Policy rate unlikely to hurt car demand

Car sales in Pakistan are projected to maintain an upward trajectory despite a notable increase of 275 basis points (bps) in the benchmark interest rate and restrictions imposed on car financing. On the other hand, the surge in agriculture income and recovery in economic activities would keep the demand for automobiles on a higher side in the country.

Recently, the State Bank of Pakistan (SBP) increased the policy rate by 100bps and imposed tighter consumer lending rules to limit rising auto loans. The central bank cumulatively increased interest rate by 275bps in the past three months. “This, however, should not impact sales volumes materially due to robust demand of automobiles as current delivery period averages between four to six months,” Arif Habib Limited (AHL) said in a report titled ‘Pakistan Strategy 2022 – A Delicate Balance’ issued the other day. The slowdown in imports of completely built units (CBUs), growing total market size of automobiles, entrance of new players in Pakistani market and SBP’s restriction on financing for imported cars would further aid the demand of local cars.

Accordingly, the sales would slow down slightly, but not significantly. “We estimate monetary tightening and new auto financing rules to hurt sales volumes by just 5% per annum.” Earlier, automobile sales increased 65% to 108,605 units in the first five months (July-November) of this fiscal year compared to 65,998 units in the same period of previous year. “We expect automobiles to register record high sales in FY22,” the research house said in the report. “We remain buoyant on the auto sector as we believe automobile sales are likely to maintain this growth momentum in FY22 and higher pricing power will improve margins of the listed OEMs (original equipment manufacturers).”

As per market sources, the new auto policy will mainly provide tax incentives for environmentally friendly cars especially electric vehicles (EV) and hybrid cars to encourage new entrants while allowing existing players to launch fresh models. The main purpose of this policy is to overcome climate change issues and reduce oil import bill to save precious foreign exchange. To make the most of it, Indus Motor Company announced an investment of $100 million for local production of Hybrid Electric Vehicle, “which will help the company avail tax benefits and to capture market in this category”.

Agriculture

From initial expectation of shortage, to an upsurge in production in the latter part of FY21 that still continues to grow, “we expect the agriculture sector to outperform in FY22”. This excellent performance has been anticipated on the back of policy support (such as revising minimum support price of wheat crop upwards to providing agriculture package to Kharif crops), coupled with favourable weather conditions for important crops such as wheat and sugarcane.

The augmented cultivation of cotton, wheat and sugarcane is expected to catalyse the contribution of this sector into higher growth this year