Removing ban on vehicle imports: Is it a prudent plan?

The highest risk is not the decision to import vehicles but linking the tariff income as a source of funding to pay the proposed salary increases, because if dollar outflow is going to be significant destabilising the existing macroeconomic stability, there is no way to contain vehicle imports as such restriction will reduce the targeted tariff income jeopardising the Government plan to provide money for salary increases without increasing taxes

The Government’s plan to lift the ban on vehicle imports is out. But it is not a prudent plan, perhaps it cannot prevail. Sometimes it might create macroeconomic chaos and uncertainty among the vehicle importing entrepreneurs. Any policy that cannot be sustained or justified in view of  strengthening the macroeconomic environment of the country is usually treated as a bad policy.

A few weeks ago, after the Central Bank Governor Dr. Nandalal Weerasinghe announced that they are planning to lift the passenger vehicle import ban on 1 February 2025, Minister Vijitha Herath reiterated the same idea confirming that the NPP Government would lift the import ban as planned. Thereafter, a few writers, including myself, voiced against the plan. Many writers pointed out that there will be a significant outflow of dollars exceeding $1.6 billion per annum which was the annual import cost (CIF price) payable in dollars prior to the ban of vehicle imports. However, the Government’s argument is that when the ban is lifted, a lot of tariff money arising from vehicle imports can be collected for the Government to provide money for the promised salary increases and to offset the loss of tax revenue by increasing the minimum PAYE tax sealing from Rs. 100,000 to Rs. 200,000 per month.

This question of lifting bans on vehicle imports was asked by a concerned journalist at the press briefing of IMF delegates, held after completing their recent review. The IMF Mission Head answered saying that the lifting of ban on vehicle imports can bring in new revenue to the Government. This sentiment endorses the NPP Government’s plan to remove the vehicle import ban, prematurely.   

Tariff income 

I argued, that the highest risk is not the decision to import vehicles but linking the tariff income as a source of funding to pay the proposed salary increases, because if dollar outflow is going to be significant destabilising the existing macroeconomic stability, there is no way to contain vehicle imports as such restriction will reduce the targeted tariff income jeopardising the Government plan to provide money for salary increases without increasing taxes.  

Interestingly, the CBSL Governor addressed this concern a couple of days ago. His strategy is to reduce unnecessary dollar outflows while increasing tariffs. The choice of policy tool is to increase import tariff in the event if there is a significant dollar outflow occurs. If tariff income is not a concern, in such situations usual policy tools that can be used to contain dollar outflows are called macro-prudential tools. For example, the central bank can increase the targeted interest rate, or it can reduce Loan-to-Value Ratio (LVR), in order to reduce the number of vehicles to be imported containing dollar outflow. Unfortunately, those macro-prudential tools cannot bring in new revenue to the Government, even though the dollar outflow is controlled.

So, the strategy should be to contain unnecessary dollar outflows that could arise from the lifting of vehicle import ban while increasing the tariff income. The governor’s strategy is to increase tariffs, in case significant outflow of foreign exchange takes place, and he said that. It seems that the target is not having a sustainable policy but to collect more revenue even in a bad situation. If the Government is targeting a sustainable revenue from car imports, it is a lunatic decision, one would say.

Additionally, the Government’s plan would create unnecessary chaos immediately after the lifting of the ban because car importers and dealers would have the impression that CBSL Governor would increase “import tariff” any time sooner than later. Their logical move is to open as many LC’s as possible under the prevailing tariff rate, hence, large amounts of dollar outflows would be immediate. Then, as already mentioned, the central bank would increase tariffs to prevent foreign exchange outflows and that itself shows the failure of policy. Therefore, the Government should look for alternative strategies to find funds to pay for the promised salary increases.

(The writer could be reached via email at [email protected])