Sri Lanka’s temporary 50% surcharge on Customs Import Duty (CID) on new personal vehicles has raised fresh questions about the country’s import management, foreign exchange pressures, and broader economic direction, as vehicle imports continue to surge despite mounting pressure on external reserves and the rupee.
In 2025, Sri Lanka’s vehicle import expenditure reached its third-highest level in history, contributing to a total import expenditure of $ 2.04 billion. Moreover, vehicle imports amounted to $ 195 million in March this year, bringing total vehicle imports to $ 613 million during the first quarter of 2026, which expanded to $ 208 million in April.
Meanwhile, in the first quarter of 2026, the merchandise trade deficit widened to $ 2.3 billion, compared to $ 1.5 billion in the corresponding period of 2025. It expanded to $ 3.7 billion in April this year.
Stakeholder views
Speaking to The Sunday Morning Business, Deputy Minister of Economic Development U.D. Nishantha Jayaweera noted that while a specific percentage of reduction in vehicle imports had not been estimated yet, the expectation was to reduce the import bill in general.
“The amount spent on fuel imports is substantially higher than the previous year. Meanwhile, the number of vehicle imports has surged beyond the expected amount. Due to these reasons and to address the subsequent uncertainty caused in the financial markets, this decision was taken. Thus, the main goal was to limit imports as much as possible,” he said.
Meanwhile, stakeholders who spoke to The Sunday Morning Business raised concerns regarding increasing import expenditure, policy inconsistencies, weak dollar inflows, and pressure on foreign reserves as key concerns behind the current situation.
Speaking to The Sunday Morning Business, Vehicle Importers’ Association of Sri Lanka (VIASL) Secretary Usman Ali stated that the temporary 50% surcharge on CID on new personal vehicles had initially triggered panic buying in the market, as consumers and importers anticipated further changes following the announcement. He noted that the rapid fluctuations in the US Dollar rate over a period of two to three days had also contributed to the uncertainty.
However, he said that the situation had begun to stabilise in the most recent days, specifically after the Finance Minister issued a statement clarifying that imports would not be temporarily banned under the current circumstances. There is also more clarity and consistency in the US Dollar rate, which has helped settle market sentiment, according to Ali.
“Prior to this, we saw panic buying, and people, including importers, were trying to get their hands on whatever imports they could get, opening Letters of Credit (LCs) as soon as possible, with banks managing an overwhelming number of LC applications,” he said.
The surcharge, which came into effect on 16 May for a three-month period, was introduced as the Government sought to curb vehicle imports and reduce pressure on the exchange rate amid rising fuel costs and global uncertainty linked to the escalating Middle East conflict.
However, despite the additional levy, Deputy Minister of Finance and Planning Anil Jayantha Fernando recently revealed that 9,429 LCs had been opened on 18 May, the first weekday after the surcharge became effective, highlighting continued demand for vehicle imports.
The Government estimates that Sri Lanka could spend around $ 200 million per month on vehicle imports despite the temporary measures. The move comes after Sri Lanka opened LCs for 624,000 vehicles between January 2025 and April 2026, while the rupee depreciated sharply to over Rs. 350 against the US Dollar in May.
Commenting on the impact on import volumes, Ali explained that it was still difficult to estimate the expected reduction in imports during the temporary surcharge period, as the immediate response had actually been an increase in imports driven by panic buying and as many importers had rushed to secure units before any further policy changes could take place.
Looking ahead, he said that the recent Loan-to-Value (LTV) adjustment by the Central Bank of Sri Lanka (CBSL) was expected to gradually reduce imports, particularly for higher-end European vehicle models, which he said were no longer financially feasible to import under the current rates.
“I do not think the market will catch up very soon. Thus, there will be a considerable reduction in those vehicles being imported,” he stated.
Speaking on the second-hand vehicle market, Ali said that prices had not increased at present, noting that the market still had a large number of unregistered vehicles available. He added that second-hand prices were unlikely to rise until those stocks began to decline.
Fiscal side
Speaking to The Sunday Morning Business on the vehicle surcharge duty, Frontier Research Senior Research Lead Arshad Ismail noted demand concerns.
“I believe it will have some impact on demand, and people will wait for a few months before importing. At the same time, a narrative is spreading claiming that the Government might ban vehicle imports, which could reverse that impact.
“Despite the vehicle tax imposed, importers will try to bring in as many vehicles as possible so that if the imports are banned, they can continue selling. I don’t believe that vehicle imports will be banned; however, that is the narrative being spread,” he said.
Ismail also explained that fuel import costs had been notably high in May, due to Sri Lanka having to pay for expensive fuel bought in March and April. However, he noted that this was expected to decline in the next few months.
The impact of the war in the Middle East was reflected in the performance of the external sector in April as well. Sri Lanka’s cumulative current account surplus reached $ 531 million during the first quarter of 2026.
However, the external current account recorded a deficit in April compared to this surplus recorded during the January–March period. According to the CBSL, this was mainly driven by the widened trade deficit, a moderation in the services surplus, and higher primary income account deficit, despite an increase in workers’ remittances compared to a year earlier.
Ismail, commenting on the fiscal side, added that Government revenue was performing relatively well in this backdrop amid the circumstances, as Sri Lanka had achieved a substantial primary surplus in the first quarter and even a budget surplus. Thus, he noted that the Government had the buffers to spend on additional expenses, such as even fuel subsidies, if it wished to.
Surcharge is the correct measure
Meanwhile, commenting on the rationale behind the surcharge itself, University of Colombo (UOC) Department of Economics Professor K. Amirthalingam said that the Government’s objective was primarily to reduce pressure on foreign exchange outflows.
“Whenever vehicles are imported to Sri Lanka, typically the Government earns a significant amount of revenue through import tariffs, Customs duties, excise duties, and related taxes. Thus, in rupee terms, revenue exists. However, our current problem is not the Sri Lankan Rupee itself; it is the dollar,” he said.
He explained that under Sri Lanka’s flexible exchange rate system, high outflows of foreign exchange against weak inflows would naturally place pressure on the rupee.
“When foreign exchange outflows are high and inflows are low, the rupee depreciates. To avoid that situation, Sri Lanka is trying to reduce vehicle imports, which have caused a huge foreign exchange outflow. When considering the macroeconomic view, this measure taken by the Government is correct,” he said.
When asked how impactful the surcharge was as a deterrent during the current period, Prof. Amirthalingam said that the measures would likely cause a considerable reduction in imports.
“Vehicle imports will certainly decline. This is not only due to the surcharge, but also due to other measures such as restricted leasing facilities. As a result, only 40% financing is allowed, meaning buyers must have 60% upfront. That is also a measure to reduce imports,” he stated.
Trade deficit concerns
Expenditure on fuel imports is the largest item in Sri Lanka’s import basket, comprising around 20% of the total import bill on average annually over the past 10 years. Despite higher import volumes of crude oil and refined petroleum in 2025, the fuel import bill declined to $ 4 billion in 2025 from $ 4.4 billion in 2024.
However, Sri Lanka’s oil import bill by the State-owned fuel retailer has risen sharply in the first four months to two-thirds of what it spent for the whole of 2025. Meanwhile, Sri Lanka’s oil import bill increased by 150% Year-on-Year (YoY) to $ 886 million in April, registering the highest fuel bill thus far for this year.
Speaking on the impact of vehicle imports on the exchange rate, University of Peradeniya (UOP) Department of Economics and Statistics Professor Ananda Jayawickreme said that vehicle importation had become one of the main reasons behind the recent depreciation of the rupee. As of end-May, the Sri Lankan Rupee had depreciated by 5.4% against the US Dollar on a Year-to-Date (YTD) basis.
“Vehicle importation is one of the major reasons for this ongoing exchange rate collapse – actually, the depreciation of the rupee. We know it increased to around Rs. 350–354 against the US Dollar, and now it has declined,” he said.
According to Prof. Jayawickreme, the main issue is the sharp rise in demand for dollars against limited foreign exchange inflows.
“Over the last one-year period from March 2025 to March 2026, we have imported vehicles worth a significant amount. Even the number of vehicles imported, especially categories such as personal vehicles and motorbikes, has increased rapidly during the period,” he stated.
He added that vehicle imports during the March 2025–March 2026 period were nearly three times higher than levels in 2019, which he described as a relatively normal economic period prior to the pandemic and subsequent crises.
Prof. Jayawickreme further claimed that the Government’s focus on increasing tax revenue through vehicle imports had come at the expense of foreign exchange reserves, adding that there was a significant cost associated with this. He also observed a broader rise in non-food consumer goods imports, noting that expenditure on such imports had increased from around $ 1.5 billion in 2024 to $ 3.6 billion in 2025.
“We are still in a crisis situation. The economy has not fully recovered, and recovering from a crisis takes a long time,” he added.
Commenting on the policy direction taken during Sri Lanka’s International Monetary Fund (IMF) programme, Prof. Jayawickreme questioned whether sufficient attention had been paid to the long-term pressure on reserves and the exchange rate. He further noted that expected dollar inflows had not materialised as anticipated.
“The Government also expected foreign remittances to increase significantly, but that has not materialised as hoped. While foreign job departures increased by three times, remittances increased only marginally,” he said.
He also stated that tourism earnings had not increased in proportion to visitor arrivals. “We received the number of tourists we expected, but the foreign exchange received from visitors has been declining and the export sector requires further expansion. Thus, we did not get the expected income in terms of dollars,” he added.
Prof. Jayawickreme also criticised the handling of exchange rate volatility, claiming that official comments, especially regarding uncertainty in the economy, had contributed to financial market uncertainty.
“Thus, in a nutshell, yes, we had repercussions from the Middle East conflict and higher fuel prices, but there are also reasons we created within our own economy. Vehicle importation, high non-food consumer imports, weak remittances, and tourism underperformance all contributed to the situation,” he added.
He maintained that vehicle imports had remained one of the biggest concerns due to the sustained rise in import expenditure throughout the year. He also shared concerns about weak Foreign Direct Investment (FDI) inflows and the broader economic environment.