Plan to Inject $650m in Ailing Auto Industry

EghtesadOnline: There are plans to finance the loss-making auto industry to the tune of 150 trillion rials ($650 million), the governor of the Central Bank of Iran said.

News ID: ۷۸۵۸۶۷

31 January 2021

Abdolnasser Hemmati made the announcement on Saturday in a visit to Iran Khodro Company (IKCO), the largest domestic carmaker that has long been under strong criticism for low quality cars and high prices.

Fifty trillion rials ($215 million) will be procured directly from  banks, according to a press release posted on the CBI website. Hemmati said the newly developed financial instrument, known as Gam, will be the largest contributor.

Gam is the Persian acronym for Productive Credit Certificate designed by the CBI to help meet the funding needs of “credible and productive” manufacturing units and businesses.

Much is not known about the new financing instrument and those eligible to borrow. However it is described by the CBI as a “market-oriented financial instrument that can be traded in money and capital markets.”

Lenders will assist credible businesses by offering tradable credit certificates similar to LCs.  The certificate can be given to suppliers of raw materials, machinery and equipment.

Like bonds, certificates have maturity dates. The supplier can cash the certificate by selling it in the stock market and liquidity is not exchanged between beneficiaries.

The mechanism enables banks meet the financial needs of manufactures without creating “non-productive liquidity”. In other words, it avoids the inflation new liquidity usually tends to create.

"Gam has a great capacity for financing the production sector in a noninflationary manner. Automakers have benefited much from the plan," Hemmati said on the sidelines of the visit.

Sluggish Industry

The senior banker criticized monopoly of the ailing auto industry, reiterating that "creating a competitive market" must be on the agenda to push automakers to innovate and compete.

Iran's auto industry is a monopoly of a few state-owned major companies, namely the IKCO and SAIPA, the second largest automaker. Experts have said that a free market economy, where prices of goods and services are set by the forces of demand and supply without government interference, contributes to competitiveness and empowers private enterprise.

"The auto industry is [far] away from the desired target. It was expected to stand on its feet and evolve from an infant industry," Hemmati was quoted as saying.

He urged carmakers to reform "correct pricing and marketing procedures, get rid of excess assets and restructure their finances."

Mismanagement, corruption and the US economic blockade have hurled Iran’s auto industry in the red. After Donald Trump, the controversial former US president, announced new restrictions in 2018, most international auto giants cut ties with Iran. The move further undermined the auto sector as never before.

It is often reported in the local media that the two major car companies for all practical purposes bankrupt and permanently in need the government bailout “to save tens of thousands of jobs” when the economy is struggling and the dole queues are getting bigger every day.