$844m Needed for Rescuing Iran’s Cash-Burning Carmakers

EghtesadOnline: An aid package worth $844 million is needed for saving Iran’s two chronically struggling carmakers.

News ID: ۷۴۷۳۴۹

18 May 2019

Deputy Industries Minister Farshad Moqimi told ICANA that over 150,000 cars are in the warehouses of local automotive firms, as they do not have the parts for completing the vehicles.

In February and under the Industries Ministry pressure, the Central Bank of Iran agreed to lend $844 million to help rescue the two dysfunctional car manufacturers, Iran Khodro (IKCO) and SAIPA, in hard currencies.

Since then, the car companies and the CBI have been at loggerheads over the loan’s repayment mechanism, Financial Tribune reported.

According to Moqimi, the aid package was to be delivered weeks ago and the Industries Ministry is exerting its full force for the loan delivery.

“If the car companies are provided with the required financial support, they will be able to buy parts, complete the vehicles and deliver them to customers,” he said.

Local news website Tejarat News estimates that the incomplete vehicles are worth over 100 trillion rials ($667 million).

Points of Contention

The CBI initially was opposed to giving such a loan to the carmakers. Experts also agree with the monetary authority that in view of the economic headwinds facing the country due to the new US sanctions, the scarce national currency reserves should not be lavished on these inefficient companies.

However, with President Hassan Rouhani’s personal intervention, the CBI relented and agreed to give IKCO and SAIPA the $844 million loan to purchase auto parts from domestic and foreign suppliers.

However, CBI laid down conditions for the loan, which were rejected by the car companies. 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 while carmakers wish to repay at the same currency rate at which they borrow.

From what is known, the money should be repaid within nine months of allocation. Another sticking point is that the carmakers want the loan to be paid as a lump sum. The CBI says it will pay the two companies in tranches and with the delivery of each shipment of auto parts.

Another “option” proposed by the car companies is that the loan be paid in rials instead of foreign currencies.

To make a rial loan of this magnitude, CBI will be forced to print money, which would be an added burden on the national economy that has more than its share of problems.

Hard-Pressed Sector

Following the US President Donald Trump’s decision last year to pull the country out of the Iran nuclear deal and impose new sanctions against Tehran, the Iranian economy has tanked.

The national currency, the rial, has lost about 70% of its value since then and prices of almost all goods have soared to unprecedented highs. The greenback was traded at 150,000 rials in Tehran Wednesday morning, though it hardly fetched 420,000 rials a year earlier.

The sanctions have disrupted Iran’s banking and industrial ties with the world. These have restricted the supply of raw materials, which has been manifested in the declining output of Iranian factories.

The key auto sector is one of the Iranian industries directly targeted by US sanctions that compelled European partners, including Renault, Peugeot, Citroen, Volvo and Daimler, to suspend their operations in Iran.

Chinese carmakers with ties to Tehran have also downsized their activities.

In addition to disruptions in auto part imports and foreign partnerships, the Iranian car industry has been struggling against “homegrown” headwinds.

Long blamed by experts, the state-controlled automotive firms’ incompetence in coming up with strategies to sustain their operations and faulty government policies vis-à-vis allocation of hard currencies for imports and over-regulation have derailed the sector and placed it on a road that will lead to the outright bankruptcy of automakers.