Goodbye used cars? — II

In a move that should surprise no one, and one that we mentioned would happen in our last story on the subject (“Goodbye used cars?”, Jan 25, 2018), the Economic Coordination Committee (ECC) of the Cabinet has allowed the release of thousands of cars stuck at port according to rules prior to the notification that shook the used car industry in October. And in a “told you so” moment, there are now talks that the new rules may never see the light of the day!

The Commerce Ministry might replace the new regulation after being cornered by importers who believe their livelihoods are at stake. The notification (SRO 1067(I)/2017) was one of the measures taken to reduce the incapacitating rise in the import bill.

To review: used cars are imported by dealers using passports and documents of overseas’ Pakistanis under the three schemes: Gift, baggage, resident transfer. They are then commercially sold. Now the new regulation mentioned above puts some nifty restrictions. It says that the duties and taxes for vehicles imported through these schemes would have to be paid out in foreign exchange arranged by Pakistani nationals themselves, or local recipient supported by bank encashment certificate showing conversion of foreign remittance to local currency. This puts car dealers in a bit of a fix. It is dealers who import used cars using documentation of Pakistanis living abroad and it is them who pay all the duties and taxes out of their pockets. How are they to show the money trail?

Earlier Miftah Ismail said that they would allow a one-time dispensation of the cars stuck at port but no further relaxation would be given to cars booked from now on. Perhaps the government realizes now that evacuating an industry, borne by necessity having firmly established its roots may not be easy.

The influx of used cars has been equal parts troubling, and equal parts exciting. It denotes the rising demand for cars in an economy that has never crossed 200,000 sales mark in a year. But higher imports also need to be paid for, putting undue pressure on the current account. In the first five months of FY18, over 30,000 used cars had come in which is a phenomenal number given that up till FY15, Pakistan was importing this much in the whole year.

While this used car policy was never meant for commercial sales, the exploitation of this policy has been endured by the government for years. One could reason that it is because the local auto manufacturing industry failed to meet the appetite of the growing car market. One that needed better technology vehicles, more variety, and more affordability. With used cars, consumers found many more renowned brands, and a much wider variety to choose from. Since they are up to three years old, they are also cheaper.

In fact, one could opine that high duties and taxes on import of Completely Built Unit (CBU)—upwards of 100%— and the fact that local assemblers weren’t meeting the needs of the car buyer, together fueled this informal used car economy. And it became too big to break. True, they are not manufacturing so they don’t provide as much employment, nor do they result in technology transfer but what about the consumer?

Why would a consumer buy a used car when he could buy a new car? Ideally, with decades of protection and opportunity for investments, local assemblers should have grown to a scale worthy of Pakistan’s growing population of car users. But the industry has even failed to localize enough. Our estimates suggest localization between 40 to 55 percent over the last decade, falling recently instead of increasing. This also means: nearly a third of the cost of a car is dependent on imports (Read our analysis: “The Fault in Our Cars”, Feb 6, 2018).

The only silver lining here is that new players are coming. They may take 7-10 years to establish their footing but with the playing field open for new ventures, consumers might get a break. Surely, used cars would dwindle down on their own if consumers were to find fresh local variety at affordable prices.