The Fall of the Rial and Commodity Scarcity

Iranian media reported last week on the influx of Iraqi citizens into border cities of Iran such as Khorramshahr and Marivan, leading to severe shortages or drastic price increases of groceries and food items in these areas. The threat of food scarcity and some essential goods prompted Iranian customs to issue a directive banning the export of 18 essential agricultural products until further notice. Abdolreza Rahmani Fazli recently warned during a meeting of the Fuel Smuggling Combat Headquarters about the smuggling of essential goods and their export to other countries, urging law enforcement and security forces to increase vigilance and control over the exit of goods and fuel products from the borders. The Secretary of Free Zones is also expected to present a specific plan to prevent the exit of essential and necessary goods in free zones. Thus, the government, unable to utilize management tools to take advantage of the depreciation of the rial against other currencies, has resorted to physical crackdowns. This situation arose following the historic fall of the rial's value against other international currencies. The depreciation of national currencies typically provides an opportunity for increased exports; however, the fall of the rial has led to shortages of essential goods in border areas and government reactions to declare the smuggling of essential goods. The influx of Iran's neighbors to purchase Iranian goods and even fuel is not surprising, as the prices of these goods, which are directly or indirectly subsidized by oil, have become price-advantaged due to the rial's depreciation, leading to noticeable shortages in domestic markets. The advantages of national currency depreciation in inward and outward economies are often a policy to encourage exports in countries seeking to capture global export markets. For example, China has successfully maintained a strategically low value for its currency, the yuan, to enhance its competitive pricing for exports. The key to the success of Chinese firms is the efficient use of resources, including labor, management, or organization. Otherwise, even with a depreciated currency, production inefficiencies could negate price advantages, preventing firms from competing internationally. Advanced countries strive to utilize technology and innovation to achieve mass production and capture global markets, as sustainable growth, expanded foreign trade, and improved dependent variables hinge on this. Why does production of goods and services in Iran lack price advantages? Central Bank statistics indicate that the producer price index has consistently increased in recent years despite fluctuations. In contrast, advanced countries reduce production costs through modern technology, making efficiency a crucial competitive resource for production and especially exports. There is consensus that Iran's economy, which is externally dependent, inward-looking, rent-seeking, and state-centered, is not agile or flexible. Consequently, Iran's production system is inefficient, as confirmed by reports from the National Productivity Organization. This inefficiency has led investors and economic activists to repeatedly state that production in Iran is not cost-effective, given that the production organization in Iran is technically, organizationally, managerially, and human resource-wise inefficient. A significant portion of this inefficiency stems from hidden unemployment in production and service units. For instance, Saeed Bastani, spokesperson for the Industries and Mines Commission of the Parliament, criticized a proposed 17% increase in car prices, stating, "The people should not bear the cost of 11,000 excess personnel at Saipa." Similarly, Majid Farahani, a member of the Tehran City Council's Planning and Budget Commission, reported severe inflation of personnel in the Tehran municipality, stating, "For about 18,000 organizational posts, more than three times the direct workforce has been recruited and employed in recent years." Furthermore, a significant portion of goods and services in Iran benefit from government subsidies, which encourage the smuggling of goods and fuel. In other words, despite the government's efforts to equalize fuel prices in Iran with international prices, these efforts have been in vain after ten years due to the rial's depreciation. In support of this, Bijan Namdar Zangeneh, the Minister of Oil, stated regarding gasoline smuggling, "Smuggling has become active and widespread. It is not just the smugglers; everyone is involved." In other words, the subsidies for Iranian citizens—especially the poorest—are being siphoned off to neighbors and smugglers due to the rial's depreciation. In Iran's externally dependent and inward-looking economy, since production capacity is low and production also benefits from oil dollar rent, even with the rial's depreciation, non-oil exports, such as goods with the simplest production processes, struggle to survive. Conversely, the demand from neighboring countries sharing borders with Iran for goods produced with subsidies—rather than due to efficient production and quality—rises. This process signifies the transfer of subsidies to those who have rushed to the border markets to purchase subsidized Iranian goods.