The interest rate hike and newly-introduced taxes have affected the vehicle market, with vehicle sales at an all-time low.
The ownership of a motor vehicle appears to be becoming a distant dream for many, as most people who purchased vehicles before the crisis now struggle to honour the leases.
According to Vehicle Importers Association President Sirishantha Gamage, the substantial drop in sales is due to the high lease interest rate.
“Due to the increase in leasing rates, the number of people who buy vehicles have dropped by about 90%. Those who cannot pay the lease and the interest are now doing their best to sell the vehicle and settle the lease. In this way, they will at least make some profit. If not, the leasing company will repossess the vehicle. Another option is to transfer the lease to someone else,” he explained.
Gamage said that prior to the interest rate hike, a majority of vehicles had been bought on lease.
“Previously, more than 70% of vehicles were purchased on a lease basis. Now, not even 2% are bought via the lease route because of the high interest rates. Most are bought via outright payments. If interest rates come down to around 17-18%, then there will be an uptick in those looking to buy cars through leasing companies,” he explained.
He said that only a reduction in interest rates could help the situation. However, given the import duties on car imports and prevailing restrictions, this is unlikely to be a viable option.
“The leasing rates used to be around 13-14%. With the current lease interest rates being about 25-28%, no one is looking to lease vehicles anymore. This is because the banks that make deposits are paying around 25% in interest so they cannot give the lease for a vehicle at the same interest rates – they have to give it at around 27%. There is little the Government can do at this point. There is no point in us even talking to the Government about allowing us to import cars on a minimum scale. Without reducing interest rates there is no point either way because no one will be buying cars,” he stressed.
Import ban for several years?
Gamage added that he believed it would be several years before the import ban on vehicles would be lifted.
“We spoke with the Commissioner General of the Department of Motor Traffic a few weeks ago and he said that they were devising a programme to restart imports because the Government was losing a lot of revenue through the taxes. However, due to the unavailability of foreign exchange, any moves to restart vehicle importation will take time – at least two to three years, I believe.”
Ranjan Peiris, an owner of a car dealership, confirmed that people were unable to pay back the new lease agreements.
“There are no imports, therefore no sales. There are only local sales within the country and these sales are very poor. People’s buying habits are slowing. Issues with the leases also pose a barrier for customers to buy vehicles. The interest rates are so high that people are unable to buy a car at those rates and continue to pay. Lease rentals are very high because of the interest rates,” he said.
Leasing companies in rough waters
He pointed out that leasing companies were also facing difficulties as they had to pay interest deposit holders.
“For those who can’t afford to pay, the leasing companies will give some time because they also know the situation. The problem is that the companies, in turn, are also paying high interest rates to deposit holders. I’m not trying to safeguard them – this is the true story in the country. Customers will then have to negotiate with the leasing companies on the lease period so that it is affordable to them or have the vehicle repossessed.”
Peiris noted that owners of newly-leased vehicles who wanted to settle early were getting an unfair deal as they had to pay the full lease and interest.
“A lot of people are going abroad now and are selling their vehicles for cheaper prices than what is on the market. This is because they usually have deadlines to go abroad and need to sell the vehicle quickly, so they drop the price. Here too there is a problem with the lease agreements. If it is a situation where a person has bought a car on a four-year lease but has to settle the lease and sell the car after one year, he still has to pay the full four-year lease, including the interest, which amounts to more than the car itself. This is unreasonable. In fact, we mentioned this to former Governor of the Central Bank of Sri Lanka Indrajit Coomaraswamy,” he said.
Other goods take precedence
Meanwhile, Economist and University of Colombo Department of Economics Lecturer Umesh Moramudali said that there were other goods which needed to be prioritised over vehicles for importation.
“I don’t see any potential of lifting the import ban any time soon because we are still on a very tight budget and we have to build up our reserves. As such, the moment we open up vehicle imports, it will negatively affect the balance of payments. I don’t think we are in a position to remove the ban on vehicle imports at the moment. Before lifting the vehicle import ban, there are many other import restrictions that need to be lifted, such as on different raw materials and electronic items. There are more than 1,000 items that come under the temporarily suspended list. These items should be the priority, not vehicles. Vehicles should be one of the last items.”
Moramudali revealed that new taxes would also add to the burden on vehicle lease holders.
“In addition to the interest rate hike, now we also have taxes that will affect lease agreements. The vehicle loan interest has increased while the net salaries of people who have bought vehicles have decreased because of the tax increases. Therefore, they are struggling to pay the vehicle lease.”
Renegotiation of the lease terms was the main solution for customers to retain their vehicle while making tax and lease payments, he explained.
“One way to deal with this is to extend the repayment period of the vehicle lease so that the loan instalment either remains the same or is reduced. This is kind of a private debt restructuring so that the debt burden on the individual is reduced, allowing them to keep the vehicle while making tax as well lease payments.”