First came the ban on CBUs and now restriction on the import of CKDs.
Though Pakistan is a free market economy, it has nonetheless never tied hands of various governments from dabbling into economy to micro-managing its various sectors. The latest State Bank of Pakistan’s circular in which banks have to seek its approval before releasing the amount in Dollars, is an inconvenient reminder.
What Does the Bank Want?
It essentially wants to play the role of the Big Brother where all stakeholders in the market first seek its permission before importing anything.
On 20-05-2022, the State Bank of Pakistan through a circular issued to all authorized dealers in foreign exchange, ie, banks – reminded them that all the imports which are conducted in the US Dollars, will now have to get prior approval from the Bank.
Why Is the Bank Acting Like This?
It is all about narrowing the import v export gap or the Current Account Deficit (CAD).
To learn more about CAD, read: Import of Luxury Cars and Non-essential Items “Banned” in Pakistan
As compared to the previous fiscal year, by April 2022, Pakistan had imported $1.6 B worth of CKDs. Year-on-Year (YOY) basis, this is an increase of 96.6%.
For an already nervous, cash strapped government, this is too many US dollars going out of the country, which in their mind, needs to stop. To stop the Dollar flight, the current government has already banned the import of CBUs.
Pakistani Automobile Industry 101
A soft reminder to those learning the ropes of the Pakistani automobile sector, cars in Pakistan are either imported as is – called Completely Built Units (CBUs) or imported in the form of parts which are then assembled here – called Completely Knocked Down Units (CKDs). Whether CBU or CKD, a car is bought in the US Dollars.
It is the CKD parts that the Bank wants auto manufacturers to first seek its approval before importing into Pakistan.
What to Expect in the Near Future
As a result of the what the SBP is trying to do, the following is likely to happen:
- Car prices going up due to fluctuating exchange rate
- Demand going down
- End of ON money
How Is the Industry Responding?
Surprisingly, the automobile sector is willing to cooperate with the government given that it does not micromanage it. For example, instead of SBP telling them how many CKD units of a specific model/variant they can import, what they want is that the government allot them a specific import quota under which they can import CKD models and variants of their choice and quantity.
All in all, the government through the State Bank of Pakistan in its quest to stop the Dollar flight from the country will make the dream of owning a car even more distant for many Pakistanis.
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