Sri Lanka’s streets may soon see new wheels, but they will come at a price, quite literally. As the Government readies plans to ease the vehicle import ban, Sri Lankan buyers could face record-high prices due to increased taxes and pent-up demand. Hence, amid the excitement, key questions remain: does the country have a sustainable plan in place, and is it truly ready for the economic and social effects of this decision?
Sri Lanka’s vehicle import ban, initially implemented during the Covid-19 pandemic, was a drastic response to preserve foreign exchange reserves and stabilise the economy. However, with the ban’s gradual easing planned in stages, the island’s vehicle market is set to see the arrival of new vehicles – a move that may not be as favourable as anticipated by the public.
Three-phase approach
Cabinet Spokesperson Minister Vijitha Herath confirmed that the Government would follow a phased approach in reintroducing imports, dividing the policy into three key stages. According to Herath, the process will begin with public transport and non-motorised goods, followed by commercial vehicles in December and private motor vehicles set for February 2025. While these stages provide a general framework, a precise timeline remains absent.
“The Finance Ministry will announce these specifications in the coming days,” Herath stated.
However, for the millions who rely on private transport, particularly in rural areas where public transport remains limited, this delay creates uncertainty and increases demand, particularly for motorcycles and small vehicles.
Ambiguity regarding implementation
Speaking to The Sunday Morning Business, Ceylon Motor Traders’ Association (CMTA) Chairman Virann De Zoysa said: “They have an idea to do it in three stages – buses for public transport, then trucks and commercial vehicles, and finally private passenger vehicles. However, no timeline has been given.”
This ambiguity regarding implementation timelines raises concerns about how the market will adjust to sudden supply changes and whether the Government has adequately considered the economic impact.
Despite the public’s enthusiasm for the return of vehicle imports, the costs of acquiring a vehicle will likely be significantly higher than pre-2020 prices. De Zoysa explained to The Sunday Morning Business that the depreciation of the Sri Lankan Rupee by 80% and newly introduced taxes could see prices soar.
“For instance, the smallest vehicle that cost Rs. 3 million in 2019 will now be priced at over Rs. 6.5 million,” he pointed out.
This inflationary spike might come as a challenge for consumers, with demand pent up over three years. With the phased reintroduction, prices are predicted to remain prohibitively high unless supply stabilises and foreign currency reserves improve.
Adding to this is a planned hike in duties on imported vehicles, intended to control demand and limit the outflow of dollars. While this move may stabilise foreign exchange, it places the financial burden on consumers, who may be forced to reconsider purchasing decisions.
“What they indicated was that there would definitely be a revision of the current duty and that it would be increased,” De Zoysa noted.
The reintroduction of vehicle imports is expected to meet an intense demand from Sri Lankans who have been waiting for over three years to purchase vehicles. The current market demand remains high, with used vehicle prices soaring due to limited availability.
Notably lower car ownership
According to vehicle industry expert Charaka Perera, Sri Lanka’s car ownership rate stands at 50 cars per 1,000 people, notably lower than the rates in developed countries. This leaves considerable room for growth, especially in rural areas where private vehicles are essential due to insufficient public transport options.
The Central Bank of Sri Lanka (CBSL) has voiced support, citing improvements in the country’s balance of payments. As of September, Sri Lanka’s gross foreign reserves were approximately $ 6 billion, strengthened by swap arrangements like the one with the People’s Bank of China.
CBSL Governor Dr. Nandalal Weerasinghe recently told the local media that the current balance of payments situation was manageable, allowing for some potential flexibility if desired.
Some economists argue that instead of prioritising vehicle imports, the Government should focus on strengthening the public transport system, which remains underdeveloped, particularly in non-urban areas. Investing in public transport infrastructure could provide a sustainable alternative to the flood of private vehicles anticipated with the import ban relaxation.
Perera stated: “Reliable transport is crucial for areas with infrequent or unreliable bus services, especially in emergencies.”
Increased public transport accessibility could mitigate the need for personal vehicles, reducing the demand for imports and thus the impact on foreign reserves. However, this solution requires considerable investment and a long-term commitment, which may not align with the Government’s immediate goals of increasing revenue through vehicle import taxes.
Precarious forex position
According to a senior official at the Ministry of Finance, who wished to remain anonymous, the country’s foreign exchange reserves are insufficient to support a sudden influx of vehicle imports, with potential outflows estimated to near $ 1 billion. With expenditure soaring and revenue remaining well below expenditure, the decision could put some strain on the reserves, the senior official noted.
While vehicle imports generate substantial tax revenue, the risk of depleting foreign reserves remains high. This risk is particularly significant given Sri Lanka’s commitment to the International Monetary Fund (IMF) to lift import restrictions gradually, highlighting the need for a carefully managed approach to prevent economic shocks.
Aligned with this, the Government is considering a tax equivalent of 3% of the Cost, Insurance, and Freight (CIF) value of newly imported vehicles for dealers who fail to register them within 90 days. This measure is to discourage speculative stockpiling by dealers, who might otherwise import vehicles en masse to meet rising demand.
Need for strategy
The Government’s decision to relax vehicle imports is being welcomed by the public and is an effort to meet public demand and generate revenue. However, without a strategy, this move risks economic disruption.
Speaking to The Sunday Morning Business, University of Colombo (UOC) Department of Economics Professor Priyanga Dunusinghe stressed the need for a gradual and structured reopening of the market, balanced with strategic policies to minimise the impact on Sri Lanka’s external financial position.
He acknowledged the inevitable need to lift the ban but warned of potential economic challenges if the process was mishandled. “If the Government delays this move further, it could increase pressure on external sectors,” he explained. “Opening the market sooner could help mitigate these pressures, but only if done carefully and sustainably.”
He noted that a measured approach was needed, since 2028 would bring new debt repayment obligations beyond the multilateral commitments faced by the country at present. “From 2028 onward, we will face a heavier repayment load, making it crucial to manage our reserves wisely,” Prof. Dunusinghe cautioned.
One recommendation is a quota-based system, allocating a limited number of vehicles annually to prevent a sudden surge in demand and foreign exchange outflows. This would consider different vehicle types, setting separate quotas for cars, vans, and other categories based on necessity and market demands.
“A quota system could help balance the need for imports with the Government’s financial capacity,” he said, adding that the Government could base allocations on a tax or levy system designed to limit excessive personal vehicle imports while still addressing the needs of essential sectors.
Public transport is another factor influencing the proposed strategy. With the country’s public transit system struggling to meet demand, Prof. Dunusinghe noted the importance of prioritising essential or commercial imports over personal vehicle imports. He proposed a model that factored in vehicle necessity and the potential to alleviate pressure on public transportation.
He also advised that the Government implement a well-designed taxation policy as part of the import policy, which could ensure that the reintroduction of vehicle imports remains financially manageable for the country.