Kicking off the new year with a whimper, last week, Pakistan Suzuki (PSX: PSMC) announced it would be keeping its car assembly plants shut for another week of January yet because of the shortage of imported CKD kits and parts having depleted its inventories. This is despite the Central Bank announcing that it would be lifting import quota restrictions for assemblers and assemblers no longer have to obtain prior approvals to open import Letters of Credit (L/Cs). But the economy is in a perilous state; paralyzed and unable to meet its debt obligations with fast-vanishing dollar reserves. The country has the ability to cover only 3-4 weeks of imports which has necessitated an essential-only import regime. The auto industry is simply not essential even if thousands of jobs are attached to it.
The industry is affected across the board with the entire supply chain disrupted. Before Suzuki, Millat Tractors had announced the suspension of production citing reduced demand and cash flow concerns, while Toyota has thus far observed several non-production days in August, September, and the end of December. This will continue over the next few weeks as the priority-imports-only regime kicks in, with no cards left for the government to play, not that there were many strategic plays up their sleeves anyway. One only has to look at the statements coming out of the latest National Security Council meeting that continues to uphold archaic and failed policies such as import substitution, instead of focusing on revenue mobilization through filling tax loopholes, export growth, and reducing subsidies. It is clear that there is no mid-term policy, let alone a long-term one conducive to getting the country out of its current mess. But frankly, even import substitution would not look like such a cardinal sin if there was actually “substitution” that was happening. Major imports in the country – fuels like oil & gas, palm oil, and machinery—are hardly substitutable at this point. They are only curtailable.
Certainly, the automobile industry has been touted as an “import substituted” product through multiple policies over the years, including long-running protectionist regimes through tariffs and duties, but the industry is still very heavily dependent on imported content. Even the parts made in the country have imported inputs and raw materials used in them. In theory, there is nothing wrong with using imported inputs to produce goods and services, but with such heavy protection from any competition and only selling the product in the domestic market at inflated prices (in part because of the dollar-heavy imported content embedded in the costs of production and in part because of hefty taxation), it is rather blurry how much import substitution even happened. But so continues this vicious cycle of dollar-based imported parts used to make a product only suitable for the domestic market as there is little competition and few standards to comply with; assemblers enjoy pricing power to boot. One may be inclined to blame assemblers and companies seeking profits for this chaos, but the problem lies with poor government policies supported by the disastrous mindset that persists even when the economy is on the brink of failure.
Nevertheless, the administrative controls to cut down on imports have worked, but there is still more room for import cut-down in the automotive space. Total automotive volumes have shrunk by 39 percent in 5MFY23 while import of CKD is down 35 percent. This is certainly not the lowest in terms of volumes or dollar value in recent history. Though assemblers have not started laying off employees, it is only a matter of time before that happens, especially if the government fails to arrange necessary funding from the IMF and the country runs out of dollars completely.
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