Auto sector struggles despite IMF agreement

Tier-one vendor Agriauto Industries announces partial shutdown in July

KARACHI:

Despite Pakistan’s recent staff-level agreement with the International Monetary Fund (IMF), which was seen as a positive development for the country’s economic stability, the auto sector continues to grapple with significant challenges. The crisis of plant shutdowns has now extended to tier-one auto sector vendors, with Agriauto Industries Limited, a major auto component manufacturer, on Monday announcing a partial shutdown of its plant in July.

Agriauto Industries, incorporated in 1981, specialises in producing and selling components for automotive vehicles, motorcycles, and agricultural tractors. The company’s decision to scale back operations is a direct result of reduced production volumes from its major clients, including renowned automakers such as Suzuki, Toyota, and Atlas Honda. These automakers have also faced plant shutdowns due to inventory shortages caused by import restrictions.

Former Chairman of the Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM), Abdul Rehman Aizaz shed light on the underlying reasons behind the industry’s ongoing challenges. Opening and retiring letters of credit (LCs) for parts and raw materials have proven to be problematic. While the recent IMF funding offers some hope, the extent and timing of its impact remain uncertain. Aizaz expressed hope that the State Bank of Pakistan (SBP) would refrain from imposing restrictive instructions that burden the industry.

Another significant obstacle is the high financing rates for auto leases. With the Karachi Interbank Offered Rate (KIBOR) at 23%, middle-class salaried individuals find leasing options for car purchases unaffordable. This, in turn, suppresses the demand for small and medium-sized cars, further exacerbating the challenges faced by the sector.

Additionally, the devaluation of the Pakistani rupee from Rs105 to Rs285, coupled with the additional taxes imposed by the Federal Board of Revenue (FBR) over the past two years, has led to a sharp increase in car prices. “It will take time for the market to recover and grow from these challenges,” he acknowledged.

Major assemblers in the auto industry have experienced similar struggles, evident in recent plant shutdowns. Indus Motor Company (IMC), responsible for assembling Toyota vehicles in Pakistan, halted production due to shortages of raw materials and components. Similarly, Pak Suzuki Motor Company (PSMC) announced the shutdown of its automobile and motorcycle plant, attributing it to government import restrictions.

Although Pakistan still faces a shortage of much-needed dollars to meet import and external payment commitments, the IMF agreement is expected to alleviate the reserve situation and potentially open doors for funding from multilateral and bilateral partners.

Research Head at Optimus Capital Management, Arsalan Siddiqui revealed that Pakistan and the IMF have reached staff-level agreement on a new nine-month, $3-billion stand-by arrangement. The programme’s objectives include enhancing the viability of the power sector, improving governance in state-owned enterprises (SOEs), and establishing a framework for financial support from multilateral and bilateral partners to replenish dwindling foreign exchange reserves.

This agreement is anticipated to address short-term concerns and facilitate the buildup of foreign exchange reserves through various inflows, including the IMF tranche, expected funds from Saudi Arabia and the United Arab Emirates (UAE), and other sources. Additionally, the pledges made for flood relief at the Geneva conference are expected to provide further assistance in building reserves.

A stable rupee is predicted to lead to a downward trajectory in inflation. The recovery of the rupee in the near term, coupled with the expected buildup of foreign exchange reserves, should also help reduce monthly inflation in fiscal year 2024.

Auto analyst Asad Ali, from Insight Securities, foresees improvements in inventory levels for auto companies as the SBP lifts import restrictions. This decision will allow auto companies to import Completely Knocked Down (CKD) kits more easily, enabling them to effectively manage their inventory and ensure smoother operations within the sector.

Published in The Express Tribune, July 4^th, 2023.

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