Imports Indispensable to Economy

EghtesadOnline: Critics of President Hassan Rouhani have argued that the rise in imports over the past few years has thwarted the realization of what they call a self-sustained, self-sufficient economy.

News ID: ۷۷۶۲۸۹

17 May 2017

To many informed economists and businesspeople, however, import is an integral part of global economic interactions.

Among them is Farhad Ehteshamzad, president of Iran’s Import Federation affiliated to Iran Chamber of Commerce, Industries, Mines and Agriculture, who believes the unreasonable and deliberately ear-piercing criticisms on the part of the opponents of the government are more of an attempt at demagoguery.

“Trade in the international arena is a two-way street. To be present in the global market, we need to both buy and sell.

Those who say we must restrict our imports are mistaken. During the sanctions period, we had no other choice but to domestically produce almost everything, as we could not get a fair deal outside the borders. Today, the sanctions are gone and we too need to change our ways,” Ehteshamzad said in an interview with Financial Tribune.

“If we want to have a share in the global market and export our products, we need to produce quality products that can compete globally. For this to happen, we need to be up-to-date. We must have the latest technology, machinery and equipment as well as all the raw material needed to produce those goods.”

Ehteshamzad explained that imports take place under three conditions: One is where the country lacks the capability or resources to produce a certain commodity. An example here would be airplanes in the case of Iran.

Other countries also turn to importing certain commodities when domestic production of those goods is not economical. For instance, many countries are able to produce pins, but they prefer to import from China as it has invested a lot in the industry and can supply the needs for all customers.

“If we want to produce pins in Iran, for example, it will end up costing much higher than Chinese pins due to the huge investment that needs to be made at home,” he said.

Finally, imports are made when demand exceeds supply. In Iran, some commodities are imported during specific times of the year. For instance, fruit is imported during the New Year holidays, or meat and chicken during the Muslim fasting month of Ramadan when demand for these products increase and cannot be met through domestic supply.

Rice is another example, as domestic production stands at just over 2.2 million tons a year while demand hovers around 3.2 million tons.

According to the Islamic Republic of Iran Customs Administration, a total of $43.68 billion worth of goods were imported in the last fiscal year (March 2016-17), marking a 5.16% growth compared to the previous year. Field corn, soybean, cars, auto parts and rice were Iran’s main imports during the period.

“Our imports are made up of 63.7% intermediate goods, 20% capital products and 16.3% consumer goods. The import of intermediate and capital goods does not cause harm. On the contrary, they help spin the wheels of the economy. They provide factories with the raw material they need and spur economic growth,” he said.

Ehteshamzad stresses that Iran need not produce everything in the post-sanctions period.

“We need to focus on areas in which we have comparative advantage, like agriculture. We have to gather all our efforts and produce quality products in those fields only and conquer the global market. Then from the revenues attained, we can import the raw materials and intermediate products we need to keep our industries up and running,” he said.

Vertical Merger

On a related note, Deputy Minister of Labor, Cooperatives and Social Welfare Isa Mansouri said “vertical merger” is an effective remedy for Iranian producers to enhance the quality of products.

In an interview with the Persian daily Etemad, Mansouri explained that developed countries have experienced three eras with regard to efforts to improve their economies.

“First, they tried to replace imports with locally-made goods. Then they moved on to an era when expansion of exports was the main policy pursued. We have been lingering in this stage for a long time,” he said.

“But the world has changed and exports can no longer make the economic cake bigger. The third era which the world is experiencing today is a vertical merger into the global market.”

By definition, a vertical merger takes place between two companies that operate at separate stages of the production process for a specific finished product. It occurs when two or more firms, operating at different levels within an industry’s supply chain, merge operations.

“First, we have to find those fields in which we enjoy comparative advantages. The next step is to introduce the production units and enterprises active in those fields to well-known domestic or foreign companies that produce popular brands. By connecting them through vertical mergers, we prepare the grounds for Iranian products to improve quality, form brands and enter the global market. This creates jobs as well as economic growth,” the deputy cooperatives minister said.

Customs Revenues

According to Ehteshamzad, one major benefit of importation is associated with the easy money it generates for the government by collecting customs duties and tariffs.

“On the other hand, imports bring the government revenues through customs duties and tariffs. This is one of the easiest ways for the government to earn revenues. These (customs duties) too are used to renovate domestic industries and boost production,” he said.

In the fiscal 2013-14, Iran’s imports stood at $63 billion, earning the IRICA about 75 trillion rials ($1.9 billion) in revenues.

The total volume of imports fell to $43.6 billion last year, showing a 40% decrease. The average tariff rate declined from 27% to 19.2%. Nonetheless, IRICA earned 180 trillion rials ($4.7 billion) in revenues last year, indicating a 150% rise.

In the budget for the fiscal 2017-18, it is stipulated that 11.07% of all revenues be sourced from customs duties.

“Imports are not a replacement for our industries, but complement them.

The common belief that imports are a threat to local production comes from a rather uninformed outlook and is flawed,” Ehteshamzad concluded.