Sri Lanka squanders oil gains on cheap cars
ECONOMYNEXT, Sri Lanka has spent all the savings from lower oil prices this year to import cars financed through cheap and easy credit, Central Bank Governor Arjuna Mahendran said.
Foreign exchange savings from international oil prices which fell sharply this year on the back of a rising US dollar had gone back to import motor vehicles, mainly cars and three-wheel taxis.
The governor warned that Sri Lanka’s financial institutions, including banks were heading towards a repetition of the 2012 pawning crisis when borrowers were unable to pay back loans they had obtained by offering gold as collateral.
When gold prices were rising on a daily basis in 2010 and 2011, banks and finance companies accelerated their pawning business but with the price of gold collapsing in 2012 the bubble burst and banks were left with bad loans.
He compared the financing of car imports to the gold pawning bubble.
"All the savings (from cheaper oil) have now unfortunately been frittered away in terms of higher imports, particularly of vehicles.
"I won’t say frittered away, maybe that is too harsh a word, but the point is on the trade side, we have not made a significant benefit on our trade account as envisaged at the beginning of the year because people have been indiscriminately importing vehicles.
"… those imports have been funded very loosely by leasing companies giving 100 percent financing. We thought that was imprudent because the second hand value of those vehicles is a fraction of that 100 percent value of the imported vehicles when they are brought in."
Mahendran said the Central Bank was still bailing out banks and other financial institutions which burnt their fingers during the pawning bubble and was keen to avoid a repetition with the car market and hence the loan to vehicle value was limited to 70 percent.
A prospective buyer will have to put up nearly a third of the value of a vehicle to obtain a loan for the balance.