By: Staff Writer
October 07, Colombo (LNW): Sri Lanka’s decision to lift a four-year ban on vehicle imports has sparked a surge in demand, delivering a windfall in government revenue while intensifying pressure on the nation’s fragile foreign exchange reserves. The move, implemented in early 2025, aims to revive tax income and stimulate economic activity, but it comes with significant external sector implications.
Official data shows that vehicle imports reached US$918 million during the first eight months of 2025, accounting for nearly 7 percent of total merchandise imports, which stood at US$13.34 billion.
Meanwhile, Letters of Credit (LCs) opened for vehicles exceeded US$1.2 billion by the end of August, signalling potential further outflows of dollars as these commitments are settled in the coming months.
Analysts warn that simultaneous LC settlements could reduce foreign reserves by several hundred million dollars, threatening the Central Bank’s US$7.5 billion reserve accumulation target under the IMF-supported programme.
Despite these pressures, Sri Lanka continues to record strong forex inflows. Exports, remittances, and tourism have contributed nearly US$19 billion in 2025, pushing official reserves up only marginally by US$55 million to US$6.2 billion by August.
Deputy Treasury Secretary Ajith Abeysekera defended the current policy, asserting that the LC volume remains “within expected parameters” and does not threaten external stability, while noting that the IMF’s Colombo mission maintains close oversight.
The fiscal impact has been significant. Vehicle imports generated Rs. 700 billion in customs revenue, an unexpected boost after years of stagnation.
Yet economists caution that while the government earns in rupees, the imports are settled in dollars, creating a mismatch that heightens external vulnerability. “We are earning in rupees but spending in dollars. That mismatch is where the pressure begins,” one analyst noted.
Commercial banks and leasing companies have also seen renewed activity in vehicle financing. Central Bank-imposed loan-to-value (LTV) limits of 50-80 percent have curbed excessive credit growth, but market participants warn of rising liquidity risks as more LCs mature. Consumer interest is particularly strong in hybrid and electric vehicles, reflecting renewed confidence and easier credit access.
Looking ahead, the government projects total vehicle imports in 2025 could reach US$1.5–1.8 billion.
Officials emphasize that coordinated management with the Central Bank ensures this outflow will not compromise reserves. Still, market observers caution that any weakening in foreign inflows from exports or tourism could necessitate tighter monetary controls or even renewed import restrictions.
For now, Sri Lanka navigates a delicate balance: reaping immediate fiscal benefits from vehicle taxes while testing the resilience of its external accounts amid continued global and domestic pressures. The coming months will reveal whether this strategy strengthens public finances or strains foreign reserves.
