When dollar takes a hike so do car prices

How Dollar rate affects Auto Industry

For any economy to thrive, it’s imperative that the country maintains a stable exchange rate that will not only allow them to avoid imported inflation but also move forward in challenging times. Since the Pakistani currency exchange rate is continuously fluctuating and is dependent on many factors, keeping a control check on these factors can help to an extent to stabilize the dollar exchange rate. But there are times that it becomes inevitable since there are external factors like market competitiveness, global inflation, etc. that come into action and tug the dollar to PKR rate in an uncertain direction. With the current avalanche of global inflation, many economies struggled to grow and sustain themselves. 

Pakistani currency was faced with skyrocketing US dollar rates during the year as well. The continuous devaluation of the Pakistani rupee led many industries to either halt their operations or move to local manufacturing plants. Since the Automobile sector is heavily dependent on imports, the fluctuations in US dollar affected the auto sector as well. Pakistan's Automobile industry saw a shift towards local manufacturing to curtail the increasing input cost of vehicles. Major manufacturers like Honda, Toyota, and Kia moved their manufacturing units after the unabating devaluation of the dollar price in Pakistan. This parity of the US dollar to PKR for the fiscal year 2022 has jumped from the previous Rs. 171.24 in January 2022 to Rs. 220.00 in October 2022. Here is how dollar has spiked up since November 2021. 

The rising dollar prices placed pressure on car manufacturers and almost all major car brands in Pakistan like MG, Peugeot, DFSK, Suzuki, Kia, Honda, and Toyota revised their pricelists that reflected the dollar price impact on car manufacturing. Kia cars like Kia Sportage, Kia Picanto, Kia Stonic, Kia Sorento, and Kia Carnival also went through price update and are now available at revised ex-factory prices with effect from July 2022, at Kia Motors Site.

So what are the underlying factors that make the prices of these automobiles hike with the increase in the exchange rate and drop with dollar rate depreciation? A few of them are highlighted as under.

Imported Product Kits

Most international auto brands like Kia, MG, Peugeot, etc have vehicle classifications under CKD (Completely Knocked Down), CBU (Completely Built Up), or SKD (Semi Knocked Down) units. The parts for these units are either entirely imported or partly imported which makes them more prone to the impact of dollar rates in Pakistan than the local product kits. 

Letter of Credit 

The more the dollar rate, the more the automobile company has to pay via the international mode of payment which is a “Letter of Credit”. Since this financial instrument is backed by the State Bank of Pakistan (central bank), the recent ban on opening new LCs made the import of vehicles absolutely null. This shortage of supply raised the demand for automobiles, resulting in the appreciation of car prices in Pakistan. 

High-Interest Rates 

With the rising dollar to PKR parity, interest rates also soar and car leasing becomes more complex for general consumers to pay for. Car finance rates are determined in correspondence to interest rates and interest rates are determined based on the prevailing exchange rates. The moment any one factor is disrupted in the currency exchange rate cycle it impacts every other element associated with it. Currently, car financing has slowed due to the rising dollar rates but will eventually revive with the stabilization of the dollar with the Pakistani rupee (keeping the hopes up).   

Conclusion

The roller coaster of the US dollar to PKR continues and since Kia Lucky Motors has been transparent with its Kia car pricing from day one, Kia raised its prices by just 14% whereas, other car manufacturers increased their product pricelist by 19% -23% to reflect dollar impact. This is a major step forward by Kia Pakistan to maintain its customer-centric approach for its valued customer as a goodwill gesture for their undying trust and unwavering support even during the economic crunch.