ISLAMABAD: The government is wooing foreign car makers like Renault and Nissan with generous import duties, but convincing them to set up factories will be an uphill challenge given fears about the country's long-term political stability and security.

Pakistan wants to shake up its Japanese-dominated car market and loosen the grip of Toyota, Honda, and Suzuki, whose locally assembled cars are sold at relatively high prices but lag behind imported vehicles in terms of quality and specifications.

To do that, analysts say, the government must convince manufacturers that the country has turned a corner after a decade of economic turbulence and a series of major attacks by militant groups including the Taliban.

With the economy growing at its fastest pace in eight years, the local currency stable against the dollar and interest rates at their lowest in 42 years, Pakistani officials believe the country is once again on the radar of investors seeking to tap into a market of nearly 200 million people.

Officials are touting a new auto policy, skewed in favour of new entrants, that includes offering foreign car manufacturers lower duties as an incentive to set up plants in Pakistan or revive shuttered ones.

“We expect that there will be one or two foreign investors coming into Pakistan,” said Miftah Ismail, chairman of the Board of Investment, who has been talking to car makers about setting up assembly plants for the local market.

Ismail told Reuters he had held talks with Japan's Nissan and France's Renault for “some time”, and last month met Fiat executives in Italy for the first time.

Previous discussions also involved Germany's Volkswagen.

“I hope some people will bite,” he said.

A source close to Renault said Pakistan was under consideration for new production investment, along with other potential locations, but added that discussions were at a very early stage. In an e-mailed statement, the company said it had “no news to announce at this time”.

Nissan chief spokesman Jonathan Adashek said: “Pakistan is certainly a market of interest for us at present”, but added no final decision had been made.

Stability

Analysts say the odds are stacked against Pakistan finalising deals, despite the concessions on offer.

A major obstacle is the perennial concern about political stability in a country where the military has staged several coups since independence and attempted others.

The threat of militant attacks also remains high, despite the armed forces' long-running campaign against groups including the Taliban who are opposed to the government in Islamabad.

Foreign companies have been reluctant to invest large sums when the long-term outlook is so uncertain. “There is potential in Pakistan. There is no doubt about that,” said Puneet Gupta, associate director at consultant IHS Automotive. “(But) we really don't feel Pakistan is in a relatively stable condition, from a mid to long-term perspective.”

Another potential turn off for investors is the size of Pakistan's car market, where 180,000 cars were sold in the 2014/2015 fiscal year. That compares with more than 2 million passenger vehicles a year in neighbouring India.

“The Pakistan market is not big enough,” said Mumshad Ali, chairman of the Pakistan Association of Automotive Parts.

He added that the government's new policies were probably not bold enough to tempt new manufacturers, nor did they address ways to increase demand, such as lowering sales taxes.

The local manufacturing partners of Suzuki, Toyota and Honda did not respond to requests for comment. But Ali said they felt aggrieved that the government was favouring new investors and believed they should be similarly encouraged to build new plants and expand existing factories.

Ismail said new entrants would be able to import machinery for plants duty free. Customs duty for importing car parts has been set at 10pc, while existing players will have to pay 30pc.

“We want greater competition, and we expect with greater competition consumers will be offered better choices,” he said.

Some Pakistanis are frustrated by high prices and the quality of locally produced cars, which tend not to have airbags, anti-lock breaking systems (ABS) and other features considered standard elsewhere.

The cheapest Pakistani car, the Suzuki Mehran, sells for 650,000 Pakistani rupee ($6,200), or about double the price of a comparable model in India.

“Local cars are so bad,” said Ali Paracha, owner of a car rental company. “The market has been in need of an overhaul for at least a decade or two.”