Secondary Car Market Liberalisation A Small Step
BMI View : With the recent liberalisation of the secondary car market, we expect to see a short-term uptick in motor vehicle registrations after they were heavily battered earlier this year, due to rising interest rates and a falling Sri Lankan rupee. However, we believe more long-term initiatives are necessary to boost sales in the nascent Sri Lankan auto industry.
Prices of 'permits' issued to state workers to buy tax slashed cars have plunged in the secondary market, from about LKR1.5mn (US$11,660) to LKR800,000 (US$6,218), following the effective legalization of a re-sale process. Previously, state workers in Sri Lanka who enjoyed tax slashed cars could only sell them after three years. There is also a new rule where LKR500,000 has to be paid to transfer ownership. The excess supply of permits on the market has resulted in their prices plunging.
BMI believes that this recent change in rules could have been motivated by the desire of the Sri Lankan government to stem revenue leakages. Previously, many non-state workers turned to grey market permits to buy cheaper cars as they could not afford the highly taxed cars available in the market, which in turn deprived the Sri Lankan government of revenue. The transparency in the secondary market together with the new fees has diminished the arbitrage opportunity and we expect motor vehicle registrations to see a short-term increase due to this move.
|Down The Slope|
|Sri Lanka- Motor Vehicle Registrations, Units|
We believe the liberalisation of the secondary car market was hastened by falling vehicle registrations, which have taken a significant dip since March, due to significant headwinds faced by the Sri Lankan consumer. The central bank unexpectedly raised interest rates earlier this year which increased financing costs, and the Sri Lankan rupee has seen a significant devaluation in the last few months vis-à-vis the US dollar. Given that a large part of the Sri Lankan vehicle fleet is imported, a weaker rupee has made imported cars more expensive, thus reducing demand.
To be sure, more steps need to be taken to grow the auto industry in Sri Lanka. In the latest budget, taxes on imported vehicles, such as small cars and trucks, were hiked. This would have the effect of further deteriorating demand for vehicles in the country. Manufacturing incentives, tax exemptions, reliable infrastructure and an educated workforce, are some of the long-term initiatives necessary to boost the nascent local auto industry.