Under pressure from the International Monetary Fund (IMF), the government is likely to increase the interest rate from the current 17% to 19%. If and when done, this would be the highest interest rate in the last 25 years. Countries raise interest rates for a variety of reasons but it is usually done to control inflation. Pakistan’s current inflation rate is very high, if not unprecedented. Food inflation alone is touching the 40% mark. But what does it mean for the already beleaguered and fledgling auto sector?
To remind our readers, according to one set of statistics, car prices during the period 2018-2023, have increased by as much as 149%. Auto sales are down by 36% (month-on-month), which is lowest since June 2020. Presently, car prices are being revised on almost a weekly basis. Kia has recently increased the price of its popular SUV, Sportage twice in two days. And in the midst of all this, the government is all set to increase the current interest rate by 2%. So what is to be expected.
What Happens When Interest Rate Is Increased?
Changing interest rates can have a variety of effects, such as:
Borrowing Becomes More Expensive – The banks would charge you more if you were thinking about taking out a loan for a new or used car. A costly loan will deter you from taking out the loan in the first place, further hurting the car sales in the country.
Car financing rates are already low in the country. According to a consumer auto finance banker, his bank has seen 50 percent less customers of auto financing from July 2022 to February 2023. This number will further increase with an increase in the interest rate.
More Bank Deposits – While the banks may lose out on auto financing customers, they will gain those customers who are interested in depositing their money into savings accounts to earn more interest. If they are depositing money in the hope of a higher rate of return, they are less likely to withdraw the same money and buy a car with it, etc.
Economic Slowdown – Individuals aren’t the only ones taking out loans from banks; businesses also take out loans to expand and grow. But as the interest rate goes up, they are less likely to grow and expand their business. Frequent auto assembly plants shutdowns in Pakistan could be a sign of it. This results in labor layoffs. The Pakistan Association of Automotive Parts & Accessories Manufacturers (PAAPAM) has recently said that around 25,000 to 30,000 laborers employed in the auto sector have already lost their jobs due to a decrease in auto sales. These numbers will unfortunately grow in the coming time.
Currency Appreciation – Increasing interest rates have their advantages too. Such an increase attracts foreign investors as they seek greater returns on their investment. As more foreign investment flows in, the local currency strengthens. So, if and when the interest rate is increased by 2%, we may see new auto entrants in Pakistan. However, it may not happen at all, depending upon how badly affected the local auto industry is and how long it would take to bring it back from the brink. Foreign investors prefer quick returns and if the local scene doesn’t guarantee it, they may not come.
In short, in the past few months, the local auto industry has been damaged thoroughly first by an ever-depreciating Rupee against the US Dollar and second, the State Bank of Pakistan’s lack of willingness to let auto assemblers import parts. The damage may still be repairable but it will take a lot of time and a well-thought out policy from the government. The expected raise in the interest rate couldn’t have come at a more inopportune time.
If you want to keep yourself up-to-date with the latest car price increases in Pakistan, do visit our New Car Page. For used cars listings on OLX Pakistan, click here.
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