Lack of protests against vehicle financing restrictions baffles economist

The lack of protests and lawsuits against recently implemented loan-to-value (LTV) ratio for vehicle financing is surprising, since the policy is likely to cause major macroeconomic distortions, according to the head of Colombo-based research house and an equity brokerage.

“We witness regular protest in the city and fundamental rights petitions seem to be the order of the day. But I am surprised as to why this directive has had no public outcry or has not been challenged in the courts,” JB Securities (Pvt) Ltd. Managing Director Murtaza Jafferjee said.

In contrast, plans to vigorously implement the existing traffic rules and to increase fines for the most dangerous offenses drew widespread protests from three-wheeler drivers.

In January, the government implemented the 2017 budget proposal of a 25 percent LTV ratio for 3-wheelers, 50 percent LTV ratio for motorcars and vans, and a 90 percent LTV ratio for commercial vehicles, changing the 70 percent LTV ratio all vehicle finances had been subjected to in December 2015.

Jafferjee said that reducing the volumes of three-wheelers to increase the available labour pool for industries such as construction is a bad policy, since the potential labour supply is larger than the current labour force, and that construction project managers would rather pay a Chinese national six times the salary of a Sri Lankan due to higher skills and productivity.

“If the problem is skills and work methods, would it not be better to upgrade the skill levels of the current stock of workers thus helping them earn higher wages rather than increase the pool of low skilled workers?” he questioned.

Jafferjee further said that reducing the supply of three-wheelers in the country would retard inclusive growth, both through the reduction of the asset being utilized as taxis as well as a personal vehicle.

“Secondly, for every taxi there is a consumer who seeks his service. By reducing the supply of such services, the consumer surplus will reduce; prices will go up or there will be unmet demand.

Since mobility is a derived demand, the lack of it will retard final demand which retards economic growth,” he noted.

He also pointed out that using LTV ratio as a means to control traffic in metropolitan areas is also misguided.

“Traffic is location-specific and timespecific, thus policy measures should aim to shift vehicle usage from specific locations and peak times. The best mechanism is dynamic congestion pricing that will incentivize users to postpone their trips, car pool, use public transport or use a different route,” he said.

The 2017 budget also included a proposal for an automated congestion pricing mechanism, which it said would be implemented in the third quarter of 2017, though it should be noted that there have been large delays between government targets and actual time of policy implementation.

Jafferjee said that using an LTV policy to control vehicle imports affects the whole country, including rural areas, where traffic is of less concern.

“Thus its impact is far more regressive on a rural lower income individual for whom the marginal returns to labour are higher. Due to lower urbanization, access to markets and jobs require longer travel which cannot be achieved due to lower availability of public transport,” he said.