Iran’s chronic inflation—among the highest and most persistent in the region—has emerged as the defining structural challenge of the national economy. Beyond eroding household purchasing power, the unrelenting rise in prices has shortened the planning horizon for businesses and investors, making long-term decision-making nearly impossible. Economists warn that sustainable disinflation will remain elusive unless policymakers simultaneously address three interlinked imbalances: the banking sector’s fragility, the government’s fiscal deficit, and currency volatility.
For decades, Iran’s anti-inflation strategies have been partial or fragmented—focusing on one area while neglecting the others. The result has been policy fatigue and repeated inflationary cycles. When the currency market was stable, fiscal spending surged uncontrollably; when budget discipline was prioritized, money creation in the banking system accelerated. The interplay of these forces has created a self-reinforcing dynamic that continuously fuels inflation.
At the core of Iran’s inflationary spiral lies excessive liquidity growth, driven largely by structural imbalances in banks and the state budget. Troubled banks—often burdened with bad assets and political influence—borrow from the central bank or create new money through credit expansion. Analysts argue that curbing this dynamic requires restoring financial health to the banking system, enforcing stricter prudential standards, and insulating the Central Bank of Iran (CBI) from political interference.
An independent and credible central bank is critical, economists say, to “say no” to fiscal dominance and prevent the monetization of government deficits. Without cleaning up undercapitalized and illiquid banks, any tightening of monetary policy will have only a temporary effect. Reform steps would include recapitalizing weak banks, resolving non-performing loans, and selling surplus assets—measures that must ultimately strengthen the CBI’s institutional autonomy.
The urgency of banking reform has become so pronounced that it is now echoed in Friday sermons. Tehran’s prayer leader recently warned that sustainable economic growth is impossible with “an unbalanced banking system,” highlighting how financial instability has entered public discourse as a national concern.
The Fiscal Pillar
The second pillar of stabilization—fiscal reform—is equally vital. Chronic budget deficits and inflationary financing methods have been major engines of money growth. Experts call for narrowing the “operational balance” (the gap between non-oil revenues and current expenditures) by expanding the tax base, cutting inefficient subsidies, and improving transparency in public spending. They argue that fiscal consolidation must go hand in hand with boosting productivity and restructuring pension funds, whose large deficits have become a hidden burden on the national budget.
Reducing reliance on volatile oil revenues is also seen as essential to fiscal stability. Over the years, temporary revenue windfalls have encouraged higher government spending, rather than strengthening buffers against shocks. Without a durable framework for expenditure control, monetary tightening alone cannot deliver lasting disinflation.
The third and most visible front is exchange-rate stability. In Iran, the informal exchange rate acts as the main anchor for inflation expectations—unlike in most economies where interest rates serve that role. Volatile currency movements quickly pass through to prices, amplifying inflationary shocks. Economists believe that a transparent, rule-based, and predictable foreign exchange policy is crucial to managing expectations.
Past reliance on “cheap-dollar injections” has proven unsustainable, creating distortions and rent-seeking opportunities rather than genuine stability. Experts emphasize that only a coherent exchange-rate regime—supported by credible monetary and fiscal anchors—can gradually restore confidence in the rial. Yet they also note that a large part of currency instability stems from political uncertainty and external risks, which monetary tools alone cannot fix.
Ultimately, breaking Iran’s inflation cycle requires coordinated action across all three fronts. Monetary tightening without fiscal discipline, or budget reform without currency stability, cannot succeed in isolation. As global experience shows, countries suffering from entrenched inflation must pursue synchronized reforms to achieve durable price stability and sustainable growth.
Iran, one of the region’s largest economies, retains significant potential to become a major industrial and financial hub. But as economists repeatedly warn, realizing that potential depends on credible, simultaneous reforms in the banking system, public finances, and exchange-rate management. Without such alignment, inflation will remain the economy’s defining—and self-perpetuating—constraint.
