KARACHI: Auto financing continued its upward trajectory for the sixth consecutive month, reaching Rs271.2bn at the end of May, up from Rs263.3bn in April, supported by a notable decline in interest rates.

However, the figure remains well below its peak of Rs368bn recorded in June 2022.

The reduction in the policy rate to 11pc from 22pc since June 2024 has rekindled interest in vehicle leasing, particularly for small cars. Analysts believe this trend could persist in the near term, although structural and policy challenges loom large.

Topline Securities CEO Mohammed Sohail said auto financing is likely to continue its gradual recovery, driven by broader economic stability, easing inflation, and lower borrowing costs, despite recent budgetary measures.

Auto sector expert and parts manufacturer Mashood Ali Khan noted the growth in financing is promising, particularly under the existing Rs3m cap on auto loans. He suggested the State Bank of Pakistan (SBP) raise the limit to Rs6m to enable access for lower-income buyers. However, he cautioned that car leasing remains difficult for many consumers due to stricter terms including reduced repayment tenures (five years for vehicles up to 1,000cc, and three years for smaller cars) and a 30pc down payment requirement.

Mr Mashood expressed serious concern over the government`s decision to allow the commercial import of used carsup to five years old from September 2025, as part of commitments under the IMF programme. These vehicles will face a 40pc regulatory duty in addition to existing taxes.

The duty will be gradually reduced to 30pcin 2026, 20pc in 2027, 10pc in 2028, and fully eliminated by July 2029. No restrictions will apply on the import of any type of used vehicle, including heavy bikes.

He urged the government to restrict financing for used cars older than five years to prevent further market distortion, especially as financing for used vehicles is already active. Despite assurances to local assemblers and vendors ahead of the FY26 budget, Mashood warned that IMF-driven measures could devastate the domestic industry.

While the sector posted a 39pc year-on-year growth in car, sport utility vehicle, pickup, and van sales to 126,226 units, the outlook remains uncertain post-September 2025, when policy shifts coulddestabilise local production.

Adding further pressure is the newly introduced NEV (New Energy Vehicle) Adoption Levy 2025, aimed at reducing reliance on internal combustion engine (ICE) vehicles. A levy of 1pc is imposed on vehicles with engines up to 1,300cc, 2pc on 1,301-1,800cc, and 3pc on engines exceeding 1,800cc.

Insight Securities estimates the levy could increase vehicle pricesbyRs44,790toRs596,970, depending on engine size.

Listed firms such as Honda Atlas Cars and Indus Motor are expected to bear the brunt of this policy shift, while Sazgar Engineering may see limited impact due to its focus on hybrid electric vehicles.

In parallel, the government unveiled the National Tariff Policy (2025-30), which proposes the elimination of additional customs duty over four years, RD over five years, and the phasing out of the Fifth Schedule of the Customs Act 1969 within five years.