Iran’s Trade Deficit Factors Examined

EghtesadOnline: Decreased average value per ton of Iran’s exports on the one hand and increased average value per ton of the country’s imports on the other is to blame for the recent negative foreign trade balance, an official with Tehran Chamber of Commerce, Industries, Mines and Agriculture said.

News ID: ۷۴۳۲۰۱

06 August 2017

The Islamic Republic of Iran Customs Administration reported in late July that Iran exported close to $13.46 billion worth of non-oil commodities during the first four months of the current fiscal year (March 21-July 22), and imported more than $15.81 billion in return, registering a 9.5% decrease and a 24% rise respectively compared with the corresponding period of last year.

The country registered a trade deficit of $2.35 billion for the four-month period. Iran registered $2.12 billion in trade surplus for last year’s corresponding period, according to TCCIMA’s news portal.

According to Mohsen Bahrami Araz-Aqdas, the head of the chamber’s Trade Facilitation and Export Promotion Commission, Iran’s exported commodities are valued at $350 per ton on average whereas each ton of imported goods has an average value of $1,400, Financial Tribune reported.

The Bane of Dual Exchange Rates

“Ddelays in the unification of the foreign exchange rates and the imbalance between exchange rates and the inflation rate are the main causes of the negative trade balance,” he said.

Iran has a dual foreign exchange regime, which means that besides the open market rates, the government considers lower preferential rates for import of certain goods. The import of these goods is rendered profitable because they are cheaper, which encourages businesspeople to embark upon imports rather than production. Not to mention the system is known to give rise to corruption and rent-seeking in doing trade.

The Central Bank of Iran’s promises of unifying the foreign exchange rates have yet to be fulfilled.

When foreign exchange rates are controlled and kept lower than what they should be, it means they will not rise in line with the inflation rate which, in turn, reduce exporters’ profits in the face of cheap rates. The whole scenario discourages traders to embark on exports.

Bahrami said production costs have increased beyond the inflation rate while the prices of Iranian goods have not increased in the international markets in line with Iran’s domestic inflation.

According to the official, gas condensates and petrochemical products account for 51% of Iran’s non-oil exports.

“These products have experienced a fall in prices in the global market. Moreover, the [forced] stability in foreign exchange rates reduces Iranian products’ ability to compete in the international markets,” he said.

Another stumbling stone, he said, is that many exporters cannot receive the money gained from their exports through the banking system, so they are forced to resort to alternative channels, which lowers their profits.

Iranian bureaux de changes, for instance, charge high commissions for transferring money.

JCPOA’s Role

According to Bahrami, the decrease in exports started about a year after the Joint Comprehensive Plan of Action was implemented in Jan. 2016.

“At the beginning when the sanctions were lifted, a tendency was formed in the European countries to improve relations with Iran. Many foreign delegations from developed countries entered Iran and a lot of Iranian missions traveled abroad. As a result, for a period after the implementation of JCPOA, we saw a hike in our non-oil exports,” he said.

JCPOA is the formal name of the July 2015 nuclear deal between Iran and P5+1 (the US, Britain, France, China and Russia, plus Germany) to limit the scope of Tehran’s nuclear program in return for the removal of international sanctions against doing trade with the Islamic Republic.

Bahrami believes the election of US President Donald Trump in the US and his anti-Iran stance created a shaky outlook for JCPOA, which also contributed to a decline in Iran’s exports.

“After the implementation of JCPOA, the world took a positive approach toward Iran and as a result, the import of high-tech products into the country increased and we were able to renovate part of our production lines and the related machinery and equipment. This is one reason behind the rise in the average value of imported goods to Iran. We are now importing products with higher qualities and the share of capital and intermediate goods entering the country has increased as well,” he said.

China was the main customer of Iranian products during the four-month period, as Iran exported $2.84 billion worth of goods to the Asian country. Other major export destinations included Iraq with $2.52 billion, the UAE ($2.03 billion), South Korea ($1.4 billion) and India ($926 million).

Major exporters to Iran included China ($3.49 billion), the UAE ($2.99 billion), South Korea ($1.07 billion), Turkey ($958 million) and India ($891 million).