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Friday August 12, 2022

Auto sector expects another rollercoaster fiscal ahead

May 27, 2022

KARACHI: The auto sector saw various ups and downs during the ongoing fiscal year, with multiple price hikes and a singular drop in prices during August on account of government decision to slash duties and taxes.

Pakistan saw car prices going down across the board for the first time after the government reduced duties and taxes on cars, otherwise the prices have never gone down except on a couple of times when companies reduced a single model’s price because of low demand. It happened only in the Suzuki Wagon-R and United Bravo’s case. Other than that, prices have technically remained irreversible in Pakistan.

Federal excise duty on all vehicles was reduced by 2.5 percent; sales tax on under 1000c was slashed to 12 percent from 17 percent, while 7 percent additional custom duty was removed on cars below 1000cc and reduced on cars above 1000cc to only 2 percent.

Government rationale was to make cars more affordable for middle and lower-income groups. The move was also expected to provide impetus for the auto sector to increase volumes and subsequently scale up localisation. This tactic spurred car sales, as people fearing reversal thronged to buy cheaper cars.

Auto sales remained robust in the first 10 months of the fiscal year 2022 – showing a 50 percent increase with 226,481 units sold. However, April sales declined due to several reasons discussed in this article. Auto sales in April were recorded at 21,950 units, showing a month on month decline of 19 percent.

By September 2021, the State Bank of Pakistan (SBP), sensing the overheated economy with current account deficit jumping up 81 percent month-on-month in August, had to revise regulations for consumer financing including auto financing. The restrictions on auto financing included a financing limit and period for auto financing.

SBP wanted to moderate demand growth in the economy, leading to slower import growth to support the balance-of-payments. This was mainly due to higher trade deficit, which continued to haunt Pakistan and only worsened.

Among the regulations, maximum tenure of auto finance was been reduced from seven to five years; maximum debt-burden ratio, allowed to a borrower, has been decreased from 50 percent to 40 percent; overall auto financing limits availed by one person would not exceed Rs3 million; and minimum down payment for auto financing was increased from 15 percent to 30 percent.

Locally manufactured or assembled vehicles of up to 1000cc engine capacity as well as electric vehicles to promote clean energy have been exempted from the revised regulations. SBP said that the financing of these two categories of vehicles would continue to be governed by the previous set of regulations.

Relaxations under Roshan Apni Car have also not been changed to encourage Roshan Digital Accounts and facilitate overseas Pakistanis who have opened these accounts.

On May 24 2022, SBP further reduced the auto loans facility maximum tenure to three years from five years. This new condition would be applicable for cars above 1000cc. For vehicles up to 1000cc, the tenure of auto loan was reduced to five years from seven years.

Just two months after taxes were reduced in the budget to bring car prices down, car companies started flexing their muscles to increase prices. They used increase in international raw material prices, freight charges and higher exchange rate to justify price hike.

Escalation in prices prompted government to threaten car companies with price fixing on the basis of engine size. In fact one of the car companies even announced a car price hike but had to take it back after immense pressure from the government.

Sensing auto makers’ plans to increase car prices, the government, through a letter asked the car makers to share cost structure and rationalise price hike. Otherwise, it said the government would consider initiating regulatory measures, which might include fixation of prices under the Price Control Prevention of Profiteering and Hoarding Act, 1977.

However, nothing came of it and car companies eventually jacked up prices in November. Then the news came that the government might announce a mini-budget or supplementary finance bill 2022 where the tax and duty incentives for the auto sector would be rolled back in January. The government eventually did that.

The news was taken seriously, notwithstanding last-month-of-the-year phenomenon in December, and monthly auto sales went up to historic high of 27,300 units – 96 percent higher than December 2020. The sales were also 46 percent higher than November.

Last-month-of-the-year phenomenon is that people normally delay buying a car by a month in December to get a car new-year number plate and model car. But last December, fear of increase in price due to increased taxes and duties pushed people to get early deliveries so as to avoid paying more in taxes and duties.

Car sales are recorded when a car is delivered. The delivery period had been over 90 days in most cases. But people thronged to dealerships requesting for quick delivery expecting a hike in prices due to expected increase in taxation in the mini-budget.

The year was also marred with global semiconductor chips shortage, which also kept Pakistan companies from increasing sales despite high demand. Supply chain disruption and chips shortage also saw suspension of booking of many models during the year.

Car companies hiked prices again in March and April this year with auto industry experts not ruling out another price hike in June. Since July 2021, car companies have jacked up car prices by up to 55 percent so far.

The Ministry of Industries and Production took notice of the intermittent price hikes, after the Public Accounts Committee (PAC) directed to check the reasons. An auto industry monitoring committee has also been formed to check the industry for profiteering and keeping car prices high.

The committee includes officials of PAAPAM, Competition Commission of Pakistan (CCP), SBP, Federal Board of Revenue (FBR), Ministry of Commerce and Ministry of Industries and Production.

The auto industry regulator Engineering Development Board (EDB) again asked car makers to share their cost structure and rationalise frequent price hikes. It again threatened the industry of fixation of prices under the Price Control Prevention of Profiteering and Hoarding Act, 1977.

However, major auto industry players declined to share their cost structures saying it was classified information. Moreover, Pakistan Automotive Manufacturers Association (PAMA), the representative body of carmakers, said that the country had a free market, and it was the market that decided prices, not the state.

Indus Motor Company CEO Ali Asghar Jamali has recently told media persons that if the government tried to fix car prices, Toyota would exit Pakistan.

Some of the industry experts see the price fixing threats by the government as an eyewash just to appease public disdain for a while over frequent car price hikes. They said the government would not be taking any actions against the industry.

Meanwhile, industry experts see car sales falling during the next year amid record high car prices, auto financing restrictions and reduced buying power amid record high inflation with JS Research expecting car sales to decline by 25 percent in the fiscal 2023.

The government also does not want car sales to increase since every car sold in the country would negatively affect Pakistan’s current account and subsequently foreign exchange reserves. Up to 90 percent of the cost of a car depends on imported CKDs, SKDs and raw material. Even the locally manufactured parts depend highly on imported raw material such as steel and plastic raisins.

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