The SBP is controlling car imports. Here’s what that means The State Bank of Pakistan (SBP) now oversees car imports and the automobile industry is not having it
By Daniyal Ahmad and Ghulam Abbas
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ll eyes in the automobile manufacturing industry are currently on the State Bank of Pakistan (SBP). Why? Because the fate of Pakistan’s automotive industry is currently hanging in the balance, and the central bank is holding the thread. Nearly a month ago, the SBP released a circular addressed to banks, letting them know that they needed the SBP’s permission before performing transactions in dollars for the import of CKD (completely knocked down) units of cars. This meant that auto assemblers in the country will now need express permission from the central bank to be able to import and assemble cars. The effects of this are far reaching. Senior industry executives had already been predicting that the upcoming year would see a serious rise in the prices of cars, particularly because of the dollar shooting up, and a fall in demand. The President of Automotive Division at Lucky Motors Corporation, Muhammad Faisal, has told Profit that a fall in sales by 40-50% compared to last year is expected, and other leading executives in the industry have expressed similar sentiment. For the assemblers, the immediate worry is hammering out a quota system with the SBP, under which every manufacturer gets a certain slice of foreign exchange to import CKDs. However, there are already disagreements within auto manufacturers over what formula should be used to calculate this quota. For consumers, it means rising prices of cars, a serious dip in demand, and the end of ‘on’ premiums.
What exactly has happened
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he crux of it is this - the government is trying to fight the current account deficit and has as a result tried to curtail the imports of cars into the country through the SBP. The SBP will now decide on a case to case basis how many dollars worth of a certain car can be imported into the country. So, for example, Lucky Motors will make a request through their bank to the SBP asking that they be allowed to import their car, the KIA Picanto. The SBP will then tell them how many KIA Picantos they can import. To understand this completely, it is necessary to know that cars are imported in two forms. They are either imported already assembled or ‘completely-built-units’ (CBUs) or they are imported in parts and then assembled in Pakistan as ‘completely-knocked-down’ (CKD) units. The import of CBU units into Pakistan has already been banned under the incumbent government’s import ban on luxury items. It is now the CKDs that are a bone of contention. The auto industry, already expecting lower demand because of the economic crisis and rising car prices, is aware of the realities. “The industry, as a whole, is cognisant of the macroeconomic environment. As such, forcing the government to rescind its ban on CBUs is not a major concern. However, the government should provide manufacturers with CKD import quotas instead of handling import approvals on a case-by-case basis,” says one senior automobile executive. Right now the SBP is micromanaging the import of all cars. They are telling Suzuki how many Swift CKDs they can import and how many Cultus CKDs they can import, while telling Toyota how many Yaris and Corolla CKDs they can individually import.
The ban only delays the inevitable. The global commodity super-cycle will lead to demand destruction. He cites reduced purchasing power and predicted price increases due to increased cost of production for manufacturers for his claim Muhammad Ali Tabba, Chairman Lucky Motors Corporation
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In response, the industry is essentially demanding that instead of dictating on a car-tocar basis, the SBP give assemblers a set amount that they can spend on importing CKDs, and let them determine themselves which model they want to import into the country. Of course, the issue here is that different auto manufacturers are in disagreement over what the best way to calculate this quota is. Some manufacturers, such as Lucky Motors, are in favour of the quota being calculated in accordance with how different car manufacturers performed in the previous year. This would be ideal for companies like KIA and Toyota, which had breakthrough years with new models of their cars. Other manufacturers would argue that it should be dependent on the capacity of the assembly line - such as Hyundai which doubled its capacity just last year. Others still like Changan will also be against basing the quota off performance since they have only just introduced new models of their cars which they did not have in the market to compete with KIA, Toyota, Honda, and others before.
The inevitable price hike
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et us just put this out there again - cars are about to get more expensive. With imports being tightly curtailed and supply low, the natural response will be for prices to go up. Revenue volumes are going down, so profit margins will have to be increased via a price hike. Assemblers will want to make up their costs and increase their profit margins, which will then mean fewer people will buy cars. This
