How Khamenei regime’s economic failures are bringing about its fall

Iran is on the cusp of a revolutionary change. Major cities are witnessing widespread protests, rioting and massive unrest. It seems the Islamic revolution of 1979 is facing its biggest existential challenge, and Khamenei’s dictatorial Islamic regime is fast approaching its end.

The Islamic dictatorship has ruled Iran with a heavy hand, suppressing every dissent with its terrorist thugs, moral police, and ruthless intelligence services. Over the last forty years, it has raised and nurtured an array of the most horrendous and brutal terrorist proxies in the region. It crushed the green movement in 2009, the 2019 civil unrest over the abrupt reintroduction of fuel rationing and soaring gasoline prices in 2019, and the 2022-23 uprising, which focused on civil liberties, identity and injustice following the death of female activist Mahsa Amini.

However, this time, it is different. The ongoing revolt hardly seems to be abating.

If the regime collapses in Iran, it will be a game-changing geopolitical event in West Asia with its ramifications across the globe. Hence, it is crucial to investigate the causes and internal-external dynamics of Iran’s socio-political churning.

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Thriving on terror, brutal suppression of dissent, support of Jihadist proxies, loyalty of the IRGC, ramping up of the nationalist passions against foreign enemies and religious ideology, the regime could successfully continue in power for about four decades.

However, over the last decade and a half, the systemic malaise in the economy, agriculture and water resource management has become one of the most problematic challenges for the regime.

Economic Failures

The recent protest began with the collapse of the Rial. In December alone, its value fell by 16 per cent, with a total decline of 84 per cent for 2025. With the annual food inflation at 72 per cent, the inflationary pressures are testing the patience of the ordinary masses. The unemployment statistics are appalling. Iran faces 20 to 23 per cent unemployment, with 40 per cent among university graduates under the age of 25.

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After the sanctions were imposed in 2011 on Iranian oil exports, its forex reserves have depleted fast, bringing down the annual GDP growth rate from the respectable figure of 5-9 per cent to less than 3 per cent. The oil exports fell from 2 million BPD before 2011 to less than 30,000 BPD in 2019.

To offset the depletion of forex reserves, the government distributed a portion of its scarce forex to the public to guard them against sanctions; however, the beneficiaries mostly spent the money on importing non-essential luxury goods and foreign travel.

Loss of oil revenues led to budget deficits, increasingly offset by printing more money, which in turn led to inflation. Further, rising tensions with Israel after the October 7 Hamas attack, resulting in the 12-day war with Jerusalem and the US, blatantly exposed Iran’s economic vulnerabilities. The attack did not inflict severe military damage but broke the economic backbone of Iran.

In order to fix the economic woes, the Pezeshkian government’s latest budget proposes to raise taxes from 42 per cent of government revenue to 57 per cent and reduce the hike in public sector wages vis-à-vis the inflation rate; however, such signals of austerity are unlikely to get traction among the Iranians already outraged with criminal economic mismanagement, rampant corruption, ostentatious displays of wealth by the government officialdom and glaring inequalities.

Further, the state has also resorted to cash transfers of 10 million rials per person ($7), having already deposited the amount for 80 million people. However, the protesters are less likely to buy such soaps amidst economic volatility. Besides, the protests that started over economic issues have transmogrified into a political, civilisational, and identity-centric movement aimed at the ouster of the Khamenei regime.

Poor water resource management is also one of the critical factors explaining widespread grievances among the agrarian class. Aridity, the depletion of groundwater resources, politicised dam construction, droughts, and water scarcity have led to large-scale internal displacement of people. In Tehran, groundwater has depleted at alarming rates, and the reservoirs are running dry.

The Pazeshkian government has even considered shifting the capital city. As a result of water scarcity in strategically sensitive Khuzestan and Sistan and Baluchistan, the people have moved from strategically important peripheral areas to densely populated urban centres, weakening government control there and limiting the state’s strategic depth.

In response to acute water crises, the government has accorded them the least strategic priority. No course correction took place at the institutional level, except for some ad hoc measures such as cloud seeding. Further, to make matters worse, the officials have floated conspiracy theories of foreign powers like Israel, the US, Saudi Arabia, and Turkey stealing and manipulating Iranian clouds.

Further, after the 2011 sanctions, the Iranian regime drained its already battered economy by investing its resources in nurturing a string of proxies like Hezbollah, Hamas, Iraqi militias, and Houthis, perceiving them as permanent assets needed to absorb the shocks. The financial investment in them came at the expense of domestic investment and a steep decline in investment required within Iranian borders to improve the middle class’s economic status.

Furthermore, the regime has marginalised the professionals and competent middle-class people and excluded them from government jobs, preferring corrupt and mediocre loyalists.

According to a Tehran-based analyst, “At the beginning of the revolution, the regime was 80 per cent ideologues and 20 per cent charlatans. Today, it is the reverse.” The preference for mediocrity has not only led to severe financial and administrative mismanagement, as is evident in Iran’s water management crisis, but also created alarming levels of resentment and apathy among the middle classes.

Finally, the last straw to break the camel’s back was the 12-day Iran-Israel war, exposing Iran’s financial vulnerabilities. The investment further declined as investors feared another escalation soon.

Notably, the most concerning aspect of the ongoing agitation is that the Bazaar merchants and the agrarian class, traditionally loyalists of the regime, have also joined the anti-regime movement. Massive corruption and the IRGC officials’ mafia-like control over the economy have led to resentment among the business class.

The Khamenei regime’s lofty claims to represent Islamic values are not holding traction because the relatives and family members of the IRGC members live a lavish and adulterous life abroad, post their pictures on social media, and the common people in Iran face severe repression from the moral police in Islamic matters.

(The author is a Cornell University graduate in public affairs, bachelors from St Stephen’s College, Delhi and has done his PhD on Jaish-e-Mohammad. He is a policy analyst specialising in counterterrorism, Indian foreign policy and Afghanistan-Pakistan geopolitics. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.)