Sunday, September 10, 2006

An Increase in Automobile Prices in Iran

BBC Persian service has reported an increase in automobile prices in Iran. I have checked the dailies such as Shargh, Sarmayeh and Rooz, I could not find similar reports, so following speculation is challengeable by contradicting evidence

In following an import substitution strategy and to boost national pride Iran has established domestic manufacturing lines to assemble automobile. Iran National Automobile Manufacturing Group known as Iran Khodro is the largest of these companies. There are also other firms such as SAIPA, started as a Renault manufacturer and others. Seeking to establish a self sufficient car manufacturing industry Iranian government banned importing foreign made cars for almost a decade; even now tariffs to import foreign manufactured cars are staggering.

In this monopoly situation purchasing a car became a rather difficult process. Queues were made of customers and the right to purchase a care at factory price became a market commodity as well. Interestingly an active market for used cars was developed as well, however hardly one can notice a depreciation of nominal price for cars during last decades. Although this increasing trend was contributed to the inflation and general increase in price index, one should notice demand for cars in Iran was not and is not purely based on utility maximization behavior.

The very low gas prices in Iran and ingenuity of local mechanics[1] keep the maintenance cost of automobile relatively low. On the other hand the real value of money keeps declining because of ever present inflationary conditions. In the absence of higher than zero real interest rates from banking system, households save in any form of durable products available to them: hard currency, golden coins[2], real estate and cars. One also must mention the increasing role of Stock Exchange Market an increase in household savings in the form of bonds and shares; however that has proved a risky endeavor in the long run[3].

It could be argued that Iranian household has learned to diversify its saving portfolio in order to reduce its risk. It also could be argued that demand for cars also is determined by the risk factor.

According to BBC the price of Samand a domestic product has increased from 10’800’000 Tomans[4] to 11’800’000, Price of Peugeot Pars from 16’900’000 to 17’800’000 Tomans. The increase in the case of Peugeot 206 is 400’000 Tomans for its different types. The price of Pride, the most popular car in country, has increased from 6’850’000 Tomans to 7’150’000 Tomans. These show an increase of 4% to almost 10% for the price of different makes and models in market.

Some speculate that the increase in automobile prices is initiated by decrease in the quantity supplied, which is because of lack of parts and Iran Khodro exports. However if the increase is universal for all models and makes, one might conclude that the increase in automobile prices could be caused by a shift in the demand.

It is certain now that government would not implement rationing of car gases to reduce the fuel imports. Thus might demand has increased because of cost of maintenance has remained low. However I would like to argue that the gas price would not be lower than before and the contribution of this policy to increase in demand should not be exaggerated.

The question is that if market demand for cars has increased because of decrease in rate of returns of stocks and an increase in the risk factors? A few months ago there was an increase in the price of gold in the market, which was controlled by increase in the supply of gold by the Central Bank of Iran. Could this be the second wave of increase of demand to save in the form of durable products excited by an increased risk factor and public expectation of a higher inflation rate?

Coming months would answer that.
[1] They actually fix the parts instead of ordering a substitute, thus one pays for labor and not the part.
[2] Traditionally Iranians are fond of golden coins and up to day it is a measurement of value, a memorable gift and a way of saving. As a gift it is more of a gift card whose real purchasing power
[3] The reaction of Tehran Stock Exchange to the last year presidential election results in major losses by middle class shareholders.
[4] Currently 1 USD is 920 Tomans in Tehran’s Bazaar, however one might argue that an exchange rate based on Purchasing Power Parity should be implemented. Thus I keep the prices at local level.

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