The State Bank of Pakistan (SBP) has been compelled to slow down import growth via adjustments in prudential laws, as well as restrict the financing cap and term, particularly for imported automobiles, as a result of the country’s ballooning trade and current account deficits.
A revision to prudential requirements for consumer finance was announced by the central bank on Thursday. “This targeted action will assist in reducing demand growth in the economy, resulting in slower import growth and, as a result, supporting the balance of payments,” the SBP stated.
The government is dealing with a significant balance of payments crisis, with a ballooning trade deficit as a result of the rapid rise in imports, which was previously regarded as crucial for economic development in the country. The current account deficit increased to $1.5 billion in August alone, indicating that it will likely exceed the SBP’s target of 2 to 3 percent of GDP for fiscal year 22 by a significant margin. The current trajectory plainly indicates that the country will face a considerably larger deficit in the future.
Specifically, the SBP stated that the changes to prudential regulations effectively prohibit financing for imported vehicles and tighten regulatory requirements for financing of domestically manufactured or assembled vehicles with engine capacities greater than 1,000cc and for other consumer finance products such as personal loans and credit cards.
According to the latest modifications, the maximum term of auto financing has been cut from seven to five years. The auto sector is thriving, despite the fact that demand is still extremely high.
The maximum term of a personal loan has been cut from five to four years, which is yet another move toward reducing the increased usage of personal loans, which have been used to purchase automobiles.
According to the modified regulations, the maximum debt-burden ratio that a borrower is permitted to have has been reduced from 50 to 40 percent.
There is also a restriction on the total amount of auto finance that a person can obtain from all banks and DFIs combined, which cannot exceed Rs3,000,000 at any moment in time. Additionally, the minimum down payment for auto financing has been raised from 15 percent to 30 percent.
“All of these actions have been taken to slow down the importation of vehicles and the availability of easy financing for them. According to Samiullah Tariq of Pak-Kuwait Investment Company, the company will try to minimize the purchase of luxury vehicles, both imported and domestically produced.
He stated that there is a huge demand for automobiles and that it can take up to six months to obtain a vehicle after purchasing one from a company. One of the factors contributing to increased demand was the ease with which it could be obtained finance, which was restrained by decreasing the amount of financing available and the duration of the credit.
Analysts also pointed out that the new hike in interest rates should be viewed in the same light as the previous increase — the expensive money would result in consumers being unable to obtain financing. The Bank of England hiked the interest rate by 25 basis points, bringing it to 7.25 percent.
The State Bank went on to say that, in order to protect purchases by people in the lower to middle-income brackets, these new laws will not apply to locally built or assembled automobiles with engine capacities of up to 1,000cc.
In addition, “they are not relevant to locally built electric vehicles to promote the use of renewable energy,” the SBP stated, adding that financing for these two types of vehicles will continue to be governed by the existing set of regulations.
In order to promote Roshan Digital Accounts and to assist Pakistanis living in other countries who have opened these accounts, the SBP stated that regulatory instructions for the Roshan Apni Car product are offered by banks or development finance institutions (DFIs) have not been amended.
Analysts predict that the impact of the adjustments to prudential regulations will be obvious in a couple of months, but that economic activity will not be slowed as a result of the changes.
The import of road motor vehicles reached $2.142 billion in FY21, up from $1.276 billion the year before, indicating a significant increase in the volume of imports. During the period July-August FY22, the import of the same totaled $495 million, compared to $160 million during the same period last year.