With the vehicle import relaxation underway, concerns remain about managing net asset outflows and foreign reserves amidst the pent-up demand that has accumulated over five years. In order to tackle this, both the Government and the Central Bank of Sri Lanka (CBSL) have addressed the need to reintroduce vehicle imports with strict controls in place to prevent a sudden influx.
Sri Lanka’s gross official reserves stood at over $ 6 billion at the end of 2024, compared to $ 4.4 billion at the end of 2023. Reserves are projected to reach $ 15.1 billion by 2028 and $ 7.1 billion in 2025 as per the International Monetary Fund (IMF), with six months of import coverage when the country begins repaying external debt.
In this context, CBSL Governor Nandalal Weerasinghe has announced that the bank is evaluating how much could be spent on vehicle imports without harming reserves. The CBSL estimates that spending $ 1 billion on vehicle imports will not hinder reserve growth.
The Governor has also noted that Sri Lanka could build reserves and repay debt even if vehicle imports reached $ 1.5 billion per year, in reference to the CBSL’s projection in 2024 that relaxing commercial vehicle imports would result in forex needs of about $ 500 million, with private vehicle imports requiring another $ 1 billion per year.
Impact on reserves
Speaking to The Sunday Morning, Frontier Research Head of Macroeconomic Advisory Chayu Damsinghe addressed reserve concerns, noting that after two years of surpluses in the current account, those dynamics may change with the lifting of the ban.
“Over the last two years and the second half of 2022, Sri Lanka has recorded surpluses in its external account. Essentially, excluding debt payment-related factors, the country has been earning more dollars than it has been spending over the past 30 months, with this surplus being in the range of $ 2-3 billion.
“What this means for imports is that with a potential outflow of $ 1.5 billion due to vehicle imports, Sri Lanka might be earning fewer dollars than before,” he stated.
However, Damsinghe explained that as this was not the only change occurring in the economy, with sectors such as tourism growing, remittances increasing, and other imports also rising, leading to additional outflows, the overall impact was not entirely straightforward.
Accordingly, compared to where the economy stood earlier in 2024, with a current account surplus of nearly $ 3 billion, the country will no longer be in as strong a surplus position.
He explained that during periods of deficit, it was crucial to have inflows to bridge the gap, as a prolonged negative balance was not sustainable. These inflows can come in the form of loan inflows, investment inflows, or other financial mechanisms.
Damsinghe added that a small deficit may be manageable, whereas a significant deficit could require adjustments elsewhere in the economy.
Further, Sri Lanka has reportedly spent $ 1.9 billion on vehicle imports in 2018 and $ 1.4 billion in 2019. With the total Government external debt as at the end of September 2024 amounting to $ 38.3 billion, the country’s fiscal obligations remain a major concern amidst the allowing of imports.
However, according to statements made by the CBSL Governor in this regard, it was confirmed that payments of Rs. 3-4 billion annually over the next 10 years would be manageable if foreign reserves reached Rs. 7 billion by the end of this year, following the completion of the debt restructuring process.
Current account surplus and imports
Under maintaining external sector stability, the CBSL’s Policy Agenda for 2025 and Beyond outlines that although Sri Lanka has maintained a current account surplus for two consecutive years in 2023 and 2024, with increasing economic activity, the external current account is expected to show a deficit in 2025.
It highlights that it is crucial for Sri Lanka to sustain the external current account at manageable levels in the medium term, given that a gradual rise in import expenditure is anticipated, especially with the Government’s planned relaxation of vehicle import restrictions this year.
Additionally, the external current account is to be supported by inflows from the services trade and workers’ remittances, which are projected to reach record-high levels.
Commenting further on the impact on the external current account, Damsinghe explained that imports did not directly affect reserves in any case, as various inflows into the economy such as exports, tourism, remittances, and capital flows along with outflows such as imports, migration, and external remittances generally took place within the banking sector.
He noted that the CBSL could generally act as a player in that market, either by buying dollars to build up reserves or selling dollars it already held, or in specific cases when the Government was borrowing or making repayments, those could directly go through the CBSL and Treasury system, bypassing the market.
Given this, he added that vehicle imports had not necessarily had a direct impact on reserves, since the Government was not responsible for importing vehicles and importers would use a portion of the available dollars in the market.
Furthermore, Damsinghe pointed out that if this reduced the amount of dollars available for the CBSL to purchase, it could slow down the increasing of reserves, and if the bank had other obligations, such as debt payments, this would contribute to outflows.
“If the amount of new reserves the CBSL can purchase from the market is lower than the debt outflows it must meet, reserves may decline. However, this is not a direct consequence of vehicle imports, but rather, it results from fewer dollars remaining after vehicle imports for the bank to purchase.
“Nevertheless, the bank does not have to buy these dollars, as it can also obtain dollars separately through loan inflows or project financing. Therefore, vehicle imports may not have a direct impact on reserves,” he said.
Impact on public sentiment and mobility
Damsinghe stated that the most direct and immediate impact on the public would be in terms of sentiment, with Sri Lanka not having allowed vehicle imports over the past five years, in addition to fundamental factors such as inflows and outflows.
With this leading to newer vehicles on the road, it would give people a sense of better assets and a renewed sense of upward mobility, he noted, with a dynamism resulting from simply seeing new vehicles on the road.
“However, on the flip side, more vehicles lead to increased traffic jams, which should also be accounted for,” he said.
According to Damsinghe, these are likely to be the most immediate impacts, rather than the more technical economic effects, which might take months, quarters, or even years to fully materialise.
He noted that he did not believe there was a strong need for an elaborate systematic structure specifically for vehicle imports. In general, if vehicle imports resume and Sri Lanka cannot manage the associated costs, the currency will gradually depreciate to a level where vehicles become too expensive, naturally leading to reduced demand.
“I am not particularly convinced that the Government needs to establish specific rigid structures for a specific product such as vehicles. Vehicles are generally consumed by the top 10% of Sri Lanka’s population and are subject to high taxes, which function as a form of wealth tax,” he noted.
Since vehicles directly impact only a small section of the population, the overall economic impact may not be a major concern. However, the fact that imports have resumed after a long period suggests that a structural shift is taking place, which is important.
Demand may gradually decline
Speaking to The Sunday Morning, Vehicle Importers’ Association of Sri Lanka (VIASL) President Prasad Manage addressed market reaction possibilities, adding that it was difficult to determine the precise nature of the demand for vehicles at present. However, according to Manage, despite the five-year gap in imports, it is likely that total imports will not exceed 10,000-20,000 vehicles.
“In the first two to three months, demand will be massive. However, it will gradually decline due to the duty structure and high prices,” he said.
Addressing regulatory concerns, Manage added that there were more than enough authorised importers in the country and emphasised the importance of purchasing vehicles through reputable importers who issued proper warranties to avoid irregularities. Otherwise, customers may face complications due to unauthorised transactions.
Commenting on the need for a structured system to regulate vehicle imports, he noted that such a system was likely, with the Government working to ensure that importers met the necessary criteria. He further highlighted the importance of opening up the import market at this time.
“What would have happened to the second-hand market if imports were not allowed? We need to look at this positively. With the opening of imports, the rise in second-hand market prices has been gradually curbed.
“If imports had been delayed until next year, it is difficult to imagine what would have happened to the second-hand vehicle market. Therefore, this will positively impact the economy. Despite high import prices, it will also introduce a certain level of affordability to the vehicle market,” Manage stated.
Impact on public transport
The recent extraordinary gazette notification issued regarding imports poses several restrictions, such as non-registered importers being allowed to import only one vehicle per year. Exceeding the approved import limit by 25% within six months up to December results in a three-year import ban and violating imports must be re-exported at the importer’s expense within 90 days.
With imports taking place in stages, the import of over-25-seater buses, 10-to-16-seater passenger transport vans, double cabs, and lorries are permitted at present, with implications on public sector transport expansion.
Commenting on public transport imports, University of Colombo (UOC) Professor of Economics Lalithasiri Gunaruwan noted that this need must be carefully assessed through a thorough survey, studying to what extent the existing fleet was utilised, rather than making an ad hoc decision to allow imports simply because dollars were available. If feasible, redeploying the existing fleet with improvements should be addressed.
“At present, the public transport mode share has declined to nearly 40%, down from 60% a decade ago and 80% at the turn of the millennium. This reflects a gradual shift towards private vehicle ownership. While usage may not have decreased in absolute numbers, its share relative to private transport has dwindled,” he said.
He explained that a further decline in the public transport mode share would lead to an increased import bill in terms of dollar outflows and expressed concern regarding the need to liberalise private vehicle imports.
Prof. Gunaruwan further noted that even if there was a shortage of vehicles, the more pressing concern at this stage was avoiding an additional burden on the country’s foreign exchange reserves.
He pointed out that liberalising imports under the intention that import duties would generate tax revenue for the Government was a narrow way of looking at the issue, adding that the private sector or the Government should not be strengthened at the expense of the national account, as this essentially functioned as a transfer payment.
“If the tax is intended to discourage imports, it is understandable, as it helps conserve foreign exchange. However, if the intention is to generate revenue for the Treasury, it comes at the cost of increased dollar outflows,” Prof. Gunaruwan noted.
Meanwhile, the Ministry of Finance was unavailable for comment on the implications for reserves.