Goods smuggled in and out of Iran annually amount to $17-18 billion, according to the head of the Headquarters to Combat Smuggling of Goods and Foreign Currencies.
“Outgoing contraband accounts for more than $5.5 billion of the total sum. The figure increased after the reimposition of economic sanctions in the fiscal 2018-19. After the government started subsidizing foreign currencies [for the import of essential goods], smuggling to the neighboring countries increased significantly,” Ali Moayyedi Khorramabadi was also quoted as saying by Fars News Agency.
While successive Iranian governments have subsidized food imports, cheap foreign currency was first given after the steep rise in forex rates in the spring of 2018 soon after the United States abandoned the Iran nuclear deal and imposed tough economic sanctions.
Until recently, subsidized foreign currencies at the rate of 42,000 rials per dollar were allocated to corn, edible vegetable oil, pharmaceuticals, wheat, oilseeds, barley and soymeal.
The market rate of the dollar is above 300,000 rials now.
Subsidy System Overhaul
Yet, after years of controversy as to the effectiveness of the practice, the government of President Ebrahim Raisi announced last week that it began depositing cash subsidies for the first to ninth income deciles to make up for ending the policy that has seen billions of dollars spent on imports of essential goods for lowering their prices in the domestic market.
A total of 23 million Iranian households, including 72 million Iranians, were entitled to the new payments, IRNA reported, citing the Subsidy Targeting Organization.
The Central Bank of Iran announced on Monday that more than 400 trillion rials (about $1.3 billion) were deposited to the account of those entitled to the subsidies.
“Until now, we have been paying to producers [read importers] but now the subsidies go to consumers. In fact, the Preferential Foreign Currency has not been ceased, rather the allocation method has changed,” the president said in a late night televised speech.
He explained that the former allocation system gave rise to corruption for years, which led his government to come up with the new plan.
Flaws in the apparently ill-advised policy emerged in the first few months after inception and the government was compelled under pressure to slash the list of goods eligible for subsidized currency.
Prominent economists, academicians and socioeconomic experts hold the strong opinion that the forex subsidy policy never achieved its intended goal of supporting the downtrodden, and greedy middlemen and cronies in the distribution chain benefited the most.
On many occasions, consumers of imported essential goods must buy their needs at prices equaling the open market forex rates, due to the gross mismanagement, inefficient distribution system and absence of viable government oversight.
In short, a significant portion of the cheap forex is pocketed by big importers and the distribution chain, instead of end customers, which ostensibly means the millions of Iranians at the lower-end of the economic ladder.
It is often said in Tehran’s politico-economic circles that in the past three years, billions in subsidized currency were given to selected companies to import food and medicine yet some of these companies simply did not bring anything into the country.
It later turned out that some of the firms who took the scarce forex resources were shell companies. Few, if any, have paid for the thefts or faced the full force of the law.
Notably, a survey by the Statistics and Economic Analysis Center of Iran Chamber of Commerce, Industries, Mines and Agriculture indicated that mismanagement in subsidy allocations is one of the main problems facing local businesses.
“There is no supervision over the government’s method of paying subsidies to some goods such as food and pharmaceuticals. The subsidized goods are either exported via customs or smuggled out,” found the survey, which was part of the Purchasing Managers’ Index report in the closing month of last fiscal year (ended March 20).
Moayyedi noted that before the fiscal 2011-12, incoming contraband stood at a staggering $25 billion per year.
Referring to garment as a major commodity smuggled into Iran, he said, “At present, contraband apparel accounts for less than $1 billion of the local market whereas only a few years ago, the figure stood between $2.5-3 billion per year.”
The lion’s share of apparel smuggled to Iran is out-of-season garments sold at prices much lower than the end price.
Wheat Smuggling Under Spotlight
Smuggling of wheat and products made from the crop has also topped the headlines lately.
Subsidies granted to flour have paved the way for smuggling to neighboring countries, the Government Trading Corporation said in a statement.
Global prices have drastically increased over the past few months, tempting intermediaries to purchase Iranian subsidized flour from the local market and smuggle it to the neighboring countries, Mehr News Agency reported.
According to GTC, smuggled flour is sold at twice the domestic prices at the border with Pakistan in the east and at prices three times as much at the western border with Turkey.
Apart from direct smuggling of flour, products such as pasta in which flour is used as the main ingredient are exported at global prices. This means that profits gained from the exports of a heavily subsidized commodity went to only a few people instead of benefiting the whole Iranian population, the GTC says.
Demand for wheat used in food industries in Iran (except for that used in bakeries) stands at around 2 million tons per year, for which the government grants more than 200 trillion rials ($666 million) in subsidies. The GTC estimates that around half of this volume exits the country as smuggled and exported commodity.
A total of 2.27 million tons of wheat products worth $470.72 million were exported from Iran in the last fiscal year (ended March 20, 2022), i.e. 1% of the country’s $48.6 billion total exports.
According to a report by the Islamic Republic of Iran Customs Administration, pasta accounted for 236,000 tons worth $84 million, wheat flour 12,800 tons worth $3.4 million, bread 94,773 tons worth $86.55 million, chocolate-free sweets 119,011 tons worth $118.01 million, cookies 130,590 tons worth $88 million and wafers 39,000 tons worth $41 million.
Other exports made using wheat flour were 24,000 tons of yeast worth $32 million, 2,800 tons of baby food products worth $8.3 million, 2,400 tons of grain products worth $4 million and 2,130 tons of gaz and sohan (two popular Iranian sweets) worth $3.3 million, ISNA reported.
Iran also exported 10,200 tons of wheat starch worth $2.6 million in the fiscal 2021-22.
