Removing the vehicle import ban: is it a prudent plan?

The highest risk is not the decision to import vehicles, but the tying of customs revenue as a source of financing to pay for the proposed wage increases, because if the outflow of dollars is to be significant and destabilize stability existing macroeconomic, there is no way to contain vehicle imports. as such a restriction will reduce targeted tariff revenue, undermining the government’s plan to provide money for wage increases without raising taxes.

The government’s plan to lift the ban on vehicle imports has been revealed. But this is not a prudent plan and it may not prevail. At times, this can create macroeconomic chaos and uncertainty among vehicle import entrepreneurs. Any policy that cannot be sustained or justified with a view to strengthening the macroeconomic environment of the country is generally considered bad policy.

A few weeks ago, after Central Bank Governor Dr. Nandalal Weerasinghe announced plans to lift the ban on import of passenger vehicles on February 1, 2025, Minister Vijitha Herath reiterated the same idea , confirming that the NPP government would lift the import ban as planned. . Subsequently, a few writers, including myself, spoke out against this project. Many authors pointed out that there would be a significant outflow of dollars exceeding $1.6 billion per year, which was the annual cost of imports (CIF price) payable in dollars before the ban on vehicle imports. However, the government’s argument is that when the ban is lifted, a large part of the customs duties from vehicle imports can be collected so that the government can provide money for promised wage increases and to compensate the loss of tax revenue by increasing the minimum tax on PAYE. sealing from Rs. 100,000 to Rs. 200,000 per month.

This question of lifting bans on vehicle imports was raised by a concerned journalist during the IMF delegates’ press briefing, held following their recent review. The IMF mission chief responded by saying that lifting the ban on vehicle imports can bring new revenue to the government. This sentiment supports the NPP government’s plan to prematurely lift the vehicle import ban.

Tariff revenue

I have argued that the highest risk is not the decision to import vehicles, but tying customs revenue to a funding source to pay for proposed wage increases, because if dollar outflows must be significant and destabilize existing macroeconomic stability, there is no way to limit vehicle imports, as such a restriction would reduce targeted tariff revenues, undermining the government’s plan to provide money for wage increases without increasing THE taxes.

Interestingly, the CBSL governor addressed this concern a few days ago. Its strategy is to reduce unnecessary outflows of dollars while increasing customs duties. The choice of political tool consists of increasing import duties in the event of a significant outflow of dollars. If customs revenue is not an issue, in such situations the usual policy tools that can be used to contain dollar outflows are called macroprudential tools. For example, the central bank can increase the targeted interest rate or reduce the loan-to-value ratio (LVR), in order to reduce the number of vehicles to be imported containing dollar outflows. Unfortunately, these macroprudential tools cannot bring new revenue to the government, even if dollar outflows are controlled.

The strategy should therefore be to contain unnecessary outflows of dollars that could result from lifting the ban on vehicle imports while increasing customs revenue. The governor’s strategy is to increase tariffs, in case significant outflows of currency take place, and that is what he has said. It seems that the goal is not to have a sustainable policy but to collect more revenue even in a bad situation. If the government is aiming for sustainable revenue from car imports, this is a foolish move, one might say.

Moreover, the government’s plan would create unnecessary chaos immediately after the ban is lifted as importers and car dealers would be under the impression that the CBSL governor would increase ‘import tariffs’ at any time. Their logical decision is to open as many letters of credit as possible at the prevailing tariff rate, which would result in massive outflows of dollars immediately. Then, as already mentioned, the central bank would increase tariffs to prevent foreign currency outflows, which in itself shows the failure of its policy. The government should therefore look for alternative strategies to find the funds needed to finance the promised salary increases.

(The author can be contacted by email at (email protected))