Cars on course

Rising import of cars has become almost a polarizing issue in this economy. On the one hand, soaring car imports in Completely Built Unit (CBU) form point towards improving livelihoods of consumers, given that locally assembled cars are also growing unabated. On the other hand, cars are considered a luxury item which adds to the import bill that in times of rising current account deficit only seem to exacerbate the problem. But much to the chagrin of the government—even if car imports in February fell by 19 percent year on year and by 37 percent since Dec-17—they aren’t going anywhere. Let’s examine.

CBU imports have only been showing a decline for the past two months because more than 10,000 used cars have been stuck at the ports waiting to be cleared. This belies the actual growth trajectory of this segment—CBU imports for cars grew by 70 percent in the July-Dec period year-on-year. Annually over 65,000-70,000 used cars are coming into the country with no sign of stopping.

But not for the lack of trying. After months of watching the import bill climb, the government came up with a host of policies. Regulatory duties were imposed to discourage imports of luxury items. Cars were part of this list. Soon after, the government decided to tackle the misuse of the used cars policy designed specifically for Pakistanis living overseas (not for commercial sales).

To quickly review: used cars are brought into the country by car dealers through the three schemes (gift, baggage and resident transfer) using documentations of Pakistanis living abroad. These cars are then commercially sold in the country. If that sounds illegal; it probably is, even though this has been happening right under the nose of the government. Was the government turning a blind eye or was the legality too obscure for anyone to call it—the verdict is still out on that.

Even so, the Commerce Ministry issued a notification (SRO 1067(I)/2017) that said all duties and taxes for imported vehicles coming through schemes would have to be paid in foreign exchange by the sender of vehicle i.e. the Pakistani living abroad. Trouble is, these cars are brought by dealers and investors, who then pay government the fixed taxes. The overseas Pakistani’s role is simply to share his documentations, keep quiet and earn some pocket change.

Only one month into the policy, the government realized it had supremely bungled. Apart from the fact that thousands of dealers are now dependent on this flourishing business as their primary source of income, the government itself was going to suffer as well.

Illegal, misuse or loophole exploitation, whatever one would prefer to call it, used cars were putting a good chunk of revenue into the pockets of the exchequer. Data available to BR Research shows the used cars industry paid Rs23 billion in taxes (for Rs31 billion worth of imported cars sans taxes) during FY16. That kind of money a cash strapped economy like Pakistan would prefer not losing.

After a hue and cry raised by motor dealers, policymakers decided to revert the decision, release the cars stuck at the ports and go back to the drawing board with “all stakeholders”, however futile that exercise may be.
Undoubtedly, this decision wouldn’t sit well with local auto assemblers, auto parts manufacturers, authorized dealers not to mention, any new players for whom used cars will provide competition.

But they and the used car guys can fight that battle with the government. One thing is for sure though, no one least of all folks at the Ministry should prematurely celebrate the latest decline in car imports. It isn’t real.