"Pakistan's booming Automotive industry now moving towards halt?" - The Backstage CH1
How certain counter measures for controlling trade deficit impacted local manufacturing industry!
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Pakistan’s economy is going through a tough economic crisis. Inflation has reached all time high and foreign exchange reserves are alarmingly depleting, moving towards a potential bankruptcy if timely and effective measures are not taken by the supreme governance. Government of Pakistan (GOP) has taken various measures in order to control this chaotic situation specially focusing on decreasing import bill as much as possible. In May’22, Pakistan’s monthly import bill stood at around $6.77 Billion and exports were around $2.60 Billion.
Therefore, GOP has imposed heavy duties and taxes or completely banned the import of various items in May’22 by calling them the unnecessary imports and requirements of rich. This also included Completely Built-Up Units (CBUs) of Motor Vehicles and other manufactured goods.
This appears to be a good step at least for Automotive sector as ban on imported vehicles will encourage people to buy locally produced ones, aiding to the already booming automotive industry of Pakistan due to the entrance of new automakers under Automotive Development Policy (ADP) of 2016-21.
However for similar reason i.e. to control the trade deficit, State Bank of Pakistan (SBP) has also introduced a new mechanism which require its prior approval before import of certain goods. These goods also include Motor vehicle Completely Knocked-Down Unit (CKD) parts. It means that for opening and amending LCs (Letter of Credit) and payments to foreign suppliers can not be made without prior approval of SBP, which in turn will analyze the economic situation to give green or red flag.
This will result in delay of payments creating shortage/unavailability of CKD parts causing hamper or even halt of Production.
Pakistan’s Automotive Industry despite being old enough is not matured even after 75 years of independence. Pakistan remained an import based economy due to inconsistent and bad policies and political instability. After ADP 2016-21, Auto manufacturers are striving to increase their localization to the maximum still, there are very critical parts which Pakistan does not have the technology to produce, hence they are need to be imported (Eg: parts related to Engine, Transmission, Gear box, Sensors etc.).
With the recent boom in Auto sector as mentioned which contributes about 4% to the GDP of Pakistan, we saw immense technological transfer to elevate the industry to produce many such parts which were imported earlier.
However, the current unfavorable business situation will not only halt this advancement but also put about 2 Million jobs at risk.
Major players in Auto sector of Pakistan including Toyota Indus, Lucky Motor Corp. (Kia and Stellantis), Honda Atlas Cars and Master Changan Motors have announced delay in deliveries. Others are likely to follow soon.
Not just Auto sector, other manufacturing industries which are recently born and are on trajectory of rapid growth such as Mobile Phones are also receiving the hit.
By analyzing the data published by Pakistan Bureau of Statistics (PBS) for June’22, it is certain that the import ban is not working the way GOP imagined. Despite the strict conditions, an increment of 13.94% in imports was observed as compared to May’22 with imports now standing at $7.72 Billion.
It is anticipated that situation will go towards positive road in near future when Pakistan’s receives loan from IMF. But the question is, till when it lasts? There could be an even bigger crisis coming for the industry and the whole economy if serious steps and long term policies are not made to address this critical issue. We will remain stuck in this death loop until this happens.
Ending with this note and hope for the best!