High taxes on car imports may hurt competition

KARACHI: The central bank said higher duties on car imports may discourage competition in the local market, which is experiencing strong demand for automobile on low rate easy-to-get consumer loans.

“The imposition of regulatory duties is against the essence of the Automotive Development Policy 2016-21 that explicitly outlines efficiency and productivity improvement through policy of tariff reduction to improve local competition,” the State Bank of Pakistan (SBP) said in a report on the state of economy. “Such deviation from a cornerstone of the policy would hurt the long-term prospects of the industry envisioned in the document.”

In June last year, the federal government imposed regulatory duties in the range of 15 to 80 percent on new and used cars imported under personal baggage, gift scheme or transfer of residence schemes as commercial imports are not allowed in the country.

Nonetheless, an average monthly import of used cars stood at 6,800 units during the first five months of FY2018 as compared to around 4,600 units/month in FY2017.

SBP’s data showed that taxes differential on account of duties on cars come at around $564 for below 800cc, $705 for 801 to 1000cc, $1,409 for 1001 to 1300cc and $1,973 for 1301 to 1500cc.

“In response to higher import cost, a part of the demand for automobiles would shift away from imported models to local brands,” the central bank said. “However, given that the local manufacturers are already operating at near capacity, this additional demand would result in lengthening the waiting time for the car delivery.”

Currently, it takes an average three to six month for a car delivery to customer since the booking. The delay encourages investors to sell vehicles on premium to buyers who crave for immediate delivery.

SBP said the demand and supply gap would give local assemblers more power on price determination.

“The growing demand and limited supply means that the local manufacturers would now have greater pricing power in the market,” the central bank added. “The effective protection available to local manufacturers, reflected as the price differential between imported and local cars, has increased further.”

Prices of local cars are already on the rise with sales of passenger cars up 20.4 percent to 103,432 units in the first half of FY2018.

Pakistan’s automobile industry gained momentum on rising purchasing power and robust demand from thriving middle class.

The new auto development policy paved the way for new entrants to capitalise on growing automobile demand. In March 2016, the government approved the automotive development policy 2016-21. The policy encourages new manufacturers to enter the market while promoting the latest technologies. At least three investors, including French auto maker Renault SA, announced to roll out car assembling plants in the country.

Analysts said newly approved auto policy, skewed in favour of new entrants, that includes offering foreign car manufacturers lower duties as an incentive to set up plants attracted French auto giant.

The central bank said the auto sector looks primed for ‘another’ healthy performance on the back of ongoing infrastructural undertakings in the country. The market is expected to reach half a million units by 2020 from 300,000 units at present. Industry experts favour investment in the sector and call for a level-playing field in the market currently dominated by Japanese automakers, namely Toyota, Honda and Suzuki.