Killing the goose for an egg

Unstable taxation regimes coupled with loopholes in the schemes that facilitate import of used cars are becoming a major drag on the auto manufacturing. Auto Industry that has contributed more than 2.5 million jobs to the national economy and brought in USD 5 billion as FDI is now feeling the heat.

Given its sensitive dependence on a bailout by the International Monetary Fund, the federal government agreed to the import of five-year-old vehicles after imposing 40 percent regulatory duty on prices. The duty may go away completely over the next few years.

The sector needs the budget makers’ prudence and due appreciation of its challenges.

The local manufacturers are dreading an increase in the import of used cars in the name of open market competition. Then International Monetary Fund is convinced that policymakers can maintain competition by allowing imports. The proposition is simple that import of used cars is detrimental to the sustainability of the current account, aggravates the balance of payments problem and replaces manufacturing with trading.

The manufacturers see Pakistan becoming a trading destination for car dealers.

First, it was Japanese and Korean cars; now it is increasingly Chinese cars. There have been reports that some of the import consignments are under-invoiced and some importers of the new cars may never enter manufacturing after using the tax incentives to import CBUs.

Over the last decade, the import of used cars has emerged as a threat to the local manufacturers. As the government is now under an IMF programme, it needs to maintain agreed benchmarked criteria on the fiscal side. Maintaining growth in revenue is one of those. Collecting custom duties is one way of doing so.

Improving fiscal performance through customs duty (at the cost of local manufacturing) amounts to killing the goose for an egg. The industry is already under a lot of pressure due to the higher cost of working capital (because of the high policy rates and higher energy prices).

In the name of creating fiscal space through customs duties on used cars, policymakers have kept the Sword of Damocles hanging over the carmakers. To stabilize the sales, as return on investment, the manufacturers may be forced to consider consolidation and mergers, like those we have seen in the telecom sector. Recently, the carmakers have been unilaterally reducing the prices. This tactic may stabilize sales in the short-run, but it may not be sustainable.

It was decided that locally manufactured cars will use 70 percent of local components by importing CKD kits. The government’s failure to implement the policy resulted in a price hike. As most of the parts were sourced from abroad, spiking international currency rates started determining local prices. Later, some other brands also joined in. This germinated the vending industry, which later proliferated and started manufacturing goods for other sectors, too.

Allowing the import of used automobiles is damaging the economy, with grey channel transactions running into billions. This could threaten the local industry and labour force throughout the supply chain.

According to industry sources, during the first eight months of the fiscal year 2023-24, the import of used cars has caused a loss of over Rs 45 billion to the local industry.

This import facility, initially available only to overseas Pakistanis, has reportedly been abused by some car dealers. The overseas Pakistanis returning to the country are expected to spend the foreign currency earned abroad. Instead, they are now spending it on imports claimed as baggage. Imports by local dealers squeeze the current account, disturbing the fragile balance of payment.

This is putting at risk the very business proposition for the 15 leading manufacturers and assemblers in Pakistan. These players and the associated vendors’ network currently host over 2.5 million jobs. Wider industry-related jobs bring the number to around 5 million.

The Pakistan automobile market is currently ranked 34th among the 49 passenger car manufacturing countries. It is among the 16 countries manufacturing complete vehicle segments, including passenger cars, trucks, buses, and tractors.

Encouraging used car imports could kill the local industry that has just started to find a steady growth this year. With demand being met by used car, local manufacturers may not be able to come up with a new generation of technologies every three to five years.

While budgets can often focus primarily on creating fiscal space for a given financial year, policymakers should not be oblivious of the long-term reality.

Copyright Business Recorder, 2025