Iran's economy faces long road to recovery as fragile truce tested

Three weeks after Iran and the United States signed a memorandum of understanding to extend their ceasefire, the truce remains fragile. Three tankers have been hit in the Strait of Hormuz over the past two days, even as both sides are expected to resume mediated talks after the funeral of Iran's Supreme Leader Ayatollah Ali Khamenei. The US military launched large air attacks on Iran's southern provinces, prompting the Islamic Revolutionary Guard Corps and Iran's regular army to fire missiles and drones at US interests in Bahrain and Kuwait. Both sides accuse each other of violating the understanding.

Even if a long-term resolution is reached and Western sanctions lifted, analysts say Iran's economy will take time to recover. The economy has been strained by years of mismanagement and corruption, stringent sanctions, damage from two wars with the US and Israel, nationwide protests, and internet shutdowns.

According to the Statistical Center of Iran, inflation in the third month of the Persian calendar (ending June 21) rose 88.6% year-on-year, a level not seen since World War II. Food inflation was nearly 134%, with oils and fats surging 278%, red meat and poultry 178%, and bread and cereals 139%. Unemployment stands at 7.5%, but labor participation is only 40%. Over 38% of employed people work more than 49 hours a week, and youth unemployment exceeds 20%. The minimum monthly wage is about $95 at the open market exchange rate. GDP contracted by 0.7% last year, gross fixed capital formation fell 12%, imports dropped 16.6%, and exports declined 5%.

The International Monetary Fund projects Iran's real GDP will shrink by 6.1% in 2026. Economist Mahdi Ghodsi says some job losses could be reversed if military escalation stops, transport and logistics are restored, and internet and payment systems function. However, factories that lost machinery and inputs may take years to recover and require foreign investment.

During the war, oil and gas facilities, petrochemical and steel plants, electricity infrastructure, ports, airports, roads, bridges, and residential units were extensively damaged. Rebuilding has begun, but full recovery remains distant. US President Donald Trump has threatened extensive attacks on Iran's electricity grid and bridges if the war resumes.

President Masoud Pezeshkian has expressed concerns about potential new protests due to public discontent, while hardliners reject any concessions. At Khamenei's funeral, Pezeshkian was heckled by anti-deal mourners.