THE State Bank’s decision to revise its prudential regulations governing consumer financing to limit car sales is a desperate move to moderate growth in domestic demand and curb burgeoning imports to control the current account deficit, which widened to $2.3bn in July-August from a surplus of $838m a year ago. The import of both CBUs and CKDs during the last fiscal had grown to $2.142bn from $1.276bn the previous year. During the first two months of this fiscal, CBU/CKD imports surged to $495m from $160m a year ago. The revisions may not have a drastic impact on the overall import bill — and consequently on the trade deficit — but they will certainly dent domestic car sales. With the current account projected to beat the central bank’s optimistic projection of 2pc-3pc of GDP for the present fiscal by a wide margin, both the bank and government have from last week begun to temper their monetary and fiscal stimulus to shift the economy back into lower gear in order to ease pressures on the precarious balance-of-payments position.

The State Bank‘s revised auto financing policy tightens regulatory requirements for procuring loans for domestically assembled cars of more than 1000cc engine capacity through reduction in lease tenures, increased minimum down payment and a cut in maximum debt burden ratios for borrowers. The new policy effectively prohibits financing for imported vehicles and fixes the maximum amount of outstanding auto loans at Rs3m at any given point. Locally assembled electric vehicles, hybrids and cars under 1000cc have been insulated from the changes with a view to encouraging environment-friendly technology and middle-income car buyers. Overseas Pakistanis with Roshan Digital Accounts will also remain unaffected by the amended regulations. Until recently, ministers had been jumping up with joy, citing the increasing car sales as a benchmark for the economy’s return to the path of recovery. The warnings from experts that the nascent economic upturn on the back of procyclical economic policies would bring the current account under immense pressure were brushed off with scorn. The recent developments have, however, proved critics of the unprecedented monetary and fiscal stimulus correct. It remains unclear as to how far the government will go to cool the overheating economy. But it is quite certain that it may soon run out of time if it does not move swiftly to shield its debt-based foreign exchange reserves and reach an understanding with the IMF in the upcoming October review of its suspended programme.

Published in Dawn, September 28th, 2021