Auto Market’s Sales Rebound Amid High Prices, New Models

Pakistan’s auto industry, long plagued by economic instability and restrictive policies, is finally showing signs of recovery in FY25 after a significant slump. By the end of FY24, industry volumes had plunged to just a third of their record highs in FY22. However, new figures from the first eight months of FY25 indicate a promising 50% year-on-year growth in sales of passenger cars, SUVs, and light commercial vehicles.

The downturn began after the sector peaked in FY22, following years of growth fueled by fresh entrants like Kia and Hyundai and favorable government incentives. But COVID-19 disruptions and policy shifts, especially those aimed at limiting imports, triggered a sharp sales decline.

Shrinking?

Despite a 57% surge in volumetric sales during 8MFY25 compared to the previous year, the automobile market has visibly contracted in recent years. Most notably, since FY22. However, this does not indicate a lack of appetite for new cars. The rising “own money” or premiums on popular models suggest that consumer interest is strongly returning.

Interest Rates & Financing Challenges

Since June 2024, the State Bank of Pakistan (SBP) has slashed policy rates, currently sitting at 12%, with further cuts anticipated. However, the cost of borrowing remains relatively high. Auto loans priced at KIBOR +4% translate to an effective 16% borrowing rate, which still deters fresh financing. Moreover, banks’ cautious lending behavior and revised SBP regulations, including shorter loan tenors, higher equity requirements, and strict loan caps, have kept financing tight, especially for luxury vehicles.

Demand Returns Through “Own Money” and New Segments

Despite tight credit, signs of revival are clear. The resurgence of “own money” (premium fees for immediate delivery) indicates strong demand, even with inflated car prices caused by currency devaluation and past import hurdles. New hybrid and electric vehicle (EV) models are also drawing interest, slowly building a niche within the market.

However, much of this renewed activity appears to be cash-based, especially from investors and dealers, suggesting bank-financed purchases are largely limited to mid-range models. Corporate and luxury buyers remain on the sidelines when it comes to financing.

Outlook: Measured Recovery Ahead

While demand is visibly picking up, the SBP’s cautious approach, evidenced by its reluctance to relax auto loan regulations, indicates that authorities are wary of an unchecked surge in imports. The risk to external accounts remains a concern.

Nonetheless, the auto sector’s recovery, however gradual, marks a hopeful turn for an industry that had lost its momentum in recent years.