The State Bank of Pakistan (SBP) has restricted opening Letter of Credits of several industries and the auto industry remains one of the most affected by the issue, which was created in the aftermath of falling foreign exchange reserves to worrisome levels.
According to car manufacturers, the LC crisis could lead to up to two months of idle production of the auto industry. It means many car assemblers have been forced to abandon their plant operations because their import supply of parts has been halted.
Toyota, listed as Indus Motor Company in Pakistan, recently announced that the State Bank of Pakistan’s LC approval constraints for CKD imports and drastic rupee devaluation are causing considerable problems for the auto industry and have disrupted its production.
“Thus, we are unable to meet the tentative delivery timelines committed on pending orders. The prevailing situation is being reviewed and we will be soon announcing the revised delivery schedule as well as the re-opening of order intake,” IMC stated in a notification.
The State Bank has been forced to curtail imports amid foreign exchange reserves depletion into dangerous level. It fell below $9 billion recently, but a recent approximately $2.3 billion payment from neighboring country China has helped Pakistan regain a slightly comfortable $10 billion level.
Reports suggest that many car companies have suspended operations at their plants amid a shortage of CKDs (completely knocked down units). CKDs are disassembled major car parts that auto companies in Pakistan import from countries including Japan, Thailand, Indonesia and China.
LC is a financial instrument that is used in international banking transactions carried by businesses to import goods from other countries. The LC has to be done through a country’s central bank such as the State Bank in Pakistan’s case. The State Bank gives sovereign guarantee to foreign exporters’ banks that importers in Pakistan will honor the payment contract. If the State Bank doesn’t allow it, there is no other way for companies to import.
The State Bank has been forced to curtail imports amid foreign exchange reserves depletion into dangerous level. It fell below $9 billion recently, but a recent approximately $2.3 billion payment from neighboring country China has helped Pakistan regain a slightly comfortable $10 billion level.
Master Changan Director Sales Shabbiruddin has been quoted as saying that the LC issue may halt two months of car assembling. When an import order is placed with LC, it normally takes 45 days to two months for the CKDs to reach the factory.
It means many auto companies could see their production lines remaining idle for up to two months. At this point in time, car companies aim to assemble cars for 10 months in the fiscal year 2022-23.
This issue, along with other issues such as the State Bank’s car financing restrictions, high policy rate, rising car prices and inflation may see auto industry contract by 30% in the fiscal year 2022-23.
The auto industry is keeping its fingers crossed just like many other industries that the International Monetary Fund (IMF) soon resumes its programme in Pakistan and the country receives IMF loan tranches.
Starting the IMF programme will also pave the way for other donors to initiate loan payments to Pakistan as IMF programme resumption gives them confidence that Pakistan has the capacity to pay back the loan they would give it – means the country may not default, which remains a major concern for the donors.