KARACHI: Auto financing completed its second straight year of downward journey last month, dropping to Rs230.5 billion in June from Rs233bn in May.

According to data released by the State Bank of Pakistan (SBP), the total decline in outstanding loans in the last two years stood at Rs138bn, based on the June 2022 figure of Rs368bn.

It appears that the cut in interest rate from 22 per cent to 20.5pc by the SBP on June 10 has yet to lure buyers towards financing for new, locally assembled vehicles due to their exorbitant prices. Buyers, however, remained focused on leasing old and locally assembled vehicles through private banks.

Consumers remained a bit reluctant to go for new vehicles due to high monthly loan instalments and interest rates, prohibitive prices of vehicles, and the State Bank’s curbs on financing aimed at slowing demand to control the current account deficit.

According to Mashhood Ali Khan, a manufacturer and exporter of auto parts, the hoped-for improvements in the auto industry did not materialise in FY24 despite the recent policy announcements.

Withholding tax (WHT), which was previously fixed for smaller segments, has now been converted into a percentage basis, leading to a rise rather than a fall in the taxable amount. Another significant matter is that a large number of used cars were imported in fiscal year 2024, affecting local production.

“Based on the low auto sales data for FY24, we seem to be heading towards an even more challenging period,” he said, attributing the drop in sales to customers’ shrinking purchasing power, followed by steep prices and the adverse impact of budgetary measures on an already hard-pressed salaried class.

Freight charges

Mashhood Khan said international freight charges had risen significantly, threatening to drive up production costs in the coming months. “It is unlikely that prices of vehicles will remain stable over the next 12 months.”

But on a positive note, he said the State Bank’s decision to lower interest rates was a move in the right direction. Auto financing would, nevertheless, remain under pressure even if interest rates are further slashed by one per cent. “A single-digit interest rate, or even 10-11 per cent, will help fully revive auto financing. As things stand, we do not foresee any improvement in sales over the next six months,” he feared.

Mr Mashhood added that there is a need for immediate action from the government to address the problems confronting auto assemblers.

Published in Dawn, July 25th, 2024