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Sri Lanka vehicle purchases plunge after tax hike, leasing controls

Feb 24, 2016 10:21 AM GMT+0530 | 0 Comment(s)

ECONOMYNEXT - Sri Lanka's new vehicle registrations have plunged around 50 percent to 31,854 units in January 2016 from peaks seen in November 2015 before a budget hiked taxes and leasing restrictions were slapped a month later.

Total vehicles registration fell from 61,864 in November to 54,316 in December and 31,854 units in January, with Indian made Maruti, two wheelers and 3-wheeler bought by relatively less affluent people falling most, an analysis of vehicle registry data by by JB Securities, a Colombo-based brokerage shows.

Three wheeler registrations fell 67 percent to 3,440 units in January from 10,494 units in November and motor bike sales fell 29 percent to 21,287 units from 31,262 units in November.

Min-truck registrations fell 54 percent to 801 units in January from 1,613 units in December.

In the run up to the budget in November 2015 when taxes were expected to be hiked, buyers scrambled to import cars in an 'announcement effect.'

From December the central bank slapped a loan to value ratio of 70 percent on vehicles.

Sri Lanka's rulers have a habit of controlling imports after keeping interest rates low and printing money to finance the budget. The worst trade controls on the poor were placed in the 1970s when almost all Treasury bills issued were bought by the central bank with printed money.
Small car imports rose partly because state workers were given a 10,000 rupee monthly salary increase by the new administration as a vote buying exercise. Some state workers effectively 'securitized' the salary increase by leasing vehicles.

Economic analysts who saw the central bank starting printing money and warned of the impending balance of payments trouble also warned that vehicles imports - a favourite scapegoat - will be curbed.

Though it was widely expected that extra deposits would be required on import letters of credit of credit - a practice which falls foul of obligations to the International Monetary Fund - authorities this time placed a more damaging control on the poor.

JB Securities in a note to clients said motor cycles were bought on lease by self-employed person whose radius of employment was raised.

A three wheeler which cost 500,000 rupees before the budget could be bought for a 50,000 rupee down payment. After the budget it had gone up to 600,000 rupees.

The initial deposit had gone up to 180,000 rupees with the loan to value ratio coming down to 70 percent from 90 percent.

"Will this rule lead to the unintended consequence of depriving economic opportunity to lower income groups due to the lack of mobility?, JB Securities questioned.

Analysts say what is required to fix the balance of payments is not ad hoc administrative measures, but avoid manipulating interest rates and injecting nominal rupee reserves into the commercial banking system through central bank credit.

Banks will now extend credit to other areas. However banks have on their own raised deposit rates by around 200 basis points over the past few months. The Central Bank also hiked policy rates 50 basis points in a belatedly.

However analysts say BOP troubles could persist if the Central Bank continues to buy Treasury bills with printed money and inject excess demand to the economy. (Colombo/Feb23/2016)