The 10-15% increase in total costs due to the removal of subsidized currency will have a direct impact on the prices of automobiles and related parts, a faculty member of Iran University of Science and Technology said.
“Despite the fact that in the fiscal 2018-19, vehicles were included in the category of goods subject to receiving the subsidized currency as a basic commodity, it did not come into force,” Amir Hassan Kakaei was also quoted as saying by Khabar Khodro.
“For a short period of time, the government’s subsidized currency was allocated to automobile and component producers, but soon it was calculated at the open market rate of 80,000 rials [instead of 42,000 rials per $1]. After that, all currencies received by the automotive and parts industries were based on Nima and Sana forex rates.”
Nima is a secondary market developed by the Central Bank of Iran to be used as a venue where companies sell their export earnings at rates lower than open market rates. The currencies sold on Nima help fund imports.
The expert noted that even the raw materials required for this industry are purchased on the basis of FOB Persian Gulf prices, so the removal of the subsidized forex rate of 42,000 rials for each US dollar will not have any effect on the automotive and parts industries.
“But the point is that in industrial activities, customs tariffs are calculated on the basis of the same subsidized currency rate, which means that if the currency of 42,000 rials is removed, the import tariff will increase sevenfold," he said.
“in other words, a 700% increase in import tariffs will undoubtedly have a big impact on the overall costs of automobiles and components. Thus, both the removal of subsidized currency and the increase in import tariffs will increase the overall costs by 10-15% in those industries.” This shows that the change in government policy will increase the automobile and parts producers’ costs.
Kakaei then outlined the effect of the increase in energy prices on total costs of energy-consuming industries such as steel and aluminum, stressing that this will lead to a rise in the prices of raw materials and end products.
“This decision will not only affect automotive production, but would also increases the total costs of parts manufacturers and trigger inflation in the country. Although the subsidized currency has a lower effect on the automotive industry compared to livestock, poultry and pharmaceutical sectors, the subsidized currency’s removal will have a noticeable effect,” he said.
The expert added that vehicle prices will definitely increase due to the hike in production costs.
As the vehicle prices in the market depend on the exchange rate, the government will be able to unify foreign exchange rates by removing the subsidized currency and prevent a rise in USD price, but because of the increase in total costs, the rise in inflation rate will be inevitable.
“If the government can manage the exchange rate and keep it fixed, vehicle prices should not increase. But unfortunately, it is unlikely that the government can keep the exchange rate constant at around 300,000 rials. As a result, with the increase in foreign exchange rate, it is obvious that the prices of cars, just like other goods, will increase and the government cannot prevent it,” he said.
Kakaei predicted that the overall automobile prices will rise more than they have in the past with the removal of subsidized currency.
Fiscal 2022-23 Budget Bill
The Iranian Parliament has agreed in principle over the budget bill outlines proposed by the government of President Ebrahim Raisi for the fiscal 2022-23.
In a Sunday vote, 174 MPs voted in favor of the bill, 76 voted against and six abstained, IRNA reported.
The Majlis Joint Commission will now examine the details of the budget bill. The parliamentary body is responsible for reviewing the budget bill as well as five-year development plans proposed by the government before it is put to a legislative vote.
President Raisi submitted the fiscal 2022-23 budget bill to parliament on Dec. 12.
The budget of state companies (including state-controlled automotive companies), banks and for-profit organizations has been put at 22,314 trillion rials ($78.63 billion).
All in all, the ceiling set for the government’s total budget is at 36,310 trillion rials ($127.94 billion), about 1,056 trillion rials ($3.72 billion) short of the general budget and that of state companies, banks and for-profit organizations combined.
The budget expects crude oil sales to stand at 1.2 million barrels per day to earn 3,818 trillion rials ($13.45 billion) in the fiscal 2022-23, accounting for about a quarter of general budget.
Notably, for the first time, the budget counts on taxing all owners of cars valued at over 10 billion rials ($35,236).
The parliament will go through the details of the budget bill to make any necessary changes before it is passed into law.
The government’s policy changes related to the elimination of subsidies allocated to energy vectors are expected to increase prices in the automotive industry and worsen inflation.
