Can Iran economically sustain a protracted war? 

Iran’s fragile economy is under siege and at risk of significant economic deteoriation in case of a protracted conflict.  

The country’s projected growth for this year - which the International Monetary Fund’s October placed at 1.1% last October - has now plunged into the red territory. The fund foresees Iran’s GDP to contract by 6.1% this year, together with an upward inflation revision of over 13 percentage points. 

Grim estimates and prophecies are pouring in from multiple quarters. Official figures suggest that the country has suffered around $270 billion in direct and indirect losses in the first few weeks of the conflict with the US and Israel – more than half of its 2024 GDP. Iran’s central bank has reportedly estimated that reconstructing the war-ravaged economy could take more than a decade.

Internet blackouts, which have continued since the start of the war, entered their 62nd day on April 30, according to NetBlocks, a digital governance and connectivity tracker. Back in January, Sattar Hashemi, Iran's Information and Communication Technology Minister, estimated that internet outages carry a daily cost of $38 million (50 trillion rials). By that measure, the shutdown alone has costed the economy at least $2.2 billion. 

Iranian rial has experience significant depreciation, declining from 1.35 million to $1 on January 1 to 1.72 million to $1 on February 28, the first day of the war, before rising to 1.46 million to $1 on March 12, according to Bonbast.com, a website that tracks live exchange rates in Iran’s free market.  

“The Iranian economy is under immense pressure. The conflict has heavily impacted productive capacity and Iran’s latest offer to open the strait and defer the conversation over the nuclear programme suggests that the US blockade is also causing real economic pain,” Vladimir Gorshkov, a macro policy strategist at State Street Investment Management told Salaam Gateway. 

The Muslim-majority country with around 90 million residents has been contending with grave economic challenges since before the conflict. Economic sanctions, political instability and fiscal deficit have exacerbated the country’s plight over several years. Prior to the conflict, the IMF had forecasted Iran’s gross government debt to spike to 36.4% of its GDP in 2026 and to 39.3% by the end of the decade. Meanwhile, inflation more than doubled from 20.6% in 1980 to 42.4% in 2025. 

“Iran entered this war after years of sustained economic pressure. Sanctions, isolation, and structural weaknesses have already produced a fragile economy. The war has intensified these pressures, but it has not represented a fundamentally new shock,” writes Alex Vatanka, a senior fellow at the Middle East Institute.

But Iran is now in unchartered economic territory, he adds. “Each additional month that the war continues could set the Iranian economy back by more than five years, reflecting the compounding impact on capital stock and productivity.” 

Mass layoffs have complicated Iran’s socio-economic landscape further with one million people having reportedly lost their jobs. Threat of privations linger as the war could push an additional 3.5 million to 4.1 million people below the poverty threshold, burgeoning the pool of 32.7 million people already surviving below the $8.3 poverty level per day, according to the United Nations development programme (UNDP). 

“Iran entered the crisis from a relatively narrow position within the upper-middle-income country category, with income levels only marginally above the World Bank threshold,” the UNDP said. 

“The additional impact of the current crisis is expected to intensify this downward trajectory and raise the likelihood that Iran could transition into lower-middle-income country status in the near-term.”

The ‘toll’ reality 
Perhaps an economically redeeming feature for Iran would be to gain control of and monetize the Strait of Hormuz, a reality which has begun to shape up, with Iranian officials confirming the receipt of the first toll revenue earlier this month. All ships passing through the route must pay the fee in Iranian rial, Iran’s Tasnim news agency cited Hamidreza Hajibabaei, the parliament’s deputy speaker, as saying. 

Global bodies have not validated Iran’s right to securing payment from transiting vessels. Arsenio Dominguez, secretary-general of the International Maritime Organization said that there was no legal basis for any country to introduce payments or impose tolls, fees or any discriminatory conditions on international straits. 

The Strait of Hormuz is a natural waterway which operates under the directives established by the United Nations Convention on the Law of the Sea, which prohibits charging vessels for passage. Article 26 of the convention suggests that charges may be levied upon a foreign ship passing through territorial sea as payment only for “specific services rendered to the ship”.

Gorshkov suggests that the transit toll would only work if there were an institutionalised system for collection in place as it could not operate on an ad hoc basis in peacetime. 

“A toll on ships transiting the Strait of Hormuz would be a new source of revenue but it doesn’t automatically follow that the overall government revenue would increase. Moreover, it’s likely to be the case that much of that flow will be captured by very narrow interests so it is hard to see how the economy at large would significantly benefit.”

The snag of storage 
Iran’s oil production and subsequent exports are also in the balance given the United Nation’s naval blockade. The country churned out approximately 3.68 million and 3.63 million barrels per day of crude oil in February and March, respectively, supported by onshore storage and continued tanker loadings, according to an International Energy Agency report published this month.

Iranian exports were also on a par with pre-war levels in March, accounting for over 70% of an average 2.3 million barrels of daily flows that transited the channel last month. However, the naval blockade enforced mid-April means that most of Iranian exports will now need to be stored. 

The US Treasury Secretary Scott Bessent claimed in a post on X on April 21 that the storage capacity at Kharg Island would be full “in a matter of days” and the “fragile Iranian oil wells will be shut in”. 

“Constraining Iran’s maritime trade directly targets the regime’s primary revenue lifelines,” he added.

Kharg Island is a small island northwest of the port of Bushehr and serves as a terminal for nearly all of Iran’s oil exports.  

Iran has also sustained significant damage to its petrochemical facilities, notably at Shiraz and Mahshahr and two power plants. Israel struck Iran’s South Pars field, a critical energy asset that supplies 80% of Iran’s natural gas. Natural gas generates 79% of the country's electricity, primarily used for heating, cooking, lighting and other uses, according to IEA. 

“Israel’s attack on the South Pars Gas Field damaged infrastructure indispensable for the survival of Iranians,” said Joey Shea, senior Saudi Arabia and United Arab Emirates researcher at Human Rights Watch.  

“Attacks on key oil and energy infrastructure have foreseeable knock-on economic impacts that could prove harmful to millions of people.”