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• Aims to curb unnecessary outflow of foreign currency for vehicle imports
• CBSL takes steps to limit LTV ratios for motor vehicles

Policy decisions taken to curb the excessive outflow of foreign exchange through the financing of vehicle imports have proved effective, according to the Department of Trade and Investment Policies.

Speaking to The Sunday Morning Business, Department of Trade and Investment Policies Director General I.J. Abeyratne said that the Government had introduced a 50% Customs Import Duty (CID) surcharge on vehicle imports, while the Central Bank of Sri Lanka (CBSL) had taken steps to limit Loan-to-Value (LTV) ratios for motor vehicles in a bid to discourage the unnecessary outflow of foreign currency. 

She said that subsequent to the introduction of these policy decisions, the department had observed a decrease in vehicle imports.

“More than the surcharge, we believe it is due to the CBSL’s changes to the LTV ratios. With that, vehicle imports have declined,” she said. 

Asked whether steps would be taken to extend the 50% CID surcharge beyond the initial three months, Abeyratne stated that it would have to be a policy decision taken by the Government.

“We originally imposed it only for three months. This extension will depend on a Government policy decision. We have not been informed of any decision so far,” she stated.

The Ministry of Finance, Planning, and Economic Development had, by an order made in terms of the powers vested under Section 10A of the Customs Ordinance (Chapter 235), as amended by Act No.83 of 1988, introduced a temporary 50% surcharge on applicable CID for public transport vehicles designed to carry 10 or more persons; motor cars; station wagons; racing cars; specialised vehicles such as ambulances, prison vans, and hearses; motorhomes; and golf cars, valid for three months and effective from 16 May 2026 onwards.

The tightening of LTV ratios by the CBSL came into effect on 25 May this year. According to a statement released by the CBSL, its Governing Board tightened the maximum LTV ratios applicable to credit facilities granted for motor vehicles by 10 percentage points and also introduced a maximum LTV ratio for credit facilities secured by gold.

The CBSL claimed that these measures had been taken in line with its macroprudential authority to promote prudent lending practices, safeguard the resilience of financial institutions, and mitigate the potential build-up of systemic vulnerabilities.

The bank noted that, in arriving at these decisions, the Governing Board had considered the recent significant growth in credit extended through facilities secured by gold and motor vehicle financing, as well as the potential impact on the financial system if such trends continued at the current pace.

It added that heightened uncertainties stemming from evolving geopolitical and geoeconomic developments had increased volatility in asset prices, including gold, alongside recent exchange rate fluctuations. 

“The temporary increase in the surcharge on vehicle imports and exchange rate movements could temporarily inflate vehicle prices. Such fluctuations may affect collateral valuations and alter the underlying credit risk profiles, while continued rapid credit expansion warrants intervention to prevent a potential build-up of excessive risks within the financial system,” the CBSL noted.

Accordingly, from 25 May, in respect of unregistered vehicles and vehicles used in Sri Lanka for less than one year after first registration, the CBSL set the maximum LTV ratio at 60% for commercial vehicles and 40% for cars, SUVs, vans, three-wheelers, and other vehicles. 

It also introduced a maximum LTV ratio of 70% for credit facilities secured by gold collateral granted by licensed banks and licensed finance companies, including existing facilities renewed on or after the effective date.