Hefty Gov’t Automotive Loan Embroiled in Technicalities

EghtesadOnline: The €844 million loan earmarked for local auto parts makers is yet to materialize, due to disagreements between automakers and state players, a deputy industries minister says.

News ID: ۷۴۷۹۳۳

21 July 2019

In February, the Iranian government and the Central Bank of Iran signed an agreement with local automotive companies to extend an €844 million loan to local auto parts makers.

Farshad Moqimi added that due to disagreements among parts makers, car companies and government officials, the loan has not been allocated, IRNA reported

“The loan was to be delivered by June 21, but the deadline had to be extended,” Financial Tribune quoted him as saying.

Over the past few months, the two sides—carmakers and policymakers—have been at each other’s throat, as they differ over technicalities related to the repayment mechanism.

CBI initially was against giving such a loan to the carmakers. Experts argued that given the economic headwinds facing the country due to the new US sanctions, the scarce national currency reserves should not be lavished on a dysfunctional industry that never seems to make a profit despite jacking up car prices regularly and unreasonably, and keeps on begging for money to stay afloat.

With President Hassan Rouhani’s intervention, CBI relented and agreed to give Iran Khodro (IKCO), SAIPA and their affiliated parts companies €844 million to sustain their operations.

Devil in the Details

CBI laid down its own conditions for the loan, which were rejected by the car companies. One of the points of contention is the rate at which the forex loan must be repaid.

While CBI insists that the loan should be repaid at the exchange rate of the repayment date, carmakers 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 118,000 rials in the market on Saturday.

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

Another option has been proposed by the car companies. They had offered to accept the loan in rials, amounting to 70 trillion rials ($593 million) instead of the foreign currency.

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

Current Status

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

However, mismanagement and corruption have plunged Iran’s auto market into a state of turmoil. To make matters worse, local car production has declined to unprecedented levels while car imports are banned.

With raw materials and auto parts supply getting bottlenecked, car production plummeted sharply. In the last fiscal year (ended March 20, 2019), a total of 955,923 cars and commercial vehicles were produced in Iran, indicating a 37.8% year-on-year decline.

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 has deteriorated.

Independent observers blame the present dire situation on the sector’s inherent corruption that obviously cannot be remedied with generous aid and rescue packages. They argue that such loans only encourage state managers of the failing industry to continue on the old path and not make an attempt to change.