Iran fiscal squeeze strains households as defence demands rise

Iran's deteriorating economic situation is affecting everyday life, as falling oil revenues, a weak currency and rising prices force the government to find a balance between military spending and keeping fuel, food and basic necessities affordable. Iran's crude exports dropped to around 260,000 barrels per day in August from nearly 1.7 million before the latest US economic sanctions, reducing the country's primary source of hard currency.

The Iranian rial has weakened to over 2 million per dollar, while inflation has accelerated and household purchasing power has declined significantly. Executive Vice President Mohammad Ghaempanah has questioned whether the government can maintain petrol at 15,000 rials per liter when the true cost is much higher. Long queues have formed at gas stations in various cities, and officials are debating whether to increase fuel subsidies, which would raise household costs as wages fail to keep up with inflation.

Urban consumer prices in August rose 84.4 percent compared to the previous year, and food and beverage prices increased 128.1 percent in July. Workers' representatives say the disparity between salaries and basic expenses has become severe, with a typical worker earning around $82 at the current exchange rate. Other labor representatives estimate a family's basic monthly consumption basket at 900 million rials, while minimum wages range from 170 million to 180 million rials.

Job losses are exacerbating the squeeze, with about 20,000 employees losing their jobs as businesses close or reduce staff. Some companies have limited employees to 10 days of work per month, and others have directed staff to unemployment insurance. Fuel remains politically sensitive, as previous attempts to raise prices led to protests.

Authorities have relied on rationing and subsidies, though shortages and the discrepancy between controlled and market prices persist. The fiscal strain is also highlighting a growing debate over spending priorities. Hardline lawmaker Ismail Kowsari has called on parliament and the government to increase military and defense spending, as Iran rebuilds its forces damaged during months of conflict.

Parliament Speaker Mohammad Baqer Qalibaf has also emphasized military reconstruction, acknowledging that military strength alone cannot sustain the country if households face hunger, weak economic activity and shrinking output. President Masoud Pezeshkian's administration has tried to assure the public that the economy is functioning.

Central Bank Governor Abdolnaser Hemmati stated that Iran has enough foreign currency to inject up to $2 billion into the market, and the central bank has provided more than $18 billion since March 21 for imports, including food, medicine, animal feed, and industrial raw materials. However, this assistance is becoming harder to finance as oil income declines.

The World Bank says Iran's economy is facing mounting challenges from conflict, sanctions, damaged infrastructure, water and energy shortages, and weaker investment, with GDP contracting 2.7 percent in the Iranian year ending March 20. The International Monetary Fund projected in July that Iran's economy would shrink 5.4 percent in 2026, with inflation approaching 70 percent.

Higher import costs and a weaker currency may further burden consumers even when shops remain stocked.