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Protests in Iran and Their Economic Roots
On December 28, protests ignited in Tehran and quickly spread across Iran due to a specific grievance: the collapse of the national currency, the rial. The decline in Iran’s currency value is not merely a technical issue; it rapidly drives up prices and diminishes purchasing power, especially since many wages are set annually. In December, as the rial lost 16% of its value—bringing its total decline to about 84% over the past year—the annual food inflation rate surged to 72%, nearly double its recent average.
These developments come after decades of economic isolation. Beginning in 2011, sanctions imposed on Iranian oil led to a sharp drop in the country’s foreign exchange revenues and a slowdown in GDP growth from 5-9% annually in the early 2000s to less than 3% thereafter. The loss of oil revenues has caused a chronic budget deficit, which the government has financed through monetary expansion, further exacerbating inflation.
Last year, Iran’s economic conditions worsened as sanctions gave way to open confrontation. Although the twelve-day war with Israel and the United States in June 2025 resulted in limited physical damage, it revealed Iran’s vulnerability to any sudden escalation, contradicting the regime’s claims of control and raising the risk premium facing the country. Investments, which were already at a low level incapable of offsetting the rial’s decline, further dropped due to fears of additional attacks from Israel and the U.S.
The effort by Iranian President Masoud Beizhekiyan to implement long-delayed economic reforms has further compounded pressures. His proposed budget for the new Iranian year (beginning March 20, 2026), presented to Parliament in November, was more contractionary than expected. Tax revenues were set to rise from 42% to 57%, reflecting anticipated declines in oil revenue.
On the other hand, public sector wages were scheduled to increase by less than half the government’s projected inflation rate of around 46% for the coming year. Although Parliament later softened the blow by reducing the proposed value-added tax from 12% to 10% and doubling the wage increase, the message of austerity had already been sent.
While austerity is difficult to market under any circumstances, it becomes politically combustible in a society that perceives rampant official corruption and is continuously confronted with displays of ostentation. Perceptions of rampant inequality have been reinforced by the distorting multiple exchange rate system in the Iranian economy.
As oil exports plummeted from over two million barrels per day before 2011 to only 300,000 barrels in 2019, the government allocated some of its scarce foreign currency at heavily subsidized rates to shield Iranians from the impact of sanctions. However, the regime inadvertently facilitated rent-seeking and capital flight, with many beneficiaries spending the funds not on importing basic goods but on luxury items, travel abroad, or reselling foreign currencies at market rates.
Subsequently, the Iranian government introduced managed foreign exchange markets, allowing licensed exporters to sell their foreign currency earnings to importers under government supervision, at prices ranging between subsidized rates and market rates. However, it has hesitated to abolish the multiple exchange rate system for fear of a violent backlash from powerful traders who benefit from privileged access.
Beizhekiyan was willing to take this step. However, his attempt to eliminate one of the most glaring sources of corruption in Iran undoubtedly incited the anger of entrenched interests, possibly contributing to an initial strike among traders in Tehran’s Grand Bazaar, leading to broader protests. While this strike may have been politically motivated—reformists often accuse their conservative rivals of using their institutional power to resist change—the protests quickly escalated into a crisis severe enough that both factions are now seeking an exit.
The challenge is as much economic as it is political. The government’s efforts to increase revenues, reduce the budget deficit, and lower its dependence on printing money could eventually lead to a decrease in inflation. However, in the short term, the reforms will carry economic costs. Abruptly removing foreign currency subsidies will drive up the prices of some goods, potentially fueling overall inflation and adding pressure on the rial.
To compensate families, the government introduced monthly cash transfers of ten million rials (approximately $7, or $40 in purchasing power parity). The government has already deposited payments for around 80 million beneficiaries, excluding only the wealthiest decile. But it is far from clear whether this will be enough to quell the protests.
The goals of the recent nationwide uprising in Iran—the “Women, Life, Freedom” movement in September 2022—were clearer. The protests erupted following the death of 22-year-old Mahsa Amini in the custody of the morality police and were met with brutal repression. Nonetheless, they are widely regarded as having achieved at least one objective: the cessation of hijab enforcement. An increasing number of Iranian women and girls are now choosing not to wear the hijab in public.
In contrast, the potential benefits of Beizhekiyan’s reforms remain uncertain and are likely to be realized only in the long term, making it difficult to convey this to a populace that has suffered years of economic volatility. The Iranian government cannot confidently promise stability in exchange rates or control of inflation anytime soon. The only move that might provide relatively quick economic relief—which the government could credibly commit to—is halting hostilities with Israel and the United States. However, this could be much harder for the Iranian leadership than conceding on hijab enforcement.
In any case, ordinary Iranians do not trust any promises from Israel, especially after its destruction of Gaza, its occupation of Syria, and its extensive bombardment of Iran last year, which reportedly killed over a thousand people. The same applies to the United States, which has proven unreliable under President Donald Trump, even to its closest allies.
In reality, the Iranian protests reflect not only economic despair but also the tension between a lack of trust in internal reform and fear of external pressure. Thus, quelling them may not be easy.
