November 30, 2023 | Policy Brief

As Iran’s Economy Grows, Inflation Remains an Achilles’ Heel

November 30, 2023 | Policy Brief

As Iran’s Economy Grows, Inflation Remains an Achilles’ Heel

The Statistical Centre of Iran on November 27, 2023, reported a 7.1 percent increase in Iran’s gross domestic product (GDP) between June and August, almost half of which was due to energy sector growth. Relaxed sanctions on the energy sector are now fueling Iran’s economic resurgence.

This summer’s growth followed a similar 7.9 percent GDP increase in the previous quarter, also disproportionately driven by the energy sector, with the service sector contributing as well. The increase in the hydrocarbon sector, which grew 25 percent over the summer following nearly 20 percent growth in the spring, pushed the sector’s share of total GDP to over 15 percent, up from 13 percent over the same period last year.

The service sector remains Iran’s largest, with financial intermediaries driving its gains. By contrast, manufacturing and real estate showed modest gains over the summer and decreased as a share of GDP compared to the same period last year. As the Iranian economy grew, unemployment dropped to an official 7.9 percent, while the labor force participation rate increased, though the true unemployment rate is likely higher.

Ordinary Iranians may not see much benefit from such positive indicators in their daily life. Inflation hovered just short of 45 percent in November, a slight decrease from 49 percent in May but still higher than a year ago. Despite high oil prices over the past year, the government continues to run a substantial budget deficit, which the current drop in oil prices will exacerbate. The rapid expansion of money supply and monetary base suggest the regime prioritizes printing money over sound financial policy, likely ensuring even worse inflation.

The Iranian government has used its increasing resources to fund proxies and fan instability across the region. If Washington wishes to coerce Tehran to restrain its export of terror and revolution, Iran’s struggle with inflation provides opportunity. The Biden administration has worked to dismantle the sanctions wall its predecessor had built, yet targeted sanctions could slash Iranian oil exports and revenue.

By targeting the energy sector, Washington could not only deprive Tehran of much-needed hard currency but also reduce oil production. Iran’s limited capacity for domestic oil storage and consumption would become a critical bottleneck. This, in turn, would have ripple effects on other sectors, such as the service sector. Disrupting Tehran’s evasion of sanctions on petrochemical exports could further amplify Washington’s economic leverage. To that end, the administration should focus on exposing regional networks that facilitate Iran’s illicit trade.

As terrorism and war highlight the danger that the Islamic Republic and its security forces pose to the region, Washington has many policy opportunities short of military coercion to constrain the regime’s ability to divert income to terror proxies. Sometimes, minimal action can exert maximum pressure. Amid high inflation and widespread dissatisfaction within Iran as the regime tries to execute unpopular policies such as raising the retirement age, exerting greater pressure would be logical for the United States.

Saeed Ghasseminejad is a senior advisor on Iran and financial economics at the Foundation for Defense of Democracies (FDD), where he contributes to FDD’s Iran Program and Center on Economic and Financial Power (CEFP). Follow Saeed on X @SGhasseminejad. For more analysis from Saeed and FDD, please subscribe HERE. FDD is a Washington, DC-based, non-partisan research institute focusing on national security and foreign policy.  


Iran Iran Politics and Economy