political decisions on a country’s economy. Given the significant interconnectedness of political decisions with Iran’s economy in the recently concluded decades, and especially the impact of foreign policy decisions on Iran’s economy, examining this phenomenon is paramount. The situation in Iran has become highly precarious-citizens and governing institutions hold diverse expectations. Examining the profound impact of politics if Iran and its strained economy is crucial given their deep and consequential entanglement.
The stark reality is that throughout the years following the initial round of sanctions by Barack Obama until the present day, the entirety of Iran’s economy, encompassing macroeconomics, business economics, and household economics, has been subsidizing the political decisions of governing institutions. While the government provided this subsidy, the economy slowly reached the brink of recession and the loss of its capabilities. Macroeconomics in these years has experienced growth lower than the average growth rate of the half-century leading up to March 2025, such that available statistics indicate an average economic growth close to zero during this period. This troubling phenomenon of low GDP growth has reduced Iran’s negotiating power in its relations with other countries, particularly regional rivals such as Saudi Arabia, Turkey, and other nations.
Furthermore, during these years, the average inflation rate in Iran has reached 45 percent, significantly higher than the inflation rate of the past few decades. This inflation rate has paved the way for the devaluation of the Rial against reputable currencies, making the Iranian Rial one of the cheapest national currencies in the world. The declining trend in investment growth during these years has led to a continuous reduction in capital stock.
Political decisions in these years have also resulted in the weakening of Iranian businesses. Households have lost their purchasing power, with numerous families falling below the poverty line.
Economic Challenges
The Iranian New Year (Nowruz) commences under the weight of a stark and intensifying conflict between political imperatives and economic realities, ushering in a period of considerable uncertainty. Iranian citizens are losing their resilience against the increasing trend of inflation, especially food inflation, and expect the government to protect them from the distressing inflation.
How will the Pezeshkian Government protect citizens from inflation? The government essentially has two options: first, to control the inflation rate by injecting foreign currency and cheapening imports, which requires an increase in revenue from oil exports. Can the government and the ruling establishment make tough decisions and increase export sanctions? Is the establishment willing to grant more political concessions to China for oil exports? If so, the possibility of a reduced degree of independence for Iran is on the agenda.
The other, and of course, a more complex path with unknown consequences, is for the governing institutions to rely on the greater resilience of the people and adapt to the increased inflation rate by further shrinking the citizens’ livelihoods while also accepting the risk of more significant public discontent. To implement the second path, the government must increase the prices of energy carriers and advocate for fewer subsidy payments, which is also a difficult political decision.
The Decision in Foreign Policy
The most significant concern of Iranians in the current situation is the decision the ruling establishment will make regarding foreign policy, specifically relations with the United States. Every decision by the government in this regard has broad consequences for the citizens’ economy, as well as the macroeconomy and business economics. If the government’s decision is not to accept direct talks with the United States, it must take the economic consequences; this means accepting the risk of a large-scale war or at least yielding to its psychological impact on the markets. In this case, the country’s economy will deviate from its existing fragile balances, and disruption and chaos will appear in all sectors. The governing institutions, with careful calculations and comprehensive reviews, may conclude that they must pursue the path of peace to safeguard their existence; in this case, a period of openings in the economy will emerge.
Economy, Politics, and the Final Battle in Iran
The reality is that the share of the limitation variable in the government’s decision-making equations in the current situation has become greater than ever. The complex economic crisis is the most significant short-term limitation for the ruling establishment in any decision-making process. The reality is that citizens are very dissatisfied with the management of the country’s economy and believe that the worsening of businesses and the decline in their living standards cannot continue any further; they are already living with great difficulty, and their level of resilience has reached its limit. On the other hand, citizens believe that the government and other institutions managing the country do not have the necessary efficiency to present a clear vision for the future. Iranian citizens do not trust economic promises such as reducing the inflation rate or increasing income growth relative to inflation growth.
For years, economists have warned policymakers about negative investment in infrastructure and the growing imbalance gap. However, a disappointing inability to secure capital is observed. The inability to produce electricity, gas, water, and gasoline, as well as to stabilize the exchange rate and food prices, is incomprehensible to citizens. Now, the Islamic Republic has reached a point where it must decide whether it wants to continue using the economy and the citizens’ livelihoods for politics and the advancement of goals such as the destruction of Israel and the defeat of the United States or whether it concludes that the economy no longer has the strength to subsidize politics and, in principle, no longer can provide subsidies. Businesses and citizens no longer have the strength to subsidize politics, especially foreign policy. In the final battle, it is politics that must subsidize the economy. If it is otherwise, without a doubt, every US dollar will rapidly reach its highest point. In the absence of oil dollars, people’s livelihoods will be gasping for breath.
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The views and opinions expressed in this article/paper are the author’s own and do not necessarily reflect the editorial position of Paradigm Shift.
Bahram P. Kalviri is a PhD candidate in political science at the University of Hyderabad, Hyderabad, India. His research interests focus on the Middle East, particularly the interplay of international relations and public diplomacy within the region.