Challenging times for Sri Lanka’s Motor Vehicle Industry

Black and white photo of a row of Honda Accords

Why has it been challenging?

Both 2019 and 2020 were challenging years for Sri Lanka’s motor vehicle industry due to import restrictions implemented by the Government. With the spread of the COVID-19 pandemic, the government introduced urgent measures to mitigate the pressure on the foreign exchange market, including a temporary suspension of the importation of selected motor vehicles since March 2020. Responding to policy measures, imports of all vehicle categories decelerated in 2020, for the second consecutive year. Both import volume and value declined by more than 50 percent in 2020 and imports of personal motor vehicles recorded a notable slip of 65 percent during the year under concern.

What was the impact on the economy?

Since importation of Motor Vehicles into Sri Lanka takes a significant portion of the total import bill of the country, reduction in motor vehicle imports contributed largely towards narrowing of the trade deficit. Motor vehicle import expenditure accounted for only 3 percent of the total import bill of the country in 2020, which was a decline from 5 percent recorded in 2019. During 2020, the trade deficit contracted notably by around USD 2 Bn and this contraction was significantly contributed by lowered motor vehicle imports. The decline in motor vehicle imports resulted in loss of revenue to the government as excise duty collected on motor vehicles declined by 63 percent in 2020 compared to 2019. In the meantime, luxury tax collected on motor vehicles declined by 13 percent in 2020 on a Y-o-Y basis.

What was the impact on industry, registrations and vehicle population?

The industry players suffered significantly in 2020, with import controls as they did not have enough stocks of vehicles in the market. Thus, prices of almost all vehicles in the country have risen sharply. In addition, the import ban is causing concern for bmore than 100,000 employees working in the industry. Declining of imports resulted in a drop of motor vehicle new registrations. Thus total registrations of 2020, hit the lowest for the last decade and even lower than the registrations recorded in 2009, when the world experienced the global financial crisis. Sri Lanka’s motor vehicle population reached 8.29 Mn as at the end of 2020. However, the growth of motor vehicle population has significantly slowed in 2019 and 2020 compared to previous years. Growth in motor vehicle population was mainly driven by the increase of motorcycles, distantly followed by three-wheelers and motor cars.

What is the current outlook?

In developing a local alternative to the importation of motor vehicles, the government approved the Standard Operating Procedure (SOP) on production, assembly and manufacturing of motor vehicles within the country. Accordingly, Motor cars, electric three-wheelers and motor cycles are expected to be assembled locally, as per newspaper reports. However, very recently a proposal made by the Central Bank of Sri Lanka to the government to allow persons those who can bring foreign exchange abroad to import motor vehicles and pay taxes in USDs.

Saumya Amarasiriwardane

Saumya Amarasiriwardane

Senior Research Associate
Economic Intelligence Unit
The Ceylon Chamber of Commerce

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