Automotive in neutral amidst economic lull

In 2015 and 2016, the automotive industry revved up on the back of consumer optimism.

With many changes in the political sphere, aspirations towards owning a vehicle and the capability to be financially astute enough to do so, spurred interest in the industry, leading to tangible increments in vehicle registrations in 2016 and 2017. However, in 2018 to date, the industry has been struggling amidst policy changes and economic mediocrity.

The untenable decline of the Sri Lankan rupee in the latter half of 2018 and the continued depreciation in 2019 against the US dollar has only served to worsen already critical market conditions.

In 2017, Sri Lanka’s motor vehicle population grew 7% from a year earlier to 7.2 million, as per research conducted by the Ceylon Chamber of Commerce and published in the Motor Vehicle Industry Report of 2018. The report noted a 5% rise in import expenditure, despite an 11% fall in import volume with yearly new registrations declining by 9%. Whilst the 2018 report is yet to be published, estimations are that the number of new registrations will decline further.

The Ceylon Motor Traders Association (CMTA) has been leading the charge in calling for a level playing field for the legitimate industry.

They are critical that the Government has failed to create transparency within the industry by not insisting on the legislative need for all importers of vehicles to be listed or registered with the respective governmental bodies.

The lack of such a statutory requirement has fostered a very voracious grey market which is steadily eroding the business of legitimate players.

With Sri Lanka’s balance of payments in disarray, the Government has resorted to trial and error in policy engagement, triggering imports substitution and ad hoc controls on vehicle importation.

However, the lack of consistency in policy modulation has led to short-term policy formulation, leading to a situation of consumer apathy and lull, as consumers play a waiting game, expecting further policy changes.

Moreover, recent budgetary policy changes saw the swish of the cane on small and medium-sized cars, as excise duty hikes on smaller engine capacity vehicles rose comparatively against higher engine capacities.

The Government’s move has not only constrained the opportunities of motor vehicle importers but also that of the green economy initiative, as the excise duty or production tax on hybrid electric cars below 1000 cc has increased to Rs.1.25 million.

Ceylon Motor Traders Association (CMTA) has been spearheading the call for change by highlighting the cons of the engine capacity-based taxation formula of the 2018 Budget.

The Association has noted that it is in fact detrimental to the Government to charge the same duty for a 2,000 cc Korean-made vehicle produced and purchased for $ 20,000 and a European manufactured one with same engine capacity purchased at $35,000.

Similarly, a European made model X with a CIF value of Rs. 5 million (taxed at 130%) will be charged with the same duty as that of a Japanese made model X with a CIF value of Rs. 2 million (taxed at 300%), thereby creating an imbalance in the revenue stream for the national exchequer.

In this scenario, the calculation will lead to the deprivation of approximately Rs. 7-10 million per vehicle to the national accounts.

The rationale for the engine capacity-based formula arose from the Government’s need to replace ad hoc taxes and to curtail under-invoicing. However, it was mainly prompted by the expansive growth in the lower capacity vehicle imports in the previous years.

Central Bank data demonstrates that the trade deficit had widened by $ 716 million in the first five months of 2018 and of that amount, $ 350 million was attributed to the increase in vehicle imports.

According to Central Bank data, foreign exchange outflow from the purchase of 1000 cc engine capacity vehicles increased to $ 195 million in 2018 from $ 26 million in 2017.

Import expenditure on 1500 cc engine capacity vehicles rose to $ 73.2 million in 2018 from $ 20 million in 2017 whilst 3000 cc petrol vehicles import expenditure dropped to $ 21.1 million from $ 33.5 million, but 2500 cc diesel vehicles rose to $ 5.4 million from $ 1.9 million.

However, it remains evident that the growth in lower engine capacity vehicles was the outcome of inconsistent policies formulated and implemented in the previous two years.

Election promise-led policy planning has once again become a bane to the national economy.