KARACHI: Japanese automaker Pak Suzuki Motor Company (PSMC) this week reported its highest-ever quarterly loss of Rs12.9 billion ($45.9 million) in the first quarter of 2023, as analysts blamed it on the economic meltdown that has mounted challenges for Pakistan’s auto sector.
Faced with an acute balance of payments crisis, Pakistan last year imposed restrictions on imports to prevent the outflow of US dollars. Consequently, commercial banks stopped issuing letters of credit (LCs), leaving importers, automakers included, struggling to arrange the greenback for already placed orders.
Pakistan’s restrictions on import may stay in place for a longer period of time as the country struggles to shore up its foreign exchange reserves, which have dangerously dipped to $4 billion.
Shortage of spare parts and dwindling sales have caused some of the major automakers operating in Pakistan, such as Toyota, Honda and Suzuki, to observe non-production days.
Deeply impacted by the prevailing economic situation in the country, PSMC’s revenue for the January-March 2023 quarter was recorded at Rs21.84 billion ($74.8 million). The figure reflects a sharp decline of 54 percent compared to Rs47.74 billion ($167.5 million) which was recorded last year, details of a stock filing revealed on Tuesday.
With a 70 percent fall in sales, the company’s revenue fell by 64 percent on a quarterly basis and 74 percent on an annual basis, according to the financial statement filed at the Pakistan Stock Exchange.
“Pakistan’s auto sector is facing challenging situation currently due to import restrictions on Completely Knocked Down (CKD) kits,” Tahir Abbas, head of research at Arif Habib Limited, told Arab News.
As its forex reserves dwindle and its talks for a bailout package with the International Monetary Fund (IMF) remain inconclusive, Pakistan’s national currency has massively declined against the US dollar.
Many foreign companies operating in Pakistan are facing problems in repatriating profits and dividends to parent companies due to the dollar liquidity crunch faced by the South Asian country.
In an earlier stock filing in March 2023, Suzuki disclosed its outstanding foreign liabilities have increased to $218 million by the end of December 2022. The company said it has incurred an exchange loss of Rs9 billion ($31.7 million) due to foreign currency transactions and exchange rate disparity.
“As a result of the import restrictions, production in the auto sector has declined significantly to approximately 40 percent of its capacity,” Abbas said. He added that the growing disparity between the value of the rupee and the US dollar, coupled with higher cost-pull inflation, has led to a “significant increase in vehicle prices within Pakistan.”
Abbas said unprecedented inflation and massive price hikes of vehicles have weakened people’s purchasing power, causing sales to decline.
“Currently depressed demand, non-opening of LCs, and a historic high interest rate are the negative factors for the auto sector,” he added.
The impact of Pakistan’s economic meltdown has been tough for Suzuki as well, who are currently observing a shutdown period till April 28, 2023.
“Since July 2022 onwards, all auto makers have been observing shutdown periods at least 15 days every month,” Mashood Ali Khan, an expert of the auto sector and former Chairman of the Pakistan Association of Automotive Parts & Accessories Manufacturers (PAAPAM) told Arab News.
“The contributing factors were LCs pressure, higher interest rates up to 25 percent, and slowing demand,” he said, adding that presently, vendors are in the “worst ever position.”
Khan said vendors, who supply critical support to the auto sector by supplying parts and components, will take at least three years to recover from their losses.
Pakistan’s restrictive measures against imports have enabled its current account balance to record a $654 million surplus in March 2023, data from the central bank showed, against a deficit of $36 million recorded in February 2023.
Abbas, however, said Pakistan’s exports and remittances had also not shown healthy growth.
“Total exports and remittances also decreased by 20 percent and 11 percent on annual basis, respectively,” he said.
