ECONOMYNEXT – Import duties on completed automobiles delivered to Sri Lanka, apparently as a part of a stability of funds measure, has triggered fears of an enlargement of a model new hire searching for enterprise sector and tax losses, although its extent is unclear as but.
Sri Lanka imposed a 30 p.c tax on automobiles this 12 months over fears that automotive imports could result in lack of reserves or damage the trade charge or international reserves.
It isn’t identified why macro-economists imagine automotive imports ought to damage the trade charge greater than another kind of import, however such Mercantilist doctrines have pushed Sri Lanka’s coverage for a lot of many years, with oil and gold additionally being targets of such beliefs at totally different occasions, analysts have identified.
“The introduction of an import obligation will assist average the affect on the trade charge,” in keeping with paperwork launched on coverage discussions with the Worldwide Financial Fund.
Sri Lanka now has numerous sectors the place home producers are promoting items at excessive costs below cowl of import duties gauging the general public, arbitraging the tax distinction as earnings.
Autos had been earlier taxed by way of worth added and excise taxes, that are impartial between imports and home manufacturing, and don’t contain arbitraged tax losses to the state, which individuals successfully pay by way of greater than world costs.
“Is there some import substitution? I can’t reply that,” IMF’s outgoing Senior Mission Chief for Sri Lanka Peter Breuer stated in a current press briefing in response to a query on whether or not home meeting would improve after import duties, and whether or not a ‘tax expenditure’ assertion could be printed on arbitraged taxes misplaced to the state.
“I might assume that after 5 years or so of a ban of imported vehicles that there might be some demand for completed vehicles from abroad.
“I do take your level that it’s potential that there could also be some meeting of vehicles domestically.”
Analysts have identified utilizing economics (then referred to as political financial system) as developed by classicals together with David Ricardo, Adam Smith and David Hume that trade charge stress or reserve losses can solely come from cash printed by a note-issue financial institution to chop charges or to refinance credit score.
Unsterilized liquidity from central financial institution swaps with home counter events may result in internet reserve losses if newly issued cash is utilized by banks to re-finance credit score and the cash is redeemed by way of foreign exchange interventions.
Trumpist Mercantilism
The Trumpist 30 p.c obligation to cut back automobile imports (or the commerce deficit), nonetheless is an enchancment on the sooner outright ban on automobile imports.
Sri Lanka’s macroeconomists banned 3,000 imports together with vehicles in 2020 after printing huge quantities of cash to chop charges to focus on potential output. The entire bans additionally didn’t cease both foreign exchange shortages or reserve losses.
Sri Lanka went on an accelerated ‘de-liberalization’ with import duties and import cesses, following a landmark gazette issued in November 2024 designed by macroeconomists who had been operating the Treasury, for ‘stability of funds’ functions in one other case of ‘financial dominance of fiscal coverage’.
The sweeping commerce restrictions got here after cash printed to mis-targeted charges in 2004 (largely gilt yields) triggered foreign exchange shortages and reserve losses amid a robust non-public credit score restoration.
Paradoxically, the 25-page gazette was signed by then President Chandrika Kumaratunga, who as Finance Minister had initiated sweeping commerce liberalization within the Nineties and began valued added tax, suggested by A S Jayewardene, an LSE educated classical economist.
“…[D]eparting from the earlier liberalization path, the Sri Lankan authorities imposed a brand new import tax on chosen gadgets by the use of a levy (known as a “cess” in Sri Lanka) in gentle of a decline in international reserves,” a report by the US Commerce Consultant famous someday after the gazette.
“The federal government additionally hopes this new tax will defend home agriculture and business. Regardless of an enchancment within the international reserve place, the federal government has not revoked the tax.”
“Along with import tariffs, the EDB levy successfully will increase fees on most completed good imports to over 48 p.c of the import worth, with the best fees on items topic to particular duties.”
“The US Embassy has acquired complaints from affected U.S. exporters and US firms in Sri Lanka relating to the brand new “prohibitive” tariff regime.”
Barely two years earlier the US Commerce report had famous as follows.
“Sri Lanka has some of the liberal commerce regimes in South Asia. Sri Lanka’s fundamental commerce coverage instrument is the import tariff.
“A number of years in the past, Sri Lanka got down to have a simplified clear two band tariff system.
“The nation has deviated from this coverage not too long ago and the tariff construction is now topic to an rising variety of modifications. At the moment, there are 6 tariff bands of two.5percent, 5 p.c,10 p.c, 15 p.c, 20 p.c and 25 p.c.”
In subsequent years, Cess and different taxes rose dramatically in Sri Lanka with politically linked hire searching for companies who weren’t export aggressive pushing for higher safety by way of quite a lot of border taxes, together with in primary cereals, tinned fish and maize regardless of malnutrition of younger youngsters.
Below Donald Trump the US itself is now imposing wildcat import duties particularly in opposition to China in a Sri Lanka-style transfer to cut back imports from nations the place the US has a commerce deficit or nations that cost excessive import duties. (Colombo/Mar15/2025)
