Economy, Business And Markets

Effective Policies Needed to Fight Smuggling

Effective Policies Needed to Fight SmugglingEffective Policies Needed to Fight Smuggling

Unreal foreign currency rates, high import tariffs and lenient penalties for smugglers are adding fuel to the fire of illegal trade. This complaint was made by Mohsen Bahrami Arz Aghdas, head of Trade Facilitation and Export Promotion Commission of Tehran Chamber of Commerce, Industries, Mines and Agriculture. He made the rare and strong castigation in an opinion piece titled ‘Policing Not Enough to Combat Smuggling’ published on TCCIMA’s website.

A translation of the Persian text follows:

We need to detect causes rather than effects when it comes to fighting contraband.  I remember the time when I was in charge of the Scientific Committee of the Campaign Against Smuggling of Goods and Foreign Currency during the administration of the former reformist president, Mohammad Khatami.

Tea consumption was more than 100,000 tons then but local production hovered around 25,000 tons. Meanwhile, a ban was in place on tea imports to protect domestic producers. But it was apparent that other countries were supplying the shortfall of tea and mostly through smuggling.

Gradually, we came to the conclusion that the ban on imports was the root cause of smuggling and that legalizing tea imports would be a better option. Therefore, we decided to charge 7,000 rials (19.8 cents based on current exchange rates) as customs duty for imports of each kilogram of tea. These revenues were to be spent on improving tea farming and boosting production over a three-year period. The move would both wean the country of imports and help strengthen local producers.

We did the same with tobacco. Domestic consumption was over 80 billion cigarettes a year. There were 220 plus types of smuggled cigarettes in the country then and local production was less than 20 billion – cigarettes which simply did not meet the taste of Iranian smokers.

 Damage Control

The likes of Zar and Eshno (two local brands of cigarettes of poor quality) were gathering dust in warehouses. Some then believed that the Islamic government should not allow imports of cigarettes as they are harmful to health. But we counter argued that it would be rational to do some damage control by getting imports under supervision now that we cannot reduce cigarette consumption. So we decriminalized cigarette imports and put in place import tariffs. Also, joint ventures were set up between the world’s leading cigarette producers and their Iranian counterparts to improve the cultivation of tobacco. Imports were subject to such cooperation. This resulted in a better share of legal imports and more government revenues while local products also improved.

The committee reduced tariffs during that period. When you impose up to 150% tariff on goods such as fabrics and make legal imports harder, illegal imports  naturally become less costly and goods enter the country at lower prices. When there is demand for a product we should open the legal channels to meet that demand.  One of the ways is to rewrite the tariff system.  

Lengthy procedures and cumbersome regulations for legal trade is also responsible for the pattern of smuggling. Importers have to deal with dozens of organizations and wait for extended periods to secure permits. The average time needed for legal imports is over two months.

Given the high burden of costs and capital erosion in Iran, efficient import formalities is vital to traders. Smugglers may import the goods within a couple of days while traders are busy grappling with bloated bureaucracies. Eager to fight smuggling, the government needs to speed up trade procedures.

 Prohibitive Costs

Relying on policing and intelligence gathering per se has not produced the desired results. Iran’s land and sea border stretch thousands of kilometers, but it has inadequate equipment to fight smuggling. This is while smugglers are well-equipped.  In the not too distant past the annual smuggling bill was $20 billion. Mind you, this is when the funds for fighting contraband and the smugglers is paltry at best.

The mismatch between smuggling and its punishment seems to be another hurdle in the unending campaign against the scourge. Contraband confiscated by the police might have several owners, which could normally end up in light sentences for those found guilty. Unfitting punishments pale in front of the crimes committed and are hardly a deterrent.

A large proportion of goods smuggled into Iran do not have buyers and the local products are enough to meet market demand. Fortunately President Hassan Rouhani’s government is working toward structural reforms in the fight against smuggling. One major factor in the reform package of the government is allowing the forces of supply and demand to determine the rate of foreign exchange.

During the past years, particularly during the presidency of Mahmoud Ahmadinejad, the inflation rate reached 46% but the price of the dollar was manipulated and kept low. This move facilitated imports and impeded exports. So as prices were rising for Iranian products at home, imports flooded the country. The trend killed competitiveness and the appeal for Iranian goods. Therefore, having real foreign currency rates, based on domestic and foreign inflation rates, will put the much-needed brakes on imports.

Low foreign currency rates, high import tariffs and low costs of smuggling would fan the flames of illegal imports and the government needs to introduce structural reforms to set the economy on the right path.