Crisis on wheels: Pakistan’s automotive industry grapples with mass layoffs and 70% sales drop

The automotive industry in Pakistan is facing a severe setback as thousands of workers were laid off due to a decline in vehicle and spare parts sales. The government’s ban on raw material imports, coupled with the depreciation of the rupee and soaring inflation, has caused a significant strain on the industry. With foreign exchange reserves dwindling and the local currency hitting historic lows against the US dollar, the economic crisis has reached unprecedented levels.

Pakistan finds itself in the midst of its most formidable economic crisis to date, as the State Bank of Pakistan’s foreign exchange reserves have plummeted to a mere $4 billion. This amount is barely sufficient to cover three weeks of imports, raising concerns about the country’s economic stability. The ban on raw material imports, implemented to prevent the outflow of US dollars, has caused a sharp decline in industrial output and triggered widespread layoffs and unemployment.

Dollar crunch and inflation

In the midst of the worsening dollar crunch, commercial banks have also halted the opening of letters of credit (LCs), leaving importers in a state of uncertainty regarding the provision of the necessary funds for already placed orders. This further exacerbates the challenges faced by the automotive industry, hindering its ability to procure essential raw materials and sustain production.

The country is grappling with soaring inflation rates, which surpassed 36 per cent in April, the highest recorded since 1964. As a result, consumer purchasing power has diminished significantly, leading to a sharp decline in vehicle sales. Munir Karim Bana, Chairman of the Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM), laments the dire situation, stating that thousands of workers have been laid off, and production has ground to a halt. The closure of auto manufacturing plants has further exacerbated the industry’s challenges.

Auto parts manufacturers are grappling with demurrage charges as raw materials worth billions of rupees remain stuck at the Karachi port. PAAPAM, responsible for supplying approximately 90 per cent of local vehicle parts, is bearing the burden of these charges. Furthermore, with production units closed, income streams have dried up, exacerbating the financial strain on the industry.

Rana Ihsan Afzal, the coordinator to Prime Minister Shehbaz Sharif on commerce and industry, acknowledges that the automotive industry’s full efficiency may not be restored until the revival of the IMF bailout program. As a sector heavily reliant on imports and foreign currency, the automotive industry is particularly vulnerable to the country’s economic challenges. The delay in the staff-level agreement on the ninth review of the IMF bailout deal signed in 2019 has further hampered the industry’s prospects.

Revival prospects and government assurance

Amid the decline in sales and mass layoffs, the coordinator to the Prime Minister expressed his concern but assured that the government is tirelessly working to revive the economy. The coordinator acknowledges the temporary phase that necessitates import restrictions on the automotive industry to protect foreign exchange reserves. However, he remains optimistic that once reserves are replenished, the industry will experience a significant upturn.

Pakistan’s automotive industry is facing a dire crisis, with plummeting sales, layoffs, and manufacturing plant closures. The ban on raw material imports, along with the economic challenges of soaring inflation and dwindling foreign exchange reserves, has pushed the industry to the brink. Despite the difficulties, the government is committed to revitalizing the sector and assuaging the concerns of manufacturers.