Hundred percent margin deposit for LCs hits vehicle importers

By Lalin Fernandopulle

Vehicle importers said that the hundred percent margin deposit for opening a Letter of Credit (LC) is adversely affecting all vehicle importers who have fallen from the frying pan to the fire due to the exorbitantly high vehicle import duty.

They said that it is the small players who are the most affected as they have to pay upfront the value of the vehicle which is a huge burden to them.

“We have called upon the government to reconsider the regulation which is having an adverse impact on the vehicle industry which has been hit by fluctuating duty for the past several years. We need a consistent policy for vehicle imports to bring stability to the industry,” a small-scale vehicle importer said. The Government imposed a 100 percent margin deposit on opening a letter of credit to import cars and vans over concerns that the weak Indian rupee and Japanese Yen could result in higher imports of vehicles.

Policy makers fear an excessive outflow of capital from Sri Lanka due to the increasing value of the US dollar.

The vehicle import duty was increased to ease pressure on the dollar and reduce imports to bridge the budget deficit which has widened as a result of the drop in exports. Export revenue has slumped considerably over the past few months due to the weak import demand from recession hit countries.

Export income dropped by around 4.5 percent and imports by 5.8 percent in the first half this year compared to the corresponding period last year. Despite the trade deficit improving by seven percent compared to last year mainly due to drop in imports, it still surpassed $4.5 billion. The Sri Lankan rupee depreciated from Rs 126 to Rs 136 to the US dollar this year.

The government aims at reducing the budget deficit to four percent of Gross Domestic Product (GDP) by generating a surplus of two percent of GDP in revenue. An official of the Vehicle Importers Association of Lanka (VIAL) said that the 100 percent margin deposit when opening a LC to import vehicles had been there for some time and added that it is not new to the industry.

The Association's Secretary, Keerthi Gunawardena said that unlike in the past where the importer paid a part or a certain component of the value of the vehicle to the bank as a guarantee, importers now have to pay upfront the value of the vehicle. The bank charges an interest at the time of opening a LC under the current regulation which would be passed on to the end user. The price of a vehicle costing Yen 1 million would go up by around Rs. 50,000 to Rs. 60,000.

Gunawardena said that they had forecast the re-imposition of the regulation so that regular importers could take steps to mitigate the impact.

Vehicle importers said that sale of heavy duty vehicles such as trucks had dropped sharply due to the high import duty. They said that sales of hybrid vehicles has not been affected. The price of commercial vehicles has risen due to the duty. Associated Motorways (Pvt) Limited (AMW), Managing Director, Samantha Rajapaksa said that the government imposed a margin deposit on LCs to ease pressure on the dollar and reduce vehicle imports. The vehicle industry is happy as the government will review the regulation in six months. He said that there has not been a major impact on vehicle sales due to the new regulation.

“The vehicle industry needs stable policies to plan for the future. Regulations in the industry are often changed,” Rajapaksa said.

The increase in duty of spare parts, hundred percent cash margin for LCs and increase in duty of vehicles imported on permits are revised from time to time. Central Bank sources said that increasing import duty and a 100 percent margin deposit on LCs have been imposed to reduce vehicle imports and bridge the budget deficit.