Fitch: Government policy to slow small car sales
Fitch Ratings expects growth in sales of automobiles, mostly small
cars, in Sri Lanka to slow in 2016 due to higher taxes and a weaker
currency, which will increase prices of vehicles in the local currency.
Tighter regulation on vehicle loans will also impact affordability for
buyers.
Registrations of new vehicles increased 375% in the first ten months
of 2015 compared with registrations for the full year of 2014, data from
JB Securities (Pvt) Limited, which tracks Sri Lanka's motor vehicle
registrations, showed. Around 93% of the new registrations were for
small cars.
The sharp increase followed a reduction in total import taxes on
small cars (with standard engine capacities of less than 1000cc) in
February 2015 to 155% of cost, insurance and freight value (CIF), from
173%. A wage increase for civil servants and lower fuel prices in 2015
also spurred demand for small cars, which are more fuel-efficient and
affordable.
In recent months, however, the Sri Lankan rupee has depreciated (it
fell 5% in September 2015), raising the local currency prices of cars,
which are all imported.
In September 2015 the Central Bank of Sri Lanka imposed a cap on the
loan-to-value ratio for vehicle loans at 70%.
The limit is due to come into effect in December 2015, which will
constrain affordability.
The government in its budget for 2016 proposed to increase taxes on
vehicles, including small cars, which will increase to around 173% of
CIF. In 2012, small car registrations more than halved after the
government increased taxes on small cars to 200% from 120% of CIF. New
regulation introduced in
October 2015 aimed at arresting under invoicing of used vehicles will
change the valuation methodadopted for taxation of used cars, but will
not impact new car importers.
Over the longer term, the government's vehicle policies are likely to
be shaped by the outflow of foreign exchange and traffic congestion. Sri
Lanka's international reserves fell to USD 6.5 bn at end August 2015
from USD 8.2 bn at end 2014.
The country's vehicle imports in the first eight months of 2015
increased 90% from a year earlier to USD 905 m. Vehicle imports
accounted for 7.2% of total imports, up from 4.6% in 2014.
Traffic congestion in the Western Province, where the majority of
vehicles are registered, is likely to increase further and experts
expect the average commuting speed in Colombo, which is currently 12 km
per hour, to halve by 2020, highlighting the need for proper traffic
planning. |