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Auto sector: Import compression likely to squeeze demand

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December 9, 2021(MLN): With a view to curb soaring import bill in the coming months, the government is likely to take certain policy measures such as the imposition of increased duties on luxury items including 50% regulatory duty (RD) on import of Completely Built Unit (CBUs) vehicles.

To cool down the heating economy, Advisor to the Finance and Revenue Shaukat Tarin while presiding over a meeting to review the balance of trade at the finance division on Thursday advised the concerned authorities to take effective measures to reduce unnecessary imports of luxury items.

According to news reports, the measures which are under consideration include an increase in RD on Electric Vehicles (EV) with 50 kWh battery pack from 10% to 50%, upsurge in customs duty to 50% from the existing 15% on Hybrid Vehicles (HV) on 1501-1800cc cars along with an increase in FED from 5% to 10% on vehicles being manufactured locally with engine capacity of 1500cc+, the topline securities in its latest report noted.

To note, the country's merchandise trade deficit has ballooned by 2.33x YoY during November 2021, standing at $4.963 billion on the back of higher imports growth than exports.

According to economic managers, the pressure on import bill was mainly due to global high commodity prices recorded in October (than today) especially energy, steel, and industrial raw materials. Meanwhile, the high import of vaccines contributed significantly to the rise in import bill.

It is worth mentioning that under the Auto Policy of 2016-21, auto manufacturers were allowed to import 100 units of CBU to test the market. however, the massive import bill suggested that commercial imports by some specific models have misused this policy. For example, around 7000 units of MG HS by MG Motors have been delivered to the buyers since Nov 2020 till date whereas the local production of cars just started recently in May 2021. Similarly, the import of other CBUs which includes Toyota Cross, Land Cruiser, Honda Accord, etc. have also led to higher import bill, Umair Naseer, Associate Director Research at Topline Securities said.

Nevertheless, the ministry of finance (MoF) expects that the impact of falling commodity prices, sliding freight costs will improve the import bill in the second half of the fiscal year 2022.

In parallel to this, the government’s efforts to increase regulatory duties on cars are a part of the exercise to control the current account deficit (CAD).

However, the proposed increase in RD on CBUs will result in high car prices and likely squeeze demand for imported CBUs by new entrants. But it may also force the new entrants to start manufacturing vehicles locally.

As under the World Trade Organization (WTO) regime, the country cannot ban imports. Hence, the proposal to ban imports completely is highly unlikely.

Additionally, stringent regulatory measures by SBP on auto financing, expected increase in FED to 10% from 5% on 1500+cc locally assembled cars, and rising Kibor are likely to damage the growth in the automobile sector.

Consequently, in Nov-2021, Pakistan’s car sales are anticipated to drop by 10% MoM owing to the aforesaid measures. While the report expected that country's car sales would grow by 10% in FY22 after a strong sales recovery in FY21.

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Posted on: 2021-12-09T13:15:05+05:00

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