Iran Central Bank, Carmakers Clash Over €844 Million Loan

EghtesadOnline: To help again rescue the dysfunctional local auto industry, the Central Bank of Iran agreed last month to lend €844 million to the two main companies, Iran Khodro and SAIPA.

News ID: ۷۴۶۸۴۸

05 March 2019

Now the two sides are at each other’s threats unable to get their act together over technicalities, namely the repayment mechanism.

The CBI initially was against giving such a loan to the dysfunctional carmakers that have long earned the wrath of almost car buyers, the Persian-language economic daily Donya-e-Eqtesad reported. The newspaper is a sister publication of the Financial Tribune.

Experts argue that given the economic headwinds the nation  is facing due to the new US sanctions, the scarce national currency reserves should not be lavished on an unrepentant  industry that never seems to make a profit despite jacking up prices to levels never ever seen before in the history of Iran’s auto industry and keep on begging for money to stay afloat, Financial Tribune reported.

With President Hassan Rouhani’s personal intervention the CBI relented and agreed to give IKCO and SAIPA another €844 million to import auto parts.

Devil in the Detail

CBI placed its own conditions for the loan which the car companies rejected. One of the points of contention between the CBI and car companies is the rate at which the forex loan must be repaid.

The CBI insists that the loan should be repaid at the exchange rate of the repayment date. The carmakers say they want to repay at the same currency rate at which they had borrowed.

From what is known, the money should be repaid nine months after allocation. The USD was traded at 127,000 rials in the market on Monday.

Another sticking point is that the carmakers say the loan should be available in a single payment. The CBI says it will pay the two companies in tranches and with the arrival of each shipment of auto parts.

Another “option” has been proposed by the car companies. They say they are ready to accept the loan in rials amounting to 70 trillion rials ($551 million) instead of the foreign currency.

The economic newspaper speculates that to make a rial loan of this magnitude it will be forced to print money, which would be an added burden for the national economy that has more than its share of problems.

Present Status

Iran’s auto sector is among those hit hard by the new US sanctions. Foreign partners of Iranian car companies walked away last year while auto parts imports have slowed.

Furthermore, mismanagement and corruption have taken a toll leading to a chaotic car market. To make matters worse, local car production has declined to unprecedented levels while car imports are banned.

During the nine months to December 2018 domestic auto output plunged to 763,519 cars and commercial vehicles -- a 31% year-on-year decline.

According to the Ministry of Industries, during the period 713,233 cars were produced, down 31.2% compared to 1,037,374 made in the same period last year. In the nine months 50,101 trucks, buses, minibuses, and pickups were made – down 27.4% YoY.

Car companies claim state loans and aid packages would help them weather the storm and boost output. They, however, fail to explain why after decades of subsidies and unending government help the companies are sinking in red ink and the quality of their vehicles have deteriorated.

Independent observers are of the opinion that the root cause of the present dire situation is the inherent corruption in the sector that obviously cannot be remedied with generous aid and rescue packages.

They argue that such loans further encourage managers of the failing industry to continue on the old path and not change for the better like all the international carmakers struggling to find buyers.