The Central Bank of Iran in a directive has required 12 local banks to grant loans to parts makers, as part of the ongoing state policy to rescue the struggling industry.
In a letter carried by Mehr News Agency and signed by Ali Asghar Mir Mohammad Sadeqi, head of CBI’s Credit Department, the monetary ombudsman has called on the banks to extend auto parts makers with added financial support.
Under the theme of ‘ Support for Iranian Products’, the letter is addressed to CEOs of 12 private and state-owned banks: Bank Melli Iran, Bank Saderat Iran, Tejarat Bank, Bank Mellat, Bank Sepah, Bank of Industry and Mine, EN Bank (Eghtesad Novin Bank), Karafarin Bank, Parsian Bank, Bank Pasargad, Sina Bank and Saman Bank.
Without strings attached and with no lending ceilings or regulatory conditions, the CBI letter focuses only on one thing: Continue funding companies making car parts.
In recent months and following new US economic sanctions, the Iranian auto industry, similar to most manufactures dependent on imports, has been hit hard. Acquiring raw materials and key parts has become a major challenge because fearing Washington’s wrath many foreign firms are unwilling to sell to Iran. Add to that the bitter reality that local companies’ purchasing power plummeted after the national currency lost 70% of its value last summer.
To sustain the dysfunctional auto sector amid growing economic challenges, the government has announced aid packages and loans for local firms.
However, given the administration’s recent policy of “move first, think later”, how state support for the beleaguered industry should be financed efficiently and whether or not the backing is economically feasible seems to be out of the question.
Big Fat Loans
Earlier and as per a directive signed by First Vice President E’shaq Jahangiri, the same 12 banks were told to lend to the two main local auto companies, Iran Khodro, and SAIPA, 40 trillion rials ($333 million). The bailout was to help car companies pay some of their mounting debt to local parts makers.
In his recent letter, Sadeqi points to the $333 million loan as part of the state’s endeavor to help preserve the sector and calls on banks to facilitate the process.
Earlier last week in a talk with Mehr, the secretary of Iran Auto Parts Manufacturers Association (IAPMA), Maziar Beiglou, provided some details about the loans.
As per an earlier directive signed by First Vice President E’shaq Jahangiri, the same 12 banks were told to lend 40 trillion rials ($333 million) to the two main auto companies, Iran Khodro, and SAIPA
He said over the past four months automakers have not paid parts makers a dime. The two major car companies are sinking in red ink and “owe local parts manufacturers some 140 to 150 trillion rials ($1.16-1.25 billion).”
“SAIPA and IKCO each will receive 20 trillion rials ($166.5 million) in new loans from the government.”
The car companies are to use the entire 40 trillion rials ($333 million) to repay a part of their outstanding debt. Beiglou says the money will not be given to car companies directly. “They should introduce parts makers to banks and declare the amounts owed them.”
It is not clear how and when the grossly inefficient and malfunctioning car companies will repay the new loans to the government that is trying to plug deep holes in its own budget and curb spending.
Strange Situation
Many observers have censured the state’s decades-old controversial support for the dysfunctional auto industry that simply cannot compete in the regional car market, let alone the international and hugely competitive international marketplace.
With nearly 1 million jobs tied to the auto industry, and in response to critics, car companies and officialdom never fail to highlight the employment side of the deepening problem.
As a matter of policy, they love to claim if automotive companies close down and walk away, hundreds of thousands of people would rush to the dole queues.
Many have likened such inept arguments to a hostage situation where a nation is forced to dig deep into its pocket to pay for the failings of imprudent policymakers and meritless industry managers.
Over the past decades, with unending ups and downs, domestic car companies have largely remained assemblers of imported parts. This reality was once again manifest when Iran was hit with new US sanctions last year and imports of a large number of goods became all the more difficult and in some cases impossible.
After beleaguered President Donald Trump pulled out the United States from the Iran nuclear deal last May and imposed new sanctions, output at IKCO and SAIPA plummeted to new lows and many companies making auto parts were forced to shut down.
Facts and Figures
During the nine months to December domestic auto output plunged to 763,519 cars and commercial vehicles -- a 31% year-on-year decline.
According to the Ministry of Industries, during the period 713,233 cars were produced, down 31.2% compared to 1,037,374 made in the same period last year. In the nine months 50,101 trucks, buses, minibuses, and pickups were made – down 27.4% YoY.
IKCO and SAIPA are in disarray, to say the least, with both reporting 35.4% and 30.3% decline in output.
During the nine-month period, IKCO total production fell from 520,480 cars and commercial vehicles (made last year) to 335,953 units this year -- a steep 35.4% Y/Y fall. Data shows IKCO produced 327,792 cars during the period – down 35.8%.
The company’s main rival SAIPA is also struggling and facing an uphill battle. Over the nine months, SAIPA made 328,355 cars and commercial vehicles, -- a 30.3% decline compared to the 471,405 units made during the corresponding period last year.
Independent observers are of the opinion that offering loans and blank checks to hubristic car companies instead of holding them to account will send them a simple message: keep going as you have for decades, waste the scarce national resources and the government will clean up the mess!
