Pakistan discourages consumer financing to address trade and current account deficits

Special A collage of photos show Pakistan’s consumer banking products impacted by the latest policy of the country’s central bank. (Photos by AFP, REUTERS)
A collage of photos show Pakistan’s consumer banking products impacted by the latest policy of the country’s central bank. (Photos by AFP, REUTERS)
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Updated 24 September 2021
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Pakistan discourages consumer financing to address trade and current account deficits

Pakistan discourages consumer financing to address trade and current account deficits
  • The State Bank of Pakistan says the step will reduce the demand growth and moderate the pace of the country’s imports
  • Financial experts maintain the new policy will have a negative impact on all sectors of the economy

KARACHI: Pakistan’s central bank on Thursday announced to control consumer financing in the country by making adjustments to prudential regulations amid burgeoning trade and current account deficit, as financial experts warned the new policy was going to halt the country’s economic growth.
Pakistan’s trade deficit increased by 120 percent to $7.49 billion due to an unprecedented growth in imports which increased by 73 percent in July-August 2021.
The country’s current account deficit also increased to $2.3 billion during the same period as compared to a surplus of $838 million in the corresponding months last year.
The State Bank of Pakistan (SBP) said in a statement the revised prudential regulations were likely to control import and demand growth.

Explaining the rationale behind its decision, the SBP said: “This targeted step will help to moderate demand growth in the economy, leading to slower import growth and thus supporting the balance-of-payments.”
The bank brought about changes to the financing mechanism for imported and domestically assembled vehicles.
According to the SBP statement, other consumer finance facilities, such as personal loans and credit cards, have also been affected.
The central bank reduced the maximum auto finance and personal loan tenures from seven to five and five to four years, respectively.
The maximum debt burden ratio allowed to a borrower has also been decreased from 50 to 40 percent.

Consumers interested in financing cars will now have to make a minimum down payment of 30 percent, instead of 15 percent in the past, and they will not be able to get more than three million rupees of financing in individual capacity.
“With the objective to protect lower to middle income category purchases, these new regulations are not applicable to locally manufactured or assembled vehicles of up to 1,000cc engine capacity,” the SBP said.
Pakistan’s transport sector imports had increased by 154 percent during July-August 2021 to $667.7 million with a major contribution of $574 million coming from the road motor vehicles.
Local car dealers told Arab News the new policy would negatively impact the automobile business in the country.
“The imported car market is about 15 percent of the total auto market in the country,” HM Shahzad, chairman of All Pakistan Motor Dealers Association, said. “The new policy will not only impact that market segment but also affect locally assembled vehicles that cost more than Rs3 million.”
Experts believed the policy shift was to reduce money supply in the market which was going to halt the overall economic growth.
“The question is whether these measures will help reduce the current account deficit and stabilize the exchange rate,” Dr. Ikram-ul-Haq, a Lahore-based expert, told Arab News. “The crisis will be not be fixed by taking short-term measures.”
He maintained that the country was likely to take more stringent measures after resuming negotiations with the International Monetary Fund (IMF) next month.
“These policies are going to have an adverse impact on all sectors of the economy,” Haq said, adding that Pakistan’s national currency was likely to slide further after the IMF negotiations.
“The available monetary policy tools are going to damage us more if they are not accompanied by a better fiscal policy,” he continued.
Haq said Pakistan had witnessed how interest rates peaked and Pak rupee bottomed in the last three years, adding the government’s economic policies had led to a slowdown while inflation continued to stay high.
The central bank’s new policy is not applicable to Roshan Apni Car, a vehicle financing facility for overseas Pakistanis.