Beware of Global Domino Effects! This is the Main Factor Behind the Iranian Currency's Fall

Illustration of a demonstration in Iran, the cause of the Iranian currency's decline (antaranews)

YOGYAKARTA - Hit by the conflict, many investors are beginning to question the main factors that caused the Iranian currency to plummet drastically to a record low in history in early January 2026.

This condition in Iran not only triggers crazy inflation in the domestic market, but also creates a large wave of protests from the community who feel that their purchasing power has been lost due to economic mismanagement.

To understand the economic problems in Iran, reported by VOI from the Iranintl website, here are some things you should know first:

Background of the Rial Crisis in 2026

In mid-January 2026, the exchange rate of the Iranian Rial recorded a dark history by touching the figure of 1.47 million rials per one US dollar in the free market. Not only dollars, the Euro also jumped to 1.72 million rials.

This phenomenon is not a sudden occurrence, but rather an accumulation of economic pressures that have peaked since the end of December 2025.

For comparison, at the time of the 1979 Revolution, one dollar was only equivalent to 70 rials. This means that this currency has lost tens of thousands of times its value in the last four decades.

Also read the article discussing the Quantity Theory of Money: Definition and Examples

The Causes of the Iranian Currency's Decline

At least, there are three main pillars that hit the stability of the Iranian currency today, including:

Activation of the UN Snapback Mechanism

The return of full international sanctions through the snapback mechanism has cut Iran's formal banking channels with the world. This makes it difficult for foreign currency to flow in, so that the supply of dollars in the domestic market is very scarce while demand continues to soar.

Elimination of Currency Subsidies

The government of President Hassan Rouhani's successor, Ebrahim Raisi, has recently stopped the subsidized exchange rate system (28,500 tomans per dollar) that was previously used to import basic goods.

This policy was taken to eradicate corruption and rent-seeking, but the side effect is a spike in food prices that are predicted to rise by up to 30% in a short time.

Budget Deficit and Misallocation of Funds

Although Iran has pocketed oil export revenues of around $193.5 billion in the past five years, the country's GDP has shrunk from $600 billion (2010) to only around $356 billion in 2025.

Thus, there is a large inequality between state revenues and public welfare because most of the funds are allocated to the security sector and religious institutions.

Social and Political Impacts in the Country

The plummeting exchange rate triggered food inflation of up to 72%. On the streets of Tehran and other major cities, waves of protests broke out again. People are frustrated because their savings in the form of Rial evaporate in value.

As a result, there was a phenomenon of "Dollarization", where residents flocked to exchange their remaining money into dollars or gold to maintain the value of their wealth.

On the other hand, in the draft budget for the upcoming fiscal year (March 2026), it is seen that the government's priorities remain focused on defense amid tensions with Israel.

Around 16% of the total budget is allocated to the military establishment. In fact, the export revenue of oil managed directly by the Islamic Revolutionary Guard Corps (IRGC) is estimated to be much larger than that going into the government's civilian coffers.

Iran's economic condition is currently at a crossroads. The government's efforts to provide direct assistance of $7 (1 million toman) per month are considered by many economists as an "economic gamble" that may not be enough to dampen public anger or slow the pace of inflation.

Without real structural reforms and de-escalation of international politics, the pressure on the Rial is predicted to continue throughout 2026.

Without structural reforms and political de-escalation, economic stability is difficult to achieve. Global pressure remains the cause of the Iranian currency's plunge, forcing citizens to continue to struggle against extreme inflation that threatens national welfare.