Iran’s economy slipped back into contraction in the first half of the current year as inflation accelerated and the rial sank to record lows, compounding the pressure on President Masoud Pezeshkian as his government seeks approval for a tight budget starting on March 21.
Fresh central bank data showed gross domestic product shrank by 0.6% including oil and by 0.8% excluding oil in the first six months of the year 1404 (started on March 21), reflecting weak demand, falling investment and heightened uncertainty across the real economy, Tasnim reported.
The downturn came despite modest growth in the oil sector, which expanded by 1.1% but failed to offset deeper declines elsewhere.
Agriculture contracted by 2.9% and industry and mining by 3.4%, while construction suffered a sharp 12.9% slump, the central bank said, pointing to a deepening recession in a sector that is a key engine of employment and related industries.
At the same time, inflation pressures intensified. The statistics center said point-to-point inflation rose to 52.6% in the month to late December, up 3.2 percentage points from the previous month, while average annual inflation climbed to 42.2%.
Food inflation was far higher, with prices of food, beverages and tobacco up 72% year-on-year, compared with 43% for non-food goods and services. Monthly inflation reached 4.2%, led by sharp increases in staples such as dairy and bread.
The deteriorating data frame a contentious budget debate in parliament, where Pezeshkian has warned that the state lacks the resources to cushion households fully from price rises.
“They tell me to raise wages, but someone should tell me where the money is supposed to come from,” he told lawmakers while defending the draft budget, which proposes a 20% public-sector pay increase – well below inflation – alongside broader tax exemptions.
Pezeshkian has said the priority is to prevent a deficit-fueled surge in prices by restraining spending growth and tightening fiscal discipline.
“An orderly budget without a deficit reduces the fire of inflation and can contain price rises to some extent,” he said, adding that the government would expand tax exemptions and roll out targeted subsidies to protect low-income households.
Parliamentary leaders and lawmakers from across factions have pushed back, arguing the budget risks aggravating inflation and living costs.
Some lawmakers have been more blunt. “The 1405 budget has an inflationary nature,” said Hossein Samasami, a member of parliament’s economic committee. “Budget decisions are among the most important drivers of prices and inflation, and ignoring their impact directly weakens purchasing power.”
Volatility in the currency market has added to the pressure. The rial has fallen sharply in recent weeks, fueling gains in gold and hard assets as households seek protection from inflation.
Guards-linked Tasnim news agency said in an analysis on Sunday that the dollar had become “a symbol of lost confidence,” criticizing what it described as inaction by the government and central bank as expectations worsened.
Markets have continued to test policy credibility. On Sunday, the rial weakened to a new record low of about 1,420,000 per dollar.
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.
Security and police forces were deployed at the site from early Friday morning and, as in previous years, sealed the cemetery gates to block families from entering, a Telegram channel called Charter of Freedom, Welfare and Equality reported. The forces also prevented relatives from gathering outside the entrance, displaying photographs of their loved ones or laying flowers.
Despite the restrictions, some families marked the anniversary by scattering flowers along the road leading to the cemetery or throwing bouquets over the walls into Khavaran, the report said.
Khavaran is widely known as the main burial site for victims of mass executions carried out in the 1980s, particularly during the summer of 1988, when thousands of political prisoners were executed following orders issued by Ruhollah Khomeini. Special tribunals later referred to by survivors as “death commissions” ordered the executions while many prisoners were already serving sentences.
Exact figures remain unknown due to official secrecy, but rights groups estimate that around 5,000 political prisoners – mainly supporters of the People's Mojahedin Organization of Iran, also known as Mojahedin-e-Khalq, and leftist movements – were executed in 1988 alone.
Unanswered appeals to the president
The restrictions come despite repeated appeals by families. In January 2024, dozens of relatives of those executed in the 1980s wrote an open letter to President Masoud Pezeshkian, saying they had been barred from Khavaran for more than 11 months and subjected to humiliating treatment by officials in charge of the site. They demanded an end to other burials at the cemetery and the removal of all obstacles to mourning and remembrance.
No public response from Pezeshkian has been reported, and access restrictions have continued.
Erasing evidence
The Telegram channel also said burials of deceased Baha’i citizens continue in mass graves at Khavaran, despite longstanding objections from families and the Baha’i community. In March 2024, the Baha'i International Community reported the destruction of more than 30 Baha’i graves at the site.
Families have repeatedly warned that such actions amount to desecration and an attempt to erase evidence of past crimes. “Commemorating loved ones and collective mourning is the most basic human right,” the group said, adding that preventing memorials denies the dignity of the victims and seeks to silence demands for justice.
At the start of 2024, Iran appeared to be riding high — expanding regional reach, edging closer to nuclear threshold status and projecting confidence at home and abroad. That trajectory began to reverse in late 2024 and accelerated into 2025.
The past year brought direct confrontation with Israel and later the United States, the weakening of Tehran’s regional proxy network and mounting domestic pressures. What it did not bring was collapse.
That survival, analysts warn, may now be shaping how the Islamic Republic approaches 2026 — not as a moment for restraint, but as proof that it can endure unprecedented pressure and press forward.
The defining moment of the year was the June war with Israel, a confrontation that punctured long-held assumptions about Iran’s deterrence while stopping short of triggering a regime change.
On Eye for Iran, Middle East analyst and former Israeli intelligence official Avi Melamed who directs the Inside the Middle East fellowship program for policy and security professionals; journalist and investigative reporter Jay Solomon, author of The Iran Wars; and historian Shahram Kholdi assessed what the Islamic Republic’s survival says about the year that is about to end and why its interpretation of that survival could make the coming year more volatile.
Fear is breaking — but survival is being reframed
Avi Melamed pointed to a psychological shift inside Iran as one of the most consequential developments of 2025.
“The most significant one is that I think that we are witnessing now a very significant shift in Iran in the sense that many Iranian people are no longer afraid of this regime,” he said.
That erosion of fear has coincided with widespread social defiance, particularly among younger Iranians and women, even as repression continues.
Shahram Kholdi said that Tehran is not reading this moment as a loss. Instead, he argued, the leadership is internalizing 2025 through a survivalist lens — one that encourages defiance rather than restraint.
“If something that can kill you doesn’t destroy you, it makes you stronger,” Kholdi said, describing what he sees as the clerical establishment’s core mentality after the June war with Israel.
That belief, he argued, helps explain why executions have continued and why the Islamic Republic is signaling resolve despite suffering unprecedented blows.
A strategic reversal — interpreted as a test passed
Externally, 2025 marked a sharp break from the trajectory that once favored Tehran. Jay Solomon described the year as a reversal after decades in which Iran expanded influence through proxies and deterrence.
“The word I’d use for the year is weakness,” he said.
Solomon pointed to Israeli strikes, the degradation of Hezbollah and Hamas, and Iran’s struggle to manage overlapping crises — from inflation and water shortages to public dissent.
Yet despite expectations of mass bloodshed following the June conflict, the Islamic Republic ultimately pulled back, reinforcing its own perception that it had weathered the storm.
Why 2026 may be more volatile
For the analysts the biggest concern for 2026 was the risk ahead.
Iran’s deterrence model has been punctured but not abandoned. Instead, Tehran appears determined to rebuild — restoring proxy leverage, advancing missile capabilities and reasserting influence amid uncertainty.
Iran’s ballistic missile stockpile appears largely intact following the June war, with roughly 2,000 heavy missiles still in its arsenal, according to Al-Monitor.
The outlet cited an Israeli security source saying that Israel's military intelligence had conveyed the assessment to the United States in an indication that Israel is urging Washington to again act to address the alleged threat.
Melamed warned that this environment heightens the risk of miscalculation. Kholdi argued that the belief that Iran “didn’t lose” the June war makes confrontation more likely, not less. Solomon added that shifting political currents in the United States are being closely watched in Tehran and Tel Aviv alike, narrowing the window for restraint.
The danger, the panel suggested, is that survival itself is being treated as victory.
As 2026 begins, the Islamic Republic may be weaker — but convinced it has passed a test. That conviction could shape the year ahead more than any battlefield outcome.
