Auto sector ‘hit hard’ by inflation as car financing falls by 23.5% YoY in Oct

• High-interest rates force auto loans to decline. 
• Loans fall by 3% month-on-month in September.
• Auto loans reached record high of Rs368bn in June ’22. 

KARACHI: High-interest rates and inflation forced the auto loans to decline for the 16th consecutive month in October, The News reported Friday citing data by the State Bank of Pakistan (SBP). 

According to the central bank, auto loans fell by 23.5% year on year to Rs264 billion in October and 3% month-on-month from Rs272 billion in September.

Auto loans reached a record high of Rs368 billion in June 2022, but have since dropped by Rs104 billion, or 28%, as the SBP tightened monetary policy to curb inflation and external imbalances.

Analysts said the SBP’s measures, higher interest rates along with a sharp depreciation of the rupee against the dollar, have increased the cost of car financing and car prices, making them unaffordable for many consumers. A sharp increase in inflation has also negatively impacted consumer purchasing power.

“The auto sector has been hit hard by the high-interest rates and the currency devaluation, which have made car financing very expensive and car prices very high,” an analyst said. 

Some car makers have reduced their prices recently, but the demand has not picked up as expected because consumers are still battling high inflation and low disposable income.

According to the Pakistan Automotive Manufacturers Association (PAMA), car sales in the country fell by 44% to 27,163 units in the first four months of the current fiscal year, which started in July.

The SBP has raised its policy rate by a cumulative 15 percentage points to 22% since September 2021, one of the highest rates in the world. The SBP is expected to start easing its monetary policy in the first half of 2024, as inflationary pressures are expected to ease and foreign inflows are expected to improve the country’s external position.

According to the SBP data, bank loans to the private sector edged down by 0.8% in October to Rs8.10 trillion. Consumer loans also fell by 8% to Rs829 billion in October, with personal loans dropping by 4% to Rs246 billion and housing loans falling by 2.7% to Rs207 billion

Analysts said credit to the private sector will likely pick up in the coming months, as interest rates are expected to decline, fiscal consolidation is expected to reduce crowding out, and foreign inflows are expected to ease liquidity constraints.