WHEN FUEL SUBSIDIES SINK THE RUPEE, WHY INCREASE THE TAX ON VEHICLES?

WHEN PRICES LIE CRISIS FOLLOWS

- By MURTAZA JAFFERJEE, CFA, CHAIRMAN OF THE ADVOCATA INSTITUTE AND CEO OF JB SECURITIES

On 15 May 2026, President Anura Kumara Dissanayake, who also serves as Sri Lanka's finance minister, issued an order under the Customs Ordinance imposing a 50% surcharge on imports classified under HS Code 87.02 (vehicles for the transport of ten or more persons including the driver), HS Code 87.03 (passenger motor vehicles), and HS Code 87.04 (vehicles for the transport of goods). Two-wheelers and three-wheelers have been exempted from the measure.

It is evident that the decision had leaked at least a day or two before it came into effect, as reflected by the unusually high number of letters of credit opened during that period. In financial markets, this would be characterized as front running - a form of market abuse whereby parties act on privileged information before it becomes public. There should be a proper investigation into how this information was leaked and who benefited from it.

One may infer that the President was advised to take such action due to rising pressure on the Sri Lankan rupee, as the foreign exchange market has witnessed an unusually rapid rate of depreciation in recent days.

Exchange rates are determined at the margin. They are influenced not only by those who need to convert currency for immediate transactions, but also by participants acting on expectations of future currency movements, e.g. foreign investors selling out of the GSEC market. During periods of heightened uncertainty and volatility, speculative behavior tends to intensify. Sellers of foreign exchange may delay conversions in anticipation of a weaker rupee, thereby constraining supply, while demand for foreign currency rises as businesses and individuals seek to lock in prevailing exchange rates before further depreciation occurs. These are classic manifestations of "animal spirits" in action, as famously described by John Maynard Keynes.