Central Bank of Iran Boss Lashes Out at Loss-Making Carmakers

EghtesadOnline: Despite the deep compulsions to work for verifiable efficiency in key economic sectors at a time when the economy is saddled with mounting pressure due to US hostility and sanctions, startling performance of the auto industry has again come under the spotlight.

News ID: ۷۴۸۷۷۴

22 October 2019

As a state-affiliated sector, the loss-making auto manufacturing business has been criticized at regular intervals from many quarters for its mismanagement and inherent dysfunctionality.

This time around it was the turn of the country’s top banker to attack the car companies that many auto experts say have become a liability and must be stopped.

Irresponsible auto officials, in response to criticisms, have always resorted to tired clichés and irritating intimidation of closure of factories and laying off large number of employees. Those running the broken car plants have gotten into the habit of permanently begging for funds from the government and support for the regularly rising auto prices, Financial Tribune reported.

What is more disturbing is the fact that for almost four decades successive governments have succumbed to the unacceptable demands of carmakers that have still to turn a profit despite regular infusions of scarce government foreign currency into their coffers that obviously do not have a floor!

In a weekend attack on the unbelievingly poor performance of the auto industry, governor of the Central Bank of Iran, Abdolnasser Hemmati, censured what he described as the indolent auto sector.

“For how long should we stick with (support) this lethargic automotive industry?” Hemmati asked on Sunday, addressing a meeting of board of representatives of the Iran Chamber of Commerce, Industries, Mines and Agriculture.

He singled out the arrogant automakers’ longstanding habit of wasting national resources with shocking impunity and openly voiced his strong opposition to funding the auto companies that have nothing to show minus the unending list of multi-billion-dollar losses they have been piling up for nearly half a century.

He was referring to an agreement between automakers and CBI in February based on which the latter agreed to lend $844 million to help rescue the two bloated car manufacturers, namely Iran Khodro (IKCO) and SAIPA, apparently under pressure from the Industries Ministry.

Since then, the car companies and the CBI have been at loggerheads over how the loan should be repaid.

Initially the CBI was opposed to giving such a loan. Experts agree with the monetary authority that in view of the economic headwinds the country is facing due to the new US sanctions scarce currency reserves should not be lavished on the inefficient and irresponsible companies broken in more ways than one.

The CBI laid down its conditions for the loan, which were rejected by the carmakers. One point of contention between the two sides is the interest rate the forex loan must be repaid.

As is usually the case, the lender insists the loan must be cleared at the forex exchange rate of the date of repayment while carmakers want to repay at the rate at which they borrowed.

“To show goodwill, I agreed to pay $844 million in foreign currency to auto parts makers… and accepted that they repay in rials” but they refused to accept the risk of foreign exchange rate volatility come  repayment due date, Hemmati said

Despite this, he added, “we deposited the money with the [Chinese] Kunlun Bank [as the agent bank] but they were hesitant for a year and in the end didn’t get the money”.

Nearing Insolvency

Long blamed by experts, the two auto firms’ gross incompetence, wrong government policies vis-à-vis allocation of hard currency for imports and over-regulations have derailed the key sector and pushed them on the verge of bankruptcy.

Over the past year, the government came up with various rescue packages — from offering multi-million-dollar loans to more incentives—to save the two state-affiliated, indebted and loss-making companies.

Apart from mismanagement the key auto sector is also suffering due to the foreign economic sanctions. The US sanctions in 2018 compelled European partners, including Renault, Peugeot, Citroen, Volvo and Daimler, to end their collaboration with Iran.

Chinese carmakers with ties to Tehran have also downsized their business fearing Donald Trump’s wrath.

By October 2018, the accumulated debts of Iranian carmakers, Iran Khodro (IKCO) and SAIPA, reached 1,000 trillion rials ($8.8 billion), the industries minister, Reza Rahmani said in a recent interview.

In words rarely heard in public, the minister said the car companies’ state of affairs is indeed “an affront to the Iranian people”.

In response to the Hemmati’s open attacks, members of Iran Vehicle Manufacturers Association and Iranian Auto Part Manufacturers Association said in a joint meeting Monday that if the domestic auto industry is to shut down, Iran would need to import foreign vehicles costing billions of dollars.

They spoke of a 35% decline in car production in the first half of the current fiscal year (March 20- Sep.22) due to three-fold rise in car prices in recent months.

Instead of doing some soul searching, they once more tried to put the blame for mounting losses on factors outside their realm, this time on the so-called Competition Council.

The council is a government body in charge of pricing domestically produced goods and regulating the market.

“Data for the past three years shows that the Competition Council set car prices in a way that put carmakers in loss,” ISNA quoted Ahmad Nematbakhsh, the general secretary of IVMA, as saying.