In October, auto loans in Pakistan continued their declining trend for the 16th consecutive month, primarily due to high interest rates and persistent inflationary pressures, according to data from the State Bank of Pakistan (SBP). This decline in auto loans reflects the challenges consumers and the auto industry face.
The data from the central bank revealed that auto loans saw a significant year-on-year decline of 23.5%, amounting to Rs264 billion in October. Moreover, there was also a 3% month-on-month decrease from Rs272 billion in September.
This downward trajectory is notable, considering that auto loans had reached a record high of Rs368 billion in June 2022. Since then, they have experienced a substantial drop of Rs104 billion, or 28%, primarily due to the SBP’s monetary policy tightening measures aimed at curbing inflation and addressing external imbalances.
Analysts have pointed out that the combination of SBP’s measures, including higher interest rates, and the sharp depreciation of the Pakistani rupee against the US dollar has resulted in increased costs for car financing and higher car prices. As a result, many consumers find it increasingly difficult to afford new vehicles. Additionally, soaring inflation has eroded consumer purchasing power, further dampening automobile demand.
“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,” noted one analyst.
While some automakers have recently reduced their prices in an attempt to stimulate demand, the expected resurgence in sales has not materialized as consumers continue to grapple with high inflation and limited disposable income.
Data from the Pakistan Automotive Manufacturers Association (PAMA) paints a grim picture, indicating that car sales in the country plummeted by 44% to 27,163 units during the first four months of the current fiscal year, which began in July.
The SBP’s policy rate has been increased by a cumulative 15 percentage points to 22% since September 2021, making it one of the highest rates globally. However, there is anticipation that the SBP will commence easing its monetary policy in the first half of 2024, as inflationary pressures are projected to abate, and foreign inflows are expected to bolster the country’s external position.
Looking at broader lending trends, SBP data also reveals that bank loans to the private sector dipped by 0.8% in October, totaling Rs8.10 trillion. Consumer loans witnessed an 8% decline to Rs829 billion in October, with personal loans dropping by 4% to Rs246 billion and housing loans decreasing by 2.7% to Rs207 billion.
Analysts suggest that credit to the private sector may rebound in the coming months, driven by expectations of declining interest rates, fiscal consolidation reducing crowding out effects, and improved liquidity conditions due to expected foreign inflows. These factors collectively paint a more optimistic picture for the future of lending and economic activity in Pakistan.