The next five to six months are bound to get more challenging for the automobile sector as the price of vehicles continues to increase. Already the industry has seen a 40 percent drop in sales and continues to face parts shortage as the State Bank’s restrictions on LCs continue. The government’s increase in GST to 18 percent and its impact has now also been transferred to consumers and prices have risen for the fourth time in a month.
The industry is notorious for jacking up prices during uncertain economic conditions and despite shrinking sales. These multiple price shocks to maintain expenditures have been common practice but the future of the industry is in question if it continues. Already, import costs were high and losses had been incurred. Jobs were lost with plant shutdowns, adding to an unprecedented unemployment crisis. Bike sales had fallen by 17 percent in 7MFY22 and the Pakistan Automotive Manufacturers Association saw a YoY contraction of 31 percent in 7MFY23.
The increase in the GST rate was inflationary and affects vulnerable segments in society more. Similar industry patterns are now expected elsewhere as well as companies struggle to maintain operations. These steps are to revive the $6.5 billion IMF programme but the global lender will only accept permanent tax measures. The risk of default is on the horizon again, with global credit rating agencies raising concerns and making it impossible for us to raise debt. More regressive taxes, forming the biggest chunk of total tax revenue in Pakistan, may see further increases.
For the automobile sector, the future is bleak as raw material inventories are running out. The government cannot do with further decreases in revenue earnings but there is little that can be done in the situation. An unaffordability crisis is underway as a round of inflation across the board is expected.