Iran’s Bank Tejarat has decided to lend 1.5 trillion rials ($6.38 million) to the major automaker Iran Khodro Company (IKCO) to boost localization.
Based on the recent agreement between the two entities, the bank agreed to pay the financial facility by the end of the current fiscal year (March 2022), the automaker’s website Ikcopress.ir reported.
IKCO's CEO Farshad Moqimi said Bank Tejarat is the company's financial strategic partner, stressing that the financial assistance can help localize auto parts manufacture and increase the sector's net working capital.
“The bank has also agreed to issue a specific amount of Productive Credit Certificates to the carmaker to help oil the industry's wheels,” he added, hoping that the pact will encourage automakers and parts manufacturers to expand their operations.
Also known by its Persian acronym Gam, Productive Credit Certificates are a financial instrument newly developed by the Central Bank of Iran to help meet the funding needs of manufacturing units and businesses.
The instrument is described by the bank as a “market-oriented instrument that can be traded in money and capital markets”.
Reza Dolatabadi, the head of the bank, said the deal has the potential of improving relations among the bank, IKCO and parts producers.
The official emphasized that the most serious difficulty facing the local auto sector is a lack of liquidity, stressing that the deal, as well as future comparable arrangements, will be of significant assistance to the industry.
CBI Assistance
In a similar move, the Central Bank of Iran allocated 150 trillion rials ($638.3 million) in aid packages and loans to the auto sector in February to help bolster productivity and localization efforts.
Abdolnasser Hemmati, the CBI chief, said that of the total sum, CBI’s Money and Credit Council, Iran’s top monetary decision-making body, has earmarked 50 trillion rials ($212.7 million) to be directly lent to automakers from bank reserves.
He said the rest would be 100 trillion rials ($408.16 million) worth of Murabaha bonds — an Islamic financing structure in which the seller provides the cost and profit margin of a commodity — and Gam certificates.
Mohammad Reza Najafi-Manesh, the head of Iranian Automotive Parts Manufacturers Association, told reporters that the Gam certificates seem to be a workable substitute for other ways of credit-based purchases, as they are more easily encashed and transferred in the local banking system compared to regular bonds. He called on automakers to use the opportunity for a positive change.
Soheil Memarbashi, the head of Transportation Office at the Industries Ministry, said the automotive sector is in dire need of financial help.
“The credit certificates can be a sustainable source of finance and simultaneously help boost parts and vehicle production,” he added.
He said the new type of financial instrument is aimed at helping develop other industrial sectors in the near future.
The efforts are in line with the government policies to minimize the industry’s dependency on foreign resources to bypass US sanctions.
Localization Resume
Based on official data, Iran Khodro has slashed capital flight by $210 million through the localization of vehicle parts in the last two Iranian years (March 2019-21).
Moqimi said IKCO has implemented 135 auto parts localization and vehicle design projects in the past two years with the help of Iranian auto parts manufacturer, SAPCO.
“The projects have gradually curbed IKCO’s dependency on foreign suppliers,” he said.
According to IKCO’s chief, the company has produced 2,000 sets of vehicle frames and mechanical tools, saving up to $22 million with the support of industrial units affiliated with the Defense Ministry and knowledge-based companies.
“The company used to spend close to $360 million on the import of parts every year. Fortunately, indigenization efforts can raise the amount of saving to $248 million per year,” he said.
SAPCO Projects Underway
In line with expanding local production, SAPCO plans to produce vehicle frames, parts and mechanical tools for 630,000 IKCO cars in the current fiscal year.
The plan is aimed at promoting localization by reducing auto part imports and utilizing the domestic industrial, scientific and technological capacities.
In terms of fiscal management, SAPCO has prioritized the revision of pricing mechanism by employing modern fiscal frameworks and improving liquidity flow in auto parts sector.
In addition, SAPCO is working on 131 localization projects in collaboration with knowledge-based companies. Projects worth 1 trillion rials ($4.2 million) are expected to cut capital flight by $150 million annually.
The parts maker also has 21 joint projects with the Defense Ministry, which are projected to save up to €33 million per year.
SAPCO has signed 23 collaboration agreements worth 2 trillion rials ($8.5 million) with the Islamic Revolution Guards Corps’ Aerospace Division. The deals are expected to slash imports by $46 million per annum.
Difficult Times
While the financial facilities being poured in the auto sector, official data show Iranian automotive companies are in the red, owing parts makers 430 trillion rials ($1.82 billion).
According to Reza Rezaei, a member of Iran Auto Parts Makers Association, parts manufacturers are strategic players of the auto industry, who help materialize the localization goals.
“They deserve more support from the government, but unfortunately the state has paid little attention to the sector,” he added.
Criticizing the cumbersome regulations in the banking system, Rezaei noted that parts makers are having a hard time in getting bank facilities.
“Even when we are trying to import raw materials, customs officials are reluctant to cooperate, which makes import procedures more difficult,” he said.
Mohsen Razmkhah, another industry insider, earlier said Iran’s auto part production sector is struggling to procure the raw material and key parts from foreign sources due to the restrictive US sanctions.
He added that the industry has fallen into stagnation due to the soaring foreign exchange rates that make it almost impossible to secure key auto parts through imports.
Since the summer of 2018 when the US sanctions were reimposed against Iran, the rial has lost about two-thirds of its value and prices of almost all goods have soared to unprecedented highs. The greenback was trading at 238,000 rials in Tehran on Saturday, though it hardly fetched 42,000 rials a year earlier.
Criticizing the state’s inefficient management of the ailing sector, Razmkhah said loans allocated to the industry so far have acted more as temporary sedatives.
“Borrowings cannot solve the underlying issues of auto parts manufacturers and an effective strategy is required to revive the industry,” he concluded.
