According to the government officials, except sluggishness in some areas in case of buses and two/three wheelers there has been robust growth in all-automobile sectors during July to March FY2021-22 in Pakistan.
The higher growth effectively manifest clearing up the pent-up demand of Covid-19 period, otherwise negativity or stagnation in growth was persisting for the previous 5-year.
During the year under consideration, there has been a persistent supply chain interruption because of chip shortages, skyrocketing freight costs, unrelenting rupee weakening, galloping inflation and auto financing restriction on high-end vehicles to decline the import bill.
The auto sector constitutes about 15 percent to LSM, hence represents significant industrial output of the country. According to PBS, automobile registered 54.1 percent upsurge during July-March FY2022. Despite robust growth during 9 months of FY2022, the higher numbers, to a great extent, fall short of installed capacities. Also, these numbers are far too meager against production projections made in the successive auto strategies.
The August performance has been observed in automobile sector during the period of July-March FY2022 that was showing latent demand for motor vehicles approximately 50 percent plus growth. Also, in the heavy commercial vehicles, there is substantial growth in trucks as the medium size trucks, around 5 ton, unexpectedly became popular because of affordability and expansion of e-commerce.
Additionally, number of small trucks signed up at a reduced rate of 5 percent in response to Kamyab Jawan Scheme. More market expansion is expected owing to inbuilt confidence through the current investors also the new entrants in bringing locally produced hybrid vehicles.
Therefore, all projections cast a positive outlook for the industry. Officials also identified that in case of passenger cars, the production and sales are up by 57 percent and 54 percent with 166,768 and 172,612 units, respectively. In this regard, higher growth has been observed in up to 800cc and up to 1000cc segments registering 77 percent and 65 percent growth, respectively.
Growth in exceeding 1000cc segment was 35 percent. For similar reasons, the production and the sales of light commercial vehicles (LCV) and SUVs registered increase by 44 percent and 46 percent, respectively. Farm tractor sector has shown growth with production and the sales up by 13.5 percent and 12 percent respectively.
This pleasant upward surge was because of overall growth in agriculture sector ensuing better crop prices and consequent more buying power of the farmers. However, these numbers are not even close to the highest numbers this industry had attained in the past. The two/three wheelers sector showed modest fall in production and the sales by 3.5 percent and 4.1 percent respectively. This fall is due intra-industry production losses by some units, while other units have shown their natural growth.
On the other hand statistics released by the state bank of Pakistan (SBP) showed that outstanding consumer financing for transport, which includes purchase of cars, reached at Rs353 billion as of August 2022, a fall of Rs 8 billion or 2.6 percent month-on-month (MoM). Moreover, the cumulative fall in auto financing since June 2022 to August 2022 has been almost Rs15 billion. The dip in financing comes in tandem with drop in auto sales and high interest rates. Passenger car sales in August reached at 8,980 units, reflecting a drop of 50 percent year-on-year (YoY) and 13 percent MoM.
Sources recorded that as Pakistan battles a bulging import bill, SBP reduced the consumer financing tenure for vehicles, bringing it down to a maximum of 3- year for cars with engine displacement of over 1,000cc, and to 5-year for those under 1,000cc. Furthermore, sources recorded that SBP’s latest measure comes a day after the Monetary Policy Committee (MPC) increased the key interest rate by 150 basis points, taking it to 13.75 percent, the highest interest-rate level since 2011 when it reached at 14 percent.
On the same day, the SBP proclaimed an increase in the markup rate for financing under Export Finance Scheme (EFS) as well, taking it from 5.5 percent to 7.5 percent. The Experts of the country identified that the measure will not have much of an impact on the banking sector, but will be a negative for the auto industry. Banks will have other avenues to move their financing from auto to other sectors. It is also said that in the present economic situation, where interest rates are already high, banks will not aggressively pursue auto financing as their priority has shifted from consumer to corporate lending.
However, SBP’s latest measure alongside the ongoing rise in car prices will not bode well for the auto sector. It is estimated that 30-40 percent of the auto sales generated are by auto financing. A reduced tenure means the installment amount would rise, denting demand.