Sri Lanka’s decision to lift the vehicle import ban in early 2025 under the new NPP government was widely presented as a pragmatic fiscal move a fast way to raise revenue without imposing politically sensitive direct taxes.
While the policy undeniably delivered a short-term windfall, a closer examination suggests the strategy may have shifted economic risk rather than resolved it, raising questions about sustainability, equity, and long-term macroeconomic management.
The government entered 2025 under intense pressure to meet IMF revenue targets, stabilize public finances, and restore economic normalcy after years of crisis.
Vehicle imports offered a tempting solution: high excise duties, import tariffs, VAT, and para-tariffs ensured that every dollar spent on vehicles yielded significant rupee revenue.
Within months, tax collections from vehicle imports surged to unprecedented levels, helping authorities exceed revenue benchmarks and improve headline fiscal indicators.
However, this approach relied on one-off demand rather than recurring economic activity. Pent-up demand from nearly five years of suppressed imports created an artificial boom, pulling future consumption into a narrow time window.
By the second half of 2025, registration data clearly showed the momentum fading a predictable outcome once early buyers exited the market and affordability constraints re-emerged.
The Central Bank’s response highlighted the underlying fragility of the strategy. As foreign exchange demand surged, authorities moved swiftly to tighten lending standards, notably by reducing loan-to-value (LTV) ratios and maintaining high interest rates on vehicle financing.
These actions, while necessary to protect reserves, effectively throttled demand, causing sales to slow sharply across SUVs, hybrids, and electric vehicles by late 2025. The result was a policy contradiction: imports were opened to raise revenue, only to be constrained months later to protect macroeconomic stability.
From a foreign exchange perspective, the risks are more pronounced. Vehicle imports are consumption-oriented and generate no direct export earnings. Every dollar spent represents a permanent outflow, unlike capital goods that expand productive capacity.
While tax revenue boosted rupee inflows to the Treasury, it did little to strengthen the external account. Critics argue that the policy effectively monetized foreign reserves converting scarce dollars into temporary fiscal relief.
Social equity concerns have also emerged. Vehicle taxes are highly regressive in effect: only higher-income households or businesses can afford new or imported vehicles, yet the macroeconomic consequences tighter credit, higher interest rates, and potential currency pressure are borne by the broader population.
Meanwhile, public transport investment and domestic vehicle assembly received comparatively limited policy attention.
Looking ahead to 2026, the limits of this strategy are becoming clearer. With pent-up demand largely exhausted, revenue from vehicle imports is expected to decline sharply.
Without structural tax reforms, export growth, or productivity-enhancing investment, the fiscal gap could re-open, forcing the government back to politically difficult choices.
In hindsight, lifting the vehicle import ban may have been a useful stopgap, but not a substitute for long-term economic reform. The experience underscores a familiar lesson in Sri Lanka’s economic history: short-term fixes can buy time, but they rarely buy stability.
