It is likely that the long-awaited removal of import restrictions on vehicle imports effective from yesterday (1) will lead to a stampede to import the latest models. The immediate impact of this rush could potentially cause a dent in precious foreign reserves, which have already seen a not-so-insignificant decline at the end of last December, but it appears that the monetary authorities have taken adequate mitigatory measures.
Lifting of vehicle import restrictions has been a decision long in the making, going back to the previous Wickremesinghe administration, which too promised to lift the restrictions round about the same time this year. That the decision has come about based on guidance provided by the Central Bank is reassuring, given the absence of such consultation in the past. Therefore, it would be safe to assume that the bank has rolled out mitigatory measures to cushion the impact on forex reserves. It is understood that one such measure has been the imposition of higher taxes so that only the most affluent could join the vehicle import queue at this juncture.
The taxation, while heavily criticised by the other not-so-affluent sections of society whose dream of owning a vehicle is gradually diminishing yet again, is however a necessary barrier in order to keep things in check on the monetary front as well as to mitigate the impact on the second-hand vehicle market. It has been reported that almost 70% of vehicle sales occur through a financial intermediary such as a bank or finance company in the form of a lease or loan.
Owing to the three-year-long import ban, prices of second-hand vehicles have gone through the roof, and it is at these highly-inflated prices that leases and loans have been arranged. A sudden drastic drop in prices would have resulted in the financial intermediaries facing a crisis of serious proportions owing to the prospect of mass default. Even if the assets were to be seized, their market value would be far lower than the original value, causing a huge loss. Therefore the decision, though costly in political terms, may well have saved the day for the financial sector.
Therefore, it is commendable that the monetary authorities have taken the necessary precautions to safeguard the interests of the financial institutions as well as the greater concern – that being the sustainability of the entire banking system. However, there is no foregoing the fact that these measures come at a heavy political cost to the regime in office as its promise of cheaper, more affordable vehicles is now effectively a non-starter. While the regime will have no choice but to take the flak for a broken promise, the fact that it is doing so – at least in this instance – for the greater good, is commendable.
Tax revenue derived from vehicle imports have traditionally been a significant source of income to the exchequer as the tax basket for imports includes a gamut of taxes in the form of Customs duty, excise duty, cess, VAT, etc., yielding a substantial harvest from every import.
Imports are also important for another reason. In today’s global economy, cross-border trade is key to building and sustaining bilateral ties. For the past three years, ever since the onset of the economic crisis in April 2022, it has more or less been a one-way street for some of Sri Lanka’s long-standing trading partners due to import bans. As a result, the trade balance between some of Sri Lanka’s key trading partners like the European Union and the United States has ballooned and it is no secret that these nations have been quietly lobbying to relax import restrictions.
While the rich can now import the vehicle of their choice by paying almost three times the CIF value, those who have been hoping to graduate to four wheels from the current two or three will now have to wait a while longer. But that, in a weird sort of way, could in fact contribute to a healthier economy, as the money they would have locked into a vehicle will now be spent on other goods, boosting consumer spending. Such spending will invariably lead to sustaining the local manufacturing industries, which form the bedrock of the economy.
In fact, it was reported recently that the President has set an ambitious export target of $ 36 billion by 2030 – roughly coinciding with the end of the governing party’s current tenure in office. While this target is also mentioned in the party’s election manifesto, what is unclear as yet is the blueprint to get there. But Budget 2025, which is now undergoing the finishing touches, is expected to outline the path ahead.
The export target seems stiff given that the figure of total exports last year was recorded at $ 16.1 billion, less than half of the intended mark, while the export target for 2025 is $ 18.2 billion, which is half the mark. While it took 77 years for Sri Lanka’s exports to reach $ 16.1 billion, it will indeed be intriguing to see it double in just the next four years. In effect, exports will need to grow by a minimum of 25% annually to reach the target set by the President.
It is noteworthy that while 2024 returned Sri Lanka’s highest export figure, the second highest was back in 2018 when the country recorded $ 15.7 billion in export revenue. In the interim period between 2019 and 2023, Sri Lanka struggled to maintain export momentum, contributing to the economic crisis.
To give the devil his due, the common denominator in both instances – the previous record of $ 15.7 billion in 2018 and the current record of Rs. 16.1 billion in 2024 – was former President Ranil Wickremesinghe, who presided over government until September last year and was Prime Minister in 2018.
It is indeed heartening that the National People’s Power (NPP) has vowed to more than double the record achieved by the Wickremesinghe administration by the end of its current tenure – a challenge as big as they come, but certainly achievable with the right leadership. Towards this end, the relaxation of import controls is of significance because it empowers the leadership to negotiate better terms with its trading partners. Imports must not come at a heavy cost only to the consumer in Sri Lanka, but the country that exports goods to Sri Lanka, be it vehicles, industrial goods, or whatever else, must also reciprocate by opening up markets to Sri Lankan exporters.
In this context, if someone were to question as to what is the connection between removing import restrictions and boosting Sri Lanka’s export volume, the answer is trade leverage. While the Trumps of this world can afford to dictate terms to trading partners owing to the scale of the US economy, little Sri Lanka cannot afford to go down that road, but that does not preclude its leadership from seeking new markets and enhanced access for existing ones by leveraging its import volumes, however small they may seem.
After all, there is no point in increasing exports if there are no markets to sell them in. If Sri Lanka is to more than double its exports from $ 16 billion to $ 36 billion in four years, then it needs to double its export markets in that same period. In an increasingly protectionist world, that is easier said than done. This is why it would profit Sri Lanka to take a page from the Trump textbook and demand equal or greater market access from its trading partners. How it is done is up to the regime, but free trade agreements covering specific goods and services is a good way to go about it.
In an era in which commodities such as rice, eggs, coconuts, and even salt are being imported – unprecedented in the history of this essentially agricultural nation – the leadership has its work cut out. At the end of the day, the role of the Government is to harmonise supply and demand profitably while optimising the use of the country’s abundant resources towards achievement of that goal. While failure is not an option given the state of the economy, it is reassuring that the leadership is aware of the fact that increasing exports is the only way out of the situation.