Iran International
Iran’s draft budget for the coming year, submitted to parliament this week, is being widely described by economists as the most contractionary in decades, shifting the burden of deficit control onto workers and consumers.
President Masoud Pezeshkian presented the draft budget bill for the Iranian year 1405 (starting on March 21, 2026) to parliament on Wednesday.
Lawmakers have until March 20, 2026, to review and approve the proposal, which has already sparked heated debate among economists, labor representatives, and political commentators.
The government says the budget was prepared with an emphasis on fiscal discipline, realistic revenue and expenditure estimates, and greater transparency.
Officials argue that the bill aims to control the budget deficit and curb inflation, which remains above 40 percent according to official figures and closer to 50 percent by independent estimates.
According to the bill, the total budget for next year amounts to roughly 10,144 quadrillion rials.
For the first time, the figures are presented using Iran’s newly approved rial unit, adopted in November, which removes four zeros. Under the new system, the same amount is recorded as 10,144 billion rials.
Total government spending is projected to rise by 28 percent.
Reliance on taxes instead of oil revenues
A central feature of the bill is its reliance on tax revenues rather than oil sales. Skepticism over the feasibility of this strategy is widespread, particularly amid expectations of intensified sanctions that could limit oil revenues and further strain businesses.
“Growth in the country’s tax revenues exceeds the inflation rate, and given that we have no economic growth—or even negative growth—this is not economically justifiable,” Gholamreza Salami, a senior tax expert, told the reformist daily Shargh.
Morteza Afqah, a professor of economics, voiced similar concerns in remarks to Entekhab, warning that higher tax revenues are unrealistic in the absence of economic growth.
“Continuing this trend will lead to the widespread closure of small and medium-sized enterprises, resulting in rising unemployment, deeper economic recession, and a further decline in consumers’ purchasing power,” he said.
Under the bill, the government plans to raise the value-added tax (VAT) rate from 10 to 12 percent and distribute the additional revenue directly to citizens through electronic food vouchers. Part of the proceeds would also be used to adjust pension payments for retirees.
Supporters argue that this approach is more targeted than broad subsidies, while critics warn it will further weaken household consumption.
Cutting subsidized currency and fuel signals
The draft budget also signals a significant reduction in subsidized foreign currency for imports to save 5.7 quadrillion rials (billion in the new system). While about €11 billion (around $12.9 billion) was allocated this year for importing essential goods, that figure will fall to €7 billion (around $8.2 billion) next year.
Currently, selected importers receive preferential currency at 280,500 rials per dollar, compared to a free-market rate that has surpassed 1.35 million. The recent suspension of this rate for rice and medicine imports has already driven steep price increases. Proponents of eliminating preferential rates argue that the wide gap between official and market exchange rates has fueled corruption and rent-seeking.
The government also plans to allocate nearly 5.5 quadrillion rials (billion in the new system) rials from revenues generated by imported gasoline sales to direct cash subsidies. Analysts say this strongly suggests gasoline price hikes next year.
In addition, the budget anticipates 2.9 quadrillion (billion in the new system) rials in revenue from selling wheat at non-subsidized rates, indicating a likely reduction—or complete removal—of preferential currency for wheat imports.
Pressure on salaried workers
Despite inflation exceeding 40 percent, the bill proposes only a 20 percent increase in salaries for government employees and retirees. At the same time, it significantly raises the tax-exempt income threshold, meaning nearly all teachers and about 70 percent of public-sector employees would be fully exempt from income tax.
Economist Kamran Nadri told Jam-e Jam that the cost of fiscal tightening is falling primarily on employees. He argued that the government is seeking to close the deficit not by eliminating inefficient institutions or redundant budget lines, but by suppressing wage growth.
According to Nadri, the projected increase in tax revenues would, if realized, fall largely on consumers and could fuel inflationary pressure. However, he added that if the government avoids monetary expansion, inflation caused by higher taxes and the removal of subsidized currency would not necessarily be permanent.
Opaque spending and institutional budgets
Despite official claims of transparency, the budget allocates around €7.5 billion (around $8.8 billion) in oil revenues to vaguely defined “special projects,” with no clear breakdown of expenditures. This extra-budgetary category accounted for nearly one-fifth of last year’s budget and, according to Donya-ye Eghtesad, more than two-thirds of the operational deficit.
Critics have also targeted increased funding for religious and promotional institutions, as well as state broadcaster IRIB, which is set to receive a 20 percent budget increase. The reformist daily Arman-e Melli warned that such allocations, combined with limited wage growth, risk fueling social unrest.
“The combination of severe inflation, soaring prices, and wage increases that cover less than half of current inflation should be a warning to the government that this kind of budgeting prepares the ground for future protests,” the paper wrote.
Nevertheless, hardline conservatives have also protested funding levels. Quds newspaper criticized cuts to the budget for promoting the “culture of pilgrimage.” Nasrollah Pejmanfar, a member of parliament from Mashhad, told the paper: “Unfortunately, neglect of the issue of pilgrimage has meant that people have not been able to benefit from it properly and have faced difficulties.”
Speaking to Arman-e Melli, reformist politician Fayyaz Zahed urged President Pezeshkian to seek Supreme Leader Ali Khamenei’s backing to gradually reduce funding for institutions reliant on public money. “If the president were to cut these budgets today,” he said, “his government would not last even a month. This is a very difficult and frightening confession to make.”
Air quality in nine monitoring stations across Tehran Province was classified as red on Saturday, according to the National Air Quality Monitoring System. Pollution levels in the cities of Damavand, Varamin, Pakdasht, Gharchak, and Shahriar in Tehran province ranged between 150 and 170 on the Air Quality Index (AQI), placing them in the “unhealthy for all” category.
The average air quality across Tehran’s 22 municipal districts stood at 136, categorised as “unhealthy for sensitive groups.” Under AQI scale, readings above 150 are considered unhealthy for the general population, while levels above 200 are deemed very unhealthy.
Khuzestan sees most severe conditions
Air pollution reached more alarming levels in Khuzestan Province in the south, where officials reported some of the worst conditions nationwide. The air quality monitoring center said the AQI in the city of Hendijan rose to 212, placing it in the purple category and signalling “very unhealthy” air.
Several other cities, including Ahvaz, Khorramshahr, Mahshahr, Dezful, etc. recorded AQI readings above 150, leaving air quality unhealthy for all age groups. Authorities advised elderly people, children, pregnant women and those with heart or respiratory illnesses to avoid outdoor activity, urging others to limit time outside.
Isfahan and Mashhad affected
In Isfahan Province, conditions were also severe. The AQI in the city of Isfahan reached 186 on Saturday morning, while some stations recorded readings above 200.
Meanwhile, officials in Mashhad said air quality there had reached “unhealthy for sensitive groups,” with pollution recorded in 16 areas of the city.
Despite recurring winter pollution crises, Iranian authorities have so far relied largely on temporary measures such as short-term closures, with critics saying no effective or lasting solution has been implemented to address the underlying causes of chronic air pollution.
“The costs of making a carpet are high and the profits low,” Akram Fakhri, a 45-year-old weaver in Kashan, told the FT, describing the pressures facing artisans across Iran.
Once a flagship of Iran’s non-oil exports, Persian rugs are expected to generate less than $40mn in the year to March 2026, down from $41.7mn the previous year, according to the Carpet and Handicrafts Commission of Iran’s Chamber of Commerce.
Export revenues have stayed below $100mn for six consecutive years, compared with a peak of more than $2bn three decades ago – figures that commission chair Morteza Haji Aghamiri described as “so meagre we can say it is practically zero.”
The downturn accelerated after 2018, when then US president Donald Trump withdrew from the Iran nuclear deal and imposed “maximum pressure” sanctions. As foreign reserves tightened, Iran required exporters to sell part of their foreign-currency earnings to the central bank at the official exchange rate rather than at market rates.
The rule destroyed incentives to export, Industry representatives said. “It completely paralysed the sector. None of them have any motivation to stay active in global markets,” said Abdollah Bahrami, head of the National Union of Handwoven Carpet Co-operatives.
For weavers such as Fakhri, the economics no longer work. She told the FT she must invest $250 in wool and silk and spend a year weaving a single carpet, only to hope it might sell for more than $600. Without social security or state support, she said the work has become physically exhausting. “I work with constant back and leg pain. But hiring an assistant weaver is beyond my means.”
Iranian carpets were once exported to about 80 countries, but sales are now largely limited to markets such as the UAE, Germany, Japan, the UK and Pakistan. As Iran lost ground, competitors from Turkey, India, China and Afghanistan moved in. “After the US market closed, some traders began rerouting Persian rugs to the US through third countries… hurting Iran’s craft by concealing its identity,” said Mohsen Shojaei, a carpet trader in Mashhad.
Regional tensions have compounded the decline. Shojaei said: “The disruption of regional airspace after the war with Israel, along with other political tensions, caused foreign traders to lose confidence.”
While officials have promised support, industry figures remain bleak. “The future? The future is gone. The sound of the loom in villages and towns has fallen silent,” Bahrami said.
Speaking on Thursday at a meeting with economic activists in Isfahan, Abbas Araghchi said Iran must accept the reality of sanctions and learn to live with them.
“We must accept that sanctions exist and accept that it is possible to live with sanctions,” he said. “Sanctions have their costs… I know very well what sanctions mean and what their costs are. I know their problems and I also know their blessings.”
The remarks quickly drew criticism as Iran grapples with soaring inflation, a weakening rial and sharp rises in the price of basic goods, pressures that have hit low-income households hardest.
Senior officials are insulated from the realities of sanctions, Economist Mohammad Tabibian wrote in a note. “We all know that he and other gentlemen can live well and comfortably even under far worse conditions,” Tabibian wrote.
“Please do not speak on behalf of the people. Ask the people themselves and let them describe their own situation.”
Social media backlash
Users on social media platforms, including X, also reacted angrily. One user identified as Yousef pointed to the recent surge in the dollar’s exchange rate hitting 1.36 million rials, writing: “The blessings are for rent-seekers and mafias. For the people, only poverty and hunger remain.”
Another user, Zahidi, criticized what he described as the lavish lifestyles of senior officials.
“Even if people are pushed into conditions worse than total deprivation, it is still a blessing for Mr. Araghchi and his friends,” he wrote, adding that the gap between officials and ordinary citizens has grown impossibly wide.
Others described the comments as offensive. A user named Azita called the remarks “shameful,” writing: “Do not speak on behalf of the nation. Sanctions have only brought misery. What blessing?”
‘People below the poverty line’
Further criticism focused on the contradiction between official rhetoric and lived experience. One user wrote that while people are being driven below the poverty line, “embezzlers ride in luxury limousines.” Another commented: “Sanctions for people mean medicine shortages, unemployment, poverty and constant anxiety. If sanctions are a blessing, publish the list of beneficiaries.”
Another post argued that Araghchi’s comments were impossible to accept for people “whose backs have been broken under the weight of sanctions,” adding that any benefits accrue to networks involved in evading sanctions, not to the public.
The backlash reflects broader public frustration with economic conditions after years of sanctions and policy mismanagement, as the cost of living continues to climb and the national currency loses value.
For many critics, Araghchi’s remarks underscored a widening disconnect between Iran’s political leadership and the daily struggles of its citizens.
The Grand Bazaar, one of Tehran’s most important commercial and historic areas, is facing a crisis that has developed below ground rather than at street level.
Iranian media reported the discovery of excavations beneath the Azadi (Dastmalchi), Ziba and Naderi caravanserais within Tehran’s Grand Bazaar in the capital city's downtown.
Given that the buildings are physically interconnected, damage to one structure can affect the others.
Size and extent of excavations
No official measurements have been released on the length or size of the underground spaces.
Tehran-based Payam-e Ma reported that unknown excavators had dug a deep and narrow tunnel covering about 5,000 square meters beneath the Grand Bazaar, close to the historic core of central Tehran. The report did not cite a source for the figure.
The estimate was attributed elsewhere to a bazaar shopkeeper identified as Mr. Fili, who was quoted by the semi-official ISNA as saying the operation included around 5,000 underground spaces and nearly 12 exit points, making the work easier to conceal.
When did the work begin?
Mohammad Amini, mayor of Tehran’s District 12, said the illegal construction likely began in the mid-2010s and continued until the end of last year.
If accurate, the timeline raises questions about how such large-scale activity could have gone undetected by municipal and oversight bodies for years.
Some Tehran bazaar traders have disputed that assessment.
One long-time shopkeeper told Iran International that continuous police monitoring makes any nighttime activity in the bazaar without official permits effectively impossible.
Another shopkeeper said that due to oversight by municipal authorities, police and cultural heritage bodies, bringing any construction materials into the bazaar — even a single bag of cement — requires official approval.
Amini said no new violations have been reported since the issue was identified sometime between late March and mid-April this year.
It remains unclear why the municipality did not publicly address the issue earlier, despite being aware of the violations since then.
Purpose of the excavations
Officials say the main aim of the excavations was to create a new underground level, likely intended for storage or commercial use outside formal oversight.
Ali Nasiri, head of Tehran’s Crisis Management Organization, said a new level had been created within part of the building foundation without technical feasibility or structural resistance.
The Research Center of the Ministry of Roads, Housing and Urban Development, the body responsible for assessing building safety, said technical inspections showed the caravanserais had become structurally unstable.
Official reports cite damage including distorted ceilings and weakened or warped columns.
The Fire Department and the Crisis Management Organization said about 1,000 shops operate in the affected area, employing roughly 3,000 people on a permanent basis.
Authorities estimate that 5,000 to 6,000 people pass through the area daily and have warned that any incident could lead to a major human disaster.
Who is responsible?
Despite judicial orders and confirmation that violations occurred, authorities have not disclosed the identities of those responsible for the excavations.
City officials say individuals seeking to profit from the project have been identified and the case is under investigation, but no further details have been made public.
Some shopkeepers and experts continue to question how a project of this scale could have continued for months or years in one of Tehran’s busiest areas.
