Car financing drops by Rs2b in January

KARACHI:

The outstanding car financing eventually dropped 0.6% (or Rs2 billion) on a month-on-month basis to Rs352 billion in January 2022, breaking the upward streak witnessed over the past 18 months.

Earlier, the authorities concerned engineered a programme to decelerate the demand for imported cars in a bid to narrow the unsustainable current account deficit, avoid the buildup of foreign debt and save foreign exchange reserves.

The stock of auto financing extended by banks to end-consumers hit a record high of Rs354 billion in December 2021, Arif Habib Limited (AHL) reported on Friday, citing central bank data.

On a year-on-year basis, however, the financing was 35% higher at Rs352 billion in January 2022 as compared to Rs262 billion in the same month of previous year.

“The major hit to car financing came from upward revision in the benchmark interest rate by the central bank, as the rate hike made financing expensive,” KASB Securities Head of Research Yousuf Rahman said while talking to The Express Tribune.

He recalled that car financing had spiked in the wake of a significant cut (625 basis points) in the benchmark interest rate during March-June of 2020 to 7%, in order to help businesses and households cope with the Covid-19 pandemic.

“Now car financing has dropped following the revision in the rate by 275 basis points (from September to December 2021) to 9.75% at present,” he said.

“The major objective of the recent rate hike was to cool down the overheated economy, as a notable growth in aggregate demand had caused the widening of current account deficit to a record high at $1.9 billion in December 2021.”

In addition to this, the authorities concerned took some targeted measures to slow down the growth in demand for cars, as the “import of cars and auto parts consumes huge foreign exchange and contributes significantly to the widening current account deficit,” he mentioned.

They reduced the maximum period for car financing to five years from seven years earlier. Besides, they increased the down payment for buyers and cut the financing limit.

The outlook for car purchases on cash and bank financing is apparently weak. “We have estimated a 15% drop in car sales next year (fiscal year 2022-23) compared to the current year,” he underlined.

Earlier, another brokerage house projected a drop of 5% in car sales in the current fiscal year 2021-22, in the wake of recent measures, compared to the prior fiscal year.

Besides, the government has revised up the duty on import of cars and auto parts in the mini-budget presented in January 2022.

Rahman pointed out that the car sales have already slowed down significantly in January 2022 compared to December 2021, after all the car manufacturers, including new entrants, increased their prices following the rupee depreciation against the US dollar.

In Pakistan, car manufacturers mostly rely on auto-parts imports, primarily from Japan.

During December 2021, Pakistan witnessed a significant growth in car sales, he said.

Pointing out the reasons, he said that car manufacturers usually introduce new models in this month and “people knew the car price would go up in January 2022”.

He projected that the interest rate would remain high until the current account deficit narrows down to sustainable level and there is a drop in global commodity prices (like petroleum products).

Published in The Express Tribune, February 19^th, 2022.

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