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Smuggling surges as US sanctions hit Iranian rial

The Rouhani administration may not be responsible for the US sanctions hitting the Iranian economy, but it is responsible for the damage caused by smuggling and other harmful activities resulting from misguided foreign exchange policies.
A close up shot shows Iran's various Rial banknotes, bearing a portrait of Iran's late founder of Islamic Republic Ayatollah Ruhollah Khomeini, next to United States one-Dollar bills bearing a portrait of first US President, George Washington in Tehran on April 10, 2018. - Iran took the drastic step of fixing the rate of its currency against the dollar in a bid to arrest a slide that has seen it fall by a third in six months. (Photo by ATTA KENARE / AFP)        (Photo credit should read ATTA KENARE/AFP/Gett

The foreign exchange policies that have emerged in Iran in the aftermath of the sudden devaluation of the national currency have not only worsened the sense of instability in Iran’s economy, but also paved the way for an increase in smuggling. Incidentally, smuggling is taking place in both directions, into and out of the country, damaging the overall trade and payment balances and economic performance as well as intensifying corrupt practices.

In a healthy economy, the devaluation of the national currency — though inflationary — could theoretically lead to a growth in exports and a reduction in imports. Such an outcome could benefit domestic industry, which would become more competitive in export markets and also against imported goods. However, the existence of economic distortions such as subsidies or multitiered exchange rates can lead to scenarios in which a currency devaluation can undermine overall economic performance. What Iran is experiencing today is a reminder of how mismanagement of economic affairs can hurt a resourceful economy. 

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