The Forum for Partners in Iran's Marketplace
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     

June 2020, No. 94


Global Economy

Sound Economic Patterns

South Korea, Malaysia, India, Turkey


The role of export earnings has become much more pronounced in the context of the recession that dominates the country’s economy.


 

Feryal Mostofi, Chairwoman of Investment Committee of Iran Chamber of Commerce, Industries, Mines and Agriculture, believes export promotion is one of the most important pillars of economic development. Most countries pay special attention to the issue and try different ways by providing infrastructure and offering various incentives and concessions, including tax breaks to encourage exports because exports stimulate economic growth and development and can have positive impacts.

In the current downturn, some manufacturers have inevitably left the economy and stopped working. Many other manufacturing units, on the other hand, are operating at lower capacities and are struggling to survive. Therefore, companies that have been able to stay competitive and continue to operate have to deal with many problems and need assistance. But in the meantime, the government’s 1399 budget bill (2020/21) has raised concerns for exporters. In the budget bill under Note 6 mention is made of duties and tax refunds as well as zero rates and tax exemptions from exports, which are the concern of many exporters and need to be reformed.

In this section of the budget, duties and tax refunds are subject to the Central Bank of Iran (CBI) regulations. One of the shortcomings of the CBI circular is the 4-month deadline set for the return of the foreign currency fetched from exports. Given the difficulties and constraints posed by the sanctions and recession, exporters face many problems in this regard.

Export procedures have been prolonged because one commodity may reach destination after going through several other destinations which means it takes longer for the client to receive his goods. On the one hand, due to financial sanctions, foreign customers face restrictions in paying for the goods. In addition to the delay in handing over the goods the exporters face higher risks, reduce their bargaining power and foreign clients demand more time to return the money in installments.

All these conditions make it very difficult for the exporter to return the foreign currency he earns from exports within the set deadline and require a thorough review. Another important issue that is directly related to the return of foreign exchange is the Forex Management Integrate System known as NIMA, which is not determined by the mechanism of actual supply and demand of the foreign currency. While the exporter has to purchase some of its raw materials at the open foreign exchange rate, its export currency falls below this value, which discourages the exporter from hastening the return of its export currency.

The producer is not like a speculator seeking to profit from fluctuations, but his main concern is the production cycle and filling the production capacity and focusing on the production and sale of the product. Therefore, the exporter tends to return the export currency to the country because he needs liquidity to produce, and this export revenue can flow through the blood vessels of the company and enable it to continue operating.

The role of export earnings has become much more pronounced in the context of the recession that dominates the country’s economy. But with the mechanism in place, the tendency of the exporter is reduced. In order to increase the exporter’s willingness to export and return the resulting foreign currency, we must trust the mechanism of forex supply and demand and allow the market to determine the price.

As the foreign exchange rate approaches this equilibrium, the flow of export currencies into the country has accelerated, so if the government wants to return the export currency into the country’s economic cycle it should know that the exporter is much more eager than the government, but this important task should be fulfilled in a just mechanism. As a result, if the forex rate moves towards liberalization, the export currency will return to the country more easily and quickly, and there will be no need for any special measures that could provide the basis for corruption.

Looking at the experiences of successful exporting countries in tax policy, South Korea and Malaysia are actively abolishing and reducing taxes that somehow affect export spending and revenue, while in Turkey and India, where most of the government revenues come from taxes, they have been partially and selectively reduced by export taxes.

In the Iranian economy, where the government budget relies on oil sales, given the recent restrictions imposed by the sanctions and the government’s move to become independent of oil revenues, the more appropriate model is to offer gradual export discounts slantwise and reduce them gradually.

This will enable the government to prepare the ground for encouraging exporters to join the world market, and by gradually reducing these exemptions, to increase government revenue from taxation and independence from oil revenues, and for the exporter to improve his competitiveness. Therefore, the government policies must be in line with support for the exporters. Under the difficult economic conditions exporters are facing, the government should not count on the revenue from taxes and duties on exporters.

 

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  June 2020
No. 94