Iran's Illegal Imports: Estimation of the Size and Analysis of Causes and Consequences

Smuggling is a part of informal economy with numerous negative effects on economy and government revenues. Using E-MIMIC method, this study tries to estimate an index of smuggling to Iran and to examine the causes and consequences of its growth. In order to trace the smuggling of imported goods, we consider the difference between imports and exports to Iran. The results show that sanctions, government intervention in exchange rate market, and real exchange rate are the most influential factors in smuggling. The estimated index shows that smuggling was low during the war and early post-war years due to great subsidies granted by the government to formal importers in the form of low exchange rates. Allocation of subsidized foreign currencies to importers resulted in low under-invoice or even over-invoice of imports in some years. However, over the 2000s, after unification of exchange rates and elimination of the foreign currency’ subsidy, the real size of smuggling increased 9.55% per annum, on average. In addition, the relative size of smuggling decreased due to higher growth rate in formal imports. The effect of sanctions was extremely significant. As a result of sanctions, smuggling increased from 24 percent of formal imports in 2010 to 60 percent in 2011 and 75 percent in 2014.