Costing an Arm and a Leg

Car prices jacked up; another round of escalation to follow

KARACHI: The Indus Motor Company (IMC) has recently increased the prices of Toyota vehicles. Other assemblers will do the same soon. And then, there will be more upward price revisions due to the pressure on the rupee, which is over-valued and cave.

Ali Asghar Jamali, chief executive officer (CEO) of Indus Motor Company, said that the prices would further go up. “The currency is under severe pressure and it will soon depreciate further. We have not increased the prices in the full range and another round of price escalation will soon follow.”

Analysts believe the domestic auto demand will continue to face several challenges and the overall industry volume is likely to decline significantly during the current fiscal year.

In the recent development, the State Bank of Pakistan (SBP) jacked up the key policy rate to 16 per cent. To recall, the last hike of 125 basis points was done in July 2022. The current stance aims at containing the impact of the elevated domestic inflationary pressure, so as to embark on a path of sustainable recovery.

Muhammad Shahroze at Insight Securities said that the automobile manufacturers might witness a slowdown in the demand, amid an increase in the financing rates.

“There will be a negative impact on certain players due to increased borrowing led by higher working capital requirements,” he added.

According to Meezan Bank Car Ijarah (financing) calculator, Toyota Yaris 1.3 ATIV CVT, which is around Rs3.9 million will now cost Rs6.9 million plus Rs0.78 million upfront payment (20 per cent) on a seven-year installment plan.

Similarly, the Bank Al Habib Apni Car Calculator suggests that the buyer will pay interest at the rate of 20.63 per cent/annum, if one finances a Rs3 million Suzuki Cultus VXL car on a three-year term with a 30 per cent upfront payment.

As per the Allied Bank Limited (ABL) auto financing plan, Rs4.3 million Honda City Aspire will cost Rs5.5 million at the interest rate of 20.2 per cent in five years. This is in addition to Rs0.9 million in upfront payment.

The economy of Pakistan is confronted with serious economic crisis on account of inflationary and external sector pressures. Amid devastating floods, policy tightening and critical efforts to tackle the sizeable fiscal and external imbalances, the country’s GDP growth is now forecasted at 2 per cent, against the previous forecast of 3 to 4 per cent before the floods.

The Indus Motor CEO said the auto industry was already bearing the brunt of escalating production costs on account of the current rupee depreciation, while the demand has also declined due to the prevailing economic downturn with higher interest rates and higher duties and taxes on vehicles.

“With the recent interest rate hike to 16 per cent, the quantum of automobile financing will shrink, impacting the demand for the new vehicles.”

Continuing restrictions on the import of the completely knocked down (CKD) kits and the components of passenger cars for the auto sector, in terms of prior approval required from the State Bank of Pakistan, has forced the automobile sector to operate up to 50 per cent of its capacity approximately and accordingly, the auto sector observed frequent plant shutdowns in the first quarter of the fiscal year 2022/23.

The central bank allowed monthly import quota to the original equipment manufacturers (OEMs) in proportion to the actual import remittances made during the period from January to April 2022. Due to the continuing restrictions, there is an acute shortage of material for production.

Consequently, the OEMs are forced to opt for temporary plant shut downs. Further, these restrictions have resulted in abnormal delays in remittances to foreign suppliers and imported consignments remain blocked at ports, causing huge detention and demurrage charges.

All the segments of the auto sector faced demand contraction during the first quarter of the current fiscal year.

The total sales of the members of Pakistan Automotive Manufacturers Association (PAMA) for the locally-manufactured vehicles was 34,472 units during the first quarter of the financial year 2022/23, which is 50 per cent down from 68,897 units sold during the same period of the last year.

COMMENTS

There will be a negative impact on certain players due to increased borrowing led by higher working capital requirements
Muhammad Shahroze

Analyst at Insight Securities

With the recent interest rate hike to 16 per cent, the quantum of automobile financing will shrink, impacting the demand for the new vehicles

Ali Asghar Jamali

CEO of Indus Motor Company