SBP cuts auto financing tenure

Experts insist move will arrest depletion of foreign exchange reserves

KARACHI:

In a bid to arrest the fast depleting foreign exchange reserves, the State Bank of Pakistan (SBP) has decided to reduce the auto financing tenure.

In a circular issued on Tuesday, the central bank underlined that the maximum tenure of auto financing facility was reduced from five to three years for vehicles above 1,000cc engine capacity.

Moreover, for vehicles up to 1,000cc engine capacity, the financing tenure had been brought down to five years from seven years, it added.

On May 23 (Monday), the monetary policy committee decided to raise the policy rate by 150 basis points to 13.75%.

“This action, together with the much-needed fiscal consolidation, should help moderate demand to a more sustainable pace while keeping expectations anchored and containing risks to the external stability,” an SBP spokesperson said.

“The government of Pakistan is putting restrictions on various sectors to maintain its foreign exchange reserves and the reduction in auto financing tenure is one of them,” said auto sector expert Mashood Khan while talking to The Express Tribune.

“Yesterday (May 23), they increased the interest rate and today (May 24) they reduced the leasing time period,” he underlined.

Its impact would be on the volumes of the auto sector, ie reduction in imports of completely knocked down (CKD) kits and local assembly/ production, he mentioned.

“This all is done to control the outflow of dollars from the country,” Khan remarked.

The authorities had already banned the financing of vehicles worth more than Rs3 million, he pointed out.

“July onwards, the auto production and sales will go down,” he projected, adding that previously the country witnessed auto sector growth of around 60%, “but this year we would see a decline”.

“Car financing comprises around 20-25% of total auto sales,” said AHL Head of Research Tahir Abbas.

With the decrease in financing tenure, monthly instalments of consumers were expected to jump by 25-45%, which would eventually slow down the demand for automobiles, thus leading to some savings in the import bill as well, he pointed out.

“The major reason behind this step is to curb auto financing, since it was not slowing down despite the increase in interest rates,” said Insight Securities analyst Ali Asif.

Despite high interest rates, auto financing touched Rs367 billion in April 2022, up 25% year-on-year and 0.9% month-on-month.

“I believe the decline in auto financing tenure may impact Pak Suzuki Motor Company more, since most of its vehicles (40-50%) are booked under auto financing,” he said.

“Indus Motor and Honda Atlas Cars will have a little impact,” he added.

Topline Securities senior research analyst Sunny Kumar was of the view that the central bank reduced the financing tenure “in order to slow down automobile demand and reduce the CKD import bill”.

The SBP’s foreign exchange reserves had declined to just $10 billion, with import cover of only 1.6 months, he mentioned.

“At present, the main issue is the dollar shortage (foreign exchange) in the country,” auto sector expert Sabir Shaikh said.

“Only the completely built unit (CBU) market will get disturbed, and it will not be a big problem for the local car industry,” he claimed.

Published in The Express Tribune, May 25^th, 2022.

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