There is a case to increase electric car duties to a more logical 50 percent...

Tariffs above 150 percent should be rationalized to a range between 100 to 150 percent as the market has shifted to hybrids. “Even the luxury cars are hybrids. There is a case to increase electric car duties to a more logical 50 percent,”

Source : http://www.lankabusinessonline.com/expert-view-bigger-problems-underlie-sri-lankas-vehicle-import-bill-says-murtaza/

A rash of credit-fueled vehicle imports is affecting Sri Lanka’s balance of payments at the moment.

But the bigger problem is not addressing fundamental monetary and fiscal policy issues, says Murtaza Jafferjee, the chief executive at Colombo-based JB Securities.

“The primary factor fueling the demand for vehicles is credit. When the larger banks started offering leases at interest rates ranging from nine to ten percent, demand skyrocketed,” he said.

Brand new car registrations rose to 4,990 units in August, up 533 percent from the same month last year. Total vehicle registrations were 50,555 in August, although off an all-time high of 62,221 in July.

Sri Lanka’s central bank spent 800 million dollars during July and August propping up the rupee, before allowing a four percent depreciation last week. Analysts now have to extricate the reasons that led to this unhealthy situation.

“When you take the historical experience of car prices holding their value over time in nominal terms I believe most people view their car as a real asset as they view gold jewellery,” he said.

“It will hold its value and also offers the added advantage of usage occasionally.”

It seems buyers and vehicle dealers play a timing game expecting the treasury to increase taxes. Dealers profit from inventory holding gains and consumers “front load their purchases” in the belief that it will be more expensive if they wait.

Financial institutions who want collateral-based lending options are happy to lend in such a situation.

Three measures are typically taken to discourage vehicle imports, Jafferjee said. High excise duties on vehicles, lowering the loan to value ratio (LTV) and imposing a stamp duty on vehicle financing transactions.

The Indian Ocean island has high excise duties on vehicles, although it has reduced from levels in the past. For hybrids, excise duty is 70 percent for vehicles under 1,000 cc, 80 percent for vehicles under 2,000 cc, and 115 percent for vehicles under 3,000 cc engine capacity.

Small petrol cars have 135 percent duties, and medium-sized petrol cars have 150 percent duties.

“This government has clearly stated in their manifesto that they want an asset owning middle class so there is no logic in depriving a person who saves and buys a vehicle,” he said.

“Issues such as congestion in cities should be addressed through congestion charges rather than duties for it penalises a person in the country side.”

Tariffs above 150 percent should be rationalised to a range between 100 to 150 percent as the market has shifted to hybrids. “Even the luxury cars are hybrids. There is a case to increase electric car duties to a more logical 50 percent,” he said.

A lower loan to value ratio, from the 85-90 percent that firms were giving out loans, could reduce demand, although small car buyers don’t appear to use their full borrowing quota. The central bank on Monday announced reduction of the loan to value ratio to 70 percent.

“Fair enforcement will be a challenge, for vehicles unlike gold are not homogenous. The value is subjective so how is the regulator going to assess whether firms are playing by the rules. Firms can game the rule by declaring a higher value for the underlying collateral,” he said.

Higher stamp duties can also drive up the cost of financing.

Although different countries and communities in the world have different values around importation and use of vehicles, and Sri Lankans are at the high end of the importation spectrum, Jafferjee considers the fundamental problem to be elsewhere.

“Contrary to popular belief, balance of payment crises that this country faces from time to time are not due to vehicle imports but due to a combination of monetary policy and fiscal policy,” he said.

By not allowing a free floating exchange rate and not revising interest rates, Sri Lanka’s central bank promoted an artificial policy of loose credit which, among other repercussions, triggered vehicle imports.

On the irresponsible use of fiscal policies, higher public servant salaries despite huge inefficiencies in the public sector, not collecting enough taxes and under recovery of petroleum taxes drives regular budget deficits that drain savings from productive investments.

“The solution to the BOP crisis is to address fundamental issues rather than meddle with vehicle taxes,” Jafferjee said.