Auto financing rises before tax hike

Slowdown, however, started emerging on back of higher financing rates

KARACHI:

Auto financing increased 19.4% year-on-year and reached Rs368 billion in the fiscal year ended June 2022, which gave a boost to car sales.

“Car sales in June registered a growth of 106% YoY and 24% MoM in anticipation of increase in vehicle prices post-imposition of taxes,” said auto analyst Arsalan Hanif.

“As a result, auto financing increased in June on a year-on-year and month-on-month basis.”

Year-on-year increase in auto financing came mainly due to heavy order backlog and pent-up demand, said Ali Asif, auto analyst at Aba Ali Habib Securities. However, on a month-on-month basis, slowdown started to emerge on the back of rising auto financing rates.

Car financing was up only 0.32% month-on-month in June. “There is no growth in auto financing,” commented Muqeet Naeem, auto sector analyst at Ismail Iqbal Securities.

Growth was recorded in the last two to three months, said auto sector expert Mashood Ali Khan while talking to The
Express Tribune.

Implementation of budget policies started from July 1 and after that, the big original equipment makers (OEMs) did not make any significant
bookings, he said.

Citing the reason, Khan pointed out that banks were not issuing Letters of Credit (LCs) in compliance with State Bank of Pakistan’s (SBP) instructions to
curb imports.

Even if banks were opening LCs, from July 1, the interest rate reached 15.75%, “now who will go for car financing at this insane rate?” he asked.

Khan elaborated that car purchase did not mean a one-time expense as after purchase there were vehicle running expenses, which were difficult for a customer to bear.

“Current figures reflecting the industry’s performance are positive when they are compared with 2021 and 2020. Real picture will emerge when comparison is made with the year before Covid outbreak,” Khan said.

He added that the positive figures were about to change as in the last three to four months new bottlenecks had started hampering growth and were putting the survival of auto and other industries
at stake.

Factors that have started to hurt the industry include high interest rates that have hit the purchasing power of the salaried class.

Prices have increased due to rupee depreciation that has reached Rs228 to a dollar. More taxes are being introduced while there are difficulties in opening LCs by the OEMs amid falling foreign exchange reserves and skyrocketing fuel prices on the back of implementation of IMF loan programme by withdrawing
all subsidies.

“Trust deficit between the government and the industry has widened,” he said. “The State Bank has been without a governor while political uncertainty in the country is pushing the economy and industries towards turmoil.”

He called on the government to sit with the industries and chart the way forward, otherwise the current situation would be catastrophic for the business. At the same time, “the industry needs to brace for the hard times”.

 

Published in The Express Tribune, July 23^rd, 2022.

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