A weakening currency and record-high interest rates discouraged consumers from purchasing new automobiles in November, according to data released by the central bank on Tuesday. Vehicle loans decline for the seventeenth month due to rising interest rates. As a result, auto loans declined for the seventeenth consecutive month.
Data from the State Bank of Pakistan indicates that auto financing decreased by 24.4 percent year-over-year to Rs257 billion. In November, these loans experienced a marginal decrease of 2.6 percent on a month-over-month basis. In automobile financing, the previous month amounted to Rs264 billion.
Automobile loan commitments peaked at Rs368 billion in June the year 2022. Since then, a reduction of Rs111 billion has been observed in these loans. Primarily, excessive borrowing costs are to blame for the declining trend in auto financing. December 12 marked a record 22 percent benchmark interest rate maintained by the SBP. Since September 2021, in an effort to suppress skyrocketing inflation, the central bank has increased interest rates by a total of 15 percentage points.
In conjunction with interest rate increases, the SBP’s macroprudential measures restricted auto financing.
In September 2021 and May 2022, the SBP implemented guidelines for consumer financing that aimed to regulate vehicle loans. To achieve this, the SBP increased the minimum down payment and decreased the maximum financing term.
For 25 high-value capital goods, including CKD vehicles, banks were additionally required to acquire SBP approval prior to May 2022 in order to obtain letters of credit. Automobile producers incurred higher production expenses as a result of the rupee’s devaluation; consequently, automobile demand decreased. As a result, automobile prices advanced. Rapid inflation has had a detrimental impact on the purchasing power of consumers.
Several significant assemblers reduced their prices in an attempt to attract consumers, but it appears that their efforts were unsuccessful.
Car sales decreased by fifty percent to 33,638 units during the first quarter of the current fiscal year, according to the most recent data from the Pakistan Automotive Manufacturers Association. As anticipated interest rate reductions occur in the coming months, private sector credit, including consumer financing, will increase.
Analysts predict an easing cycle to commence early next year as inflation and interest rates reach their zeniths. “Operators anticipate that the SBP will implement its initial rate cut in response to the tapering of inflation at the start of 2024. Subsequently, real rates are anticipated to stabilize at levels that are significantly positive.” Analysts at Alfalah Securities anticipate that the policy rate will decline to 20% by the conclusion of the fiscal year 2024.
Private sector bank loans decreased by 0.2 percent to Rs8.191 trillion in November, according to data from the SBP. Consumer loans at Rs825 billion decreased by 8.5% year-over-year in November. As of Rs246 billion, personal loans extended to consumers were down 4%.