In a great display of resilience, automobile sales have remained consistently strong on May 24 after delivering a worthy performance in the previous month as well. That’s two consecutive months of selling over 10,000 units—setting the highest record in 15 months of low volumes—spread across passenger cars, LCVs and SUVs. Compared to May 23, it’s a 100 percent recovery. Price cuts perhaps had a hand in the matter. But anyone expecting this to set the tone for FY25 may have a rude awakening in store for them.

For one, a substantive recovery hinges on SBP’s monetary policy going forward. Given the Central Bank is hesitant to give a firm direction on forward inflation—treading with extreme caution still after cutting the rate for the first time in 4 years—it seems unlikely that the rate cuts over the next fiscal year will be significant enough to boost automobile financing. Though it would be welcome for sure, lower rates are not on the horizon for now which leaves a major portion of the market demand staying untapped. Additionally, a strict stance on imports to keep current accounts in check does not invite confidence that auto financing will be encouraged. The SBP has already tightened regulations on car financing before to reduce demand.

An even bigger deal is the changes in the less-than-inventive budget that the government has just announced. A mammoth, IMF-friendly tax target forced the government to make hasty changes by imposing higher taxes on salaries and consumptions, as well as non-filers. Cars for instance will now be taxed based on their price. Taxes will have an inflationary impact broadly, and on cars specifically. Even if the increased price of cars has no impact or a delayed impact on volumes, reduced purchasing power certainly will as cash purchases become harder than ever.

In 11MFY24, total volumetric sales in the industry have slid 25 percent compared to the same period in FY23, and much higher—64 percent—compared to the same period in FY22. In other words, only two years ago, car sales were 2.8 times what the industry is selling today with more models and variety in the entirety of the fleets assembled combined.

There are no signals at present that suggest that the government wants demand to resurface or improve. The economy is simply not prepared for it and the tightening noose on fiscal policy is only one way to confirm the diagnosis that—it’s not over.