As tensions escalate between Israel and Iran, both countries find themselves embroiled in an unpredictable conflict that raises pressing questions about their economic resilience. The conflict, which has seen sustained strikes over the past week, underscores not just geopolitical stakes, but significant economic ramifications for both nations.
### The Current Situation
In the past few days, Israel has intensified its military actions against Iran, targeting high-profile military leaders and critical nuclear sites. Reports indicate that Israel’s strikes have resulted in significant casualties, with at least 240 deaths documented, alongside substantial damage to Iran’s oil and gas infrastructure. In retaliation, Iran has executed missile strikes aimed at urban centers in Israel, leading to further casualties, estimated at 24 fatalities.
This ongoing military engagement raises critical questions: Can the economies of Israel and Iran withstand the pressures of a prolonged conflict?
### Economic Costs for Israel
Israel faces an unprecedented fiscal challenge. The ongoing military operations, particularly those in Gaza and now against Iran, have rendered this period one of the most expensive in Israeli history. Recent estimates from Israeli outlets indicate that the financial impact of operations in Gaza alone exceeded 250 billion shekels (approximately $67.5 billion) by the end of 2024. Initial days of conflict with Iran added to this burden, costing an estimated 5.5 billion shekels ($1.45 billion).
Such spending trends threaten to disrupt fiscal stability. The Israeli government has already raised its defense budget significantly, from 60 billion shekels ($17 billion) in 2023 to a projected 99 billion shekels ($28 billion) in 2024. Consequently, further increases could jeopardize Israel’s fiscal goals, particularly its target to maintain a budget deficit of 4.9 percent of GDP.
### The Debt Profile Under Strain
Israel’s economy is grappling with multiple strains as military expenditures soar. While tax revenue projections have improved slightly, longer-term growth forecasts have been downgraded. Reports from CofaceBDI suggest that approximately 60,000 businesses closed in the previous year due to economic pressures, exacerbated by local security threats and reduced tourism.
The economic impact of this conflict has attracted the attention of rating agencies. Standard & Poor’s issued warnings that continued military actions, especially if met with a robust Iranian response, could lead to a downgrade in Israel’s credit rating from A to A-. The implications of such a downgrade could lead to higher borrowing costs and a decline in foreign investment.
### Iran’s Economic Struggles
On the other side, Iran faces its own severe economic landscape exacerbated by recent military actions. Iranian oil exports have undergone a dramatic decline; the most recent figures indicate that exports dropped to merely 102,000 barrels per day (bpd), down significantly from 242,000 bpd earlier this year. Notably, key export hubs like Kharg Island have reported activity halts, raising alarms about the financial viability of the Iranian fossil fuel sector.
Adding to these pressures, recent strikes have severely impacted Iran’s South Pars gas field, one of the world’s largest, which provides a substantial portion of the country’s gas production. The aftermath of these military actions could further stifle Iran’s already beleaguered energy industry.
### The Role of Sanctions
Iran’s economic situation is further complicated by prolonged international sanctions, which have been in effect since the late 20th century. Following a temporary reprieve during the 2015 JCPOA agreement, U.S. sanctions were reinstated in 2018, resulting in a substantial downturn in oil export revenues, with figures dropping to approximately 200,000 bpd—less than 10 percent of 2016 levels.
These economic sanctions have drastically limited Iran’s foreign exchange earnings and cried out for urgent infrastructural investment. The state of the economy has led to widespread financial hardship, with President Masoud Pezeshkian admitting that current challenges are more acute than during the Iran-Iraq War of the 1980s.
### Broader Challenges Facing Iran
Iran is not only grappling with economic sanctions and military confrontations; it faces multiple, interrelated challenges, including severe energy shortages, water supply issues, and a collapsing currency. The Iranian rial has lost more than 90 percent of its value since sanctions were reimposed, leading to inflation rates that, according to some experts, are closer to 50 percent.
Moreover, social indicators on poverty suggest that approximately one-fourth of the population lives below the poverty line, compounded by high unemployment figures, which may hide even greater unemployment levels when adjusted for reality.
### The Defense Budget Dilemma
Faced with this grim economic backdrop, Iran’s ability to finance military operations is also constrained. Analysts estimate that Iran spends approximately 3 to 5 percent of its GDP on defense, translating to around $12 billion. While Tehran maintains around $33 billion in foreign exchange reserves, using these for military engagements could jeopardize its long-term stability.
Despite recent displays of national unity following military actions, public sentiment could quickly shift in the face of sustained conflicts and internal strife.
### Conclusion
As Israel and Iran continue their military actions, the economic landscape for both nations appears precarious. For Israel, rising military expenditures may threaten long-term fiscal stability, while Iran’s economy remains vulnerable due to entrenched sanctions and infrastructural deficiencies. Both countries face monumental challenges that go beyond military capabilities, encompassing financial sustainability and public sentiment.
In the grand view, the viability of their economic strategies in a wartime context is uncertain. As the conflict deepens, it becomes evident that neither nation can afford a prolonged war without significant repercussions on their economies and, ultimately, their longevity as stable states in an already volatile region.
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