Sri Lanka’s automotive landscape is undergoing significant transformations due to recent policy changes in vehicle imports and leasing regulations. These developments present both challenges and opportunities for consumers, importers, and the broader economy.
Vehicle Importers’ Association of Sri Lanka (VIASL) President Prasad Manage stated that Sri Lankans should not fear that importation of vehicles may be halted, but should instead exercise patience and await the efforts of the importers to bring down vehicles.
The latest policy adjustments are aimed at regulating vehicle imports, while also controlling foreign exchange reserves, stabilising the rupee, and ensuring sustainable economic growth. However, the effects on affordability, consumer behaviour, and the overall automotive market remain subjects of debate.
Return of vehicle imports
Following a nearly four-year ban on vehicle imports due to economic constraints, Sri Lanka has now partially reopened imports, allowing vehicles to enter the market under regulated conditions. This decision comes at a time when the country is gradually recovering from an economic crisis, with the demand for personal and commercial vehicles on the rise.
However, the new import framework introduces several restrictions, such as stricter Loan-to-Value (LTV) ratios, registration deadlines, and tax compliance measures. These regulations aim to ensure that vehicle imports do not cause unnecessary strain on foreign reserves, while still meeting domestic demand.
Leasing facilities and LTV ratio
The Government’s new regulations have set the LTV ratio for vehicle financing at 50%. This stipulates that consumers must provide half of the vehicle’s value as a down payment, with the remainder financed through leasing.
Manage acknowledged that this requirement could dampen vehicle demand, due to the substantial upfront cost. “When a person gets a lease at a higher rate, they will have to pay a bigger amount, which might be burdensome,” he explained.
Despite this, he clarified that vehicle prices were unlikely to decrease soon. “The duty structure remains unchanged and the rupee continues to devalue. These factors will keep vehicle prices high,” he said.
For many middle-income consumers, the higher upfront cost creates a significant financial hurdle. Those who previously relied on full or high-percentage financing will now need to either delay their purchases or seek alternative funding sources.
Interest rates and affordability
On a positive note, interest rates on vehicle loans have seen a significant decline compared to two years ago. Banks now offer rates between 10% and 11%, while finance companies offer rates around 13-14%. This reduction makes vehicle financing more accessible to a broader segment of the population.
However, affordability remains a pressing concern as high taxes on vehicles persist, and while the second-hand market has seen a price drop of 20-25%, new vehicles remain expensive, posing a challenge for consumers aspiring to own new vehicles.
Additionally, some prospective buyers fear that vehicle imports might be halted again, prompting rushed purchasing decisions at inflated prices.
Impact of import regulations
The Government has introduced several measures to regulate vehicle imports, including a mandate to register imported vehicles within three months. Manage acknowledged the rationale behind these rules, emphasising the need to prevent over-importation, which could negatively impact the economy.
He identified two primary concerns with the current regulations; firstly, the requirement to specify the exact date of manufacture which is deemed impractical. He suggested that using the date of registration would be more feasible.
Second, he criticised the three-month registration rule. The stipulation that importers must register vehicles within three months of arrival could lead to logistical challenges, especially if there were delays in the import process, he suggested. Furthermore, Manage claimed that the matter would be raised before the Finance Ministry, seeking a solution soon.
These measures are designed to prevent speculation and hoarding within the market, ensuring that vehicles are available for immediate use rather than stored as investments. However, importers argue that the rapid registration requirement might lead to inefficiencies and possible financial losses.
Direct imports and leasing
Consumers have the option to directly import vehicles under leasing facilities. However, Manage clarified that the importer must possess a Taxpayer Identification Number (TIN) and was limited to importing one vehicle per year.
He explained that in the event of leasing, the problem did not exacerbate. In such cases, the vehicle is registered under the importer’s name, but the leasing company retains absolute ownership until the lease is fully settled.
This move is aimed at preventing large-scale vehicle imports by individual traders who might seek to exploit the system. The requirement for a TIN also ensures greater tax compliance, contributing to Government revenue and discouraging tax evasion.
The second-hand vehicle market
The secondary vehicle market remains an important factor in Sri Lanka’s automotive industry. With high taxes on new vehicle imports and limited purchasing power among consumers, second-hand vehicle sales have remained strong.
However, with the import ban being lifted, prices in the second-hand market have started to decline. Some consumers who bought used vehicles at inflated prices during the import restrictions are now facing depreciation losses. Those considering second-hand purchases may find better deals in the coming months, especially as newly imported vehicles enter the market.
Govt.’s allocation for vehicle imports
While the new regulations present challenges, Manage remained optimistic about the long-term benefits, noting that the economy had changed and there was a need to adapt to new hurdles. He estimated that the Government’s allocation of $ 1.2 billion for vehicle imports could allow for around 40,000 units, which he believed was sufficient for the Sri Lankan market for one year.
However, whether this quota will be enough to meet demand remains uncertain. Some industry analysts argue that commercial vehicle imports should be prioritised to support economic activities, such as logistics, tourism, and public transportation.
Challenges in implementing the policy include foreign exchange management, as Sri Lanka’s foreign reserves must sustain vehicle imports in the long term while ensuring economic stability. Another major concern is inflation and the cost of living; with consumers already struggling, vehicle ownership may become increasingly difficult, necessitating relief measures from policymakers.
Moreover, importers must adjust to new documentation and taxation policies, which can lead to delays and increased costs in clearing vehicles from ports.
Attempts made by The Sunday Morning to contact the Ministry of Finance for comment proved futile.
Looking ahead
The future of Sri Lanka’s vehicle import policy will depend on multiple factors, including the country’s economic trajectory, global automotive trends, and Government policy adjustments. While the lifting of the ban is a positive step, the new regulations add complexity to an already challenging market.
As global trends shift towards electric and hybrid vehicles, Sri Lanka may need to refine its policies to encourage sustainable vehicle imports. Incentives for hybrid and electric vehicles, better leasing options, and streamlined taxation policies could further enhance accessibility and affordability for consumers.
Sri Lanka’s vehicle import policy is at a crossroads, balancing the need to protect the economy with the demand for affordable and accessible vehicles. As the first batch of vehicles under the new regulations arrives in the country later this month, stakeholders will be closely watching how these policies shape the future of the automotive market.
Whether the new regulations succeed in stabilising the market while maintaining consumer affordability remains to be seen. The coming months will be crucial in determining the long-term viability of Sri Lanka’s evolving vehicle import policy.