The rupee continued it's free fall with the central bank quoting the selling rate of the US Dollar as 354.03, its highest level since March 2023.

Over the weekend, the president gazetted a temporary surcharge on vehicle import duties for the next three months, a measure officials say is meant to slow the outflow of dollars at a moment when the currency is under visible pressure.

On paper, the logic is straightforward. Vehicles are among the more dollar-intensive categories of imports, and curbing them, even temporarily, should ease demand for foreign exchange. In practice, however, economists are sharply split on whether the surcharge addresses the real problem or simply shifts the cost of the crisis onto ordinary consumers while leaving the deeper imbalance untouched.

We spoke to three of them, and what emerged was less a consensus than a debate about what is actually driving the rupee down, and what, if anything, the government can credibly do about it.

Economist and CEO of Colombo-based Thinktank Advocata, Dhananath Fernando, begins not with the surcharge itself, but with the mechanics of how Sri Lanka arrived at this point. In his telling, the Central Bank's own effort to rebuild dollar reserves over the past two years, broadly welcomed at the time, has quietly fuelled the very wave of imports now putting pressure on the currency. "When the Central Bank builds reserves by buying dollars from the market, in a way they print money," he explains. "Because when the Central Bank buys dollars from the banking system, they have to give rupees to the banks. The banks cannot just keep those rupees inside their drawers. They have to lend that money to their customers. So when they extend credit, people are coming and getting loans to buy vehicles, build houses, build factories. As a result, a lot of imports are coming in. That is where the currency starts depreciating. That's why we see it's been depreciating, because we build reserves by basically inserting money into the system." In Fernando's framing, the depreciation is not a sudden shock but the predictable downstream consequence of a policy choice already made.

The reserves had to be rebuilt, but the rupee liquidity that rebuilding created has now found its way back into the import bill.

It is precisely against that backdrop of credit-fuelled imports that the government has now stepped in with the vehicle surcharge. And to Prof. Priyanga Dunusinghe, the move, far from being heavy-handed, was overdue. He argues that the country's vehicle yards are now visibly oversupplied, and that this oversupply was no accident. Importers, he contends, had been reading the same signals as everyone else and positioning themselves accordingly. "What has happened right now is that vehicle sellers or the importers have imported many more vehicles than the demand in the market," he says. "You could clearly see in the market a lot of new vehicles in the sales yards. In a country with limited foreign exchange earnings, we need to make sure the foreign exchange is spent on consumer demand. So the excess supply is right now in the vehicle market, where almost all the vehicle sales yards are filled with new vehicles. This particular way of importation happened due to the fact that traders knew the currency would gradually depreciate, and in such a context, they could make money. If you look at the situation, the start of the Middle East war, most of these imports happened within a very short period, which also put pressure on the currency." For Prof. Dunusinghe, the surcharge is less a punishment than a correction, a way of dampening a speculative dynamic that was already pulling dollars out of the country faster than the economy could afford.

Not every economist looks at the same yard, the same trade data and the same depreciation and arrives at the same conclusion. Murtaza Jafferjee, chairman of the Advocata Institute, reaches almost the opposite position. To him, the vehicle surcharge is not just a blunt instrument but a misdirected one, aimed at a category of imports that simply is not large enough to explain the pressure on the currency. He points to one striking statistic from March that, in his view, exposes the misdirection at the heart of the policy. "I disagree with that option, because vehicles are not a demerit good," he says. "If the concern is that the Sri Lankan rupee is depreciating, and we have seen quite a strong depreciation even today, it's a matter of managing total import demand. Let's take the statistics for March. The total outflows of dollars were about 2.5 billion, of which vehicle imports were only 200 million, while fuel imports were 600 million, three times more. If you're concerned about external sector pressures, you have only two tools: monetary policy or fiscal policy. The current monetary policy stance is, I think, adequate. The currency has been allowed to depreciate, so it is sending the right signals to the market. The problem is with fiscal policy, and specifically fuel prices. The president himself said that the diesel price is 392 at the pump, but it costs 720 to the CPC. So whatever action is taken should be for the total import demand. We shouldn't fall into the trap of trying to select certain imports and saying this is essential and something else is non-essential."

In Jafferjee's reading, the government is leaning on the wrong lever, taxing vehicles because vehicles are politically easy to tax, while a much larger drain on the country's dollars, subsidised fuel, sits untouched.

Confronted with the argument that the surcharge will simply raise prices for ordinary consumers without addressing the underlying imbalance, Prof. Dunusinghe pushes back and clarifies what he is and is not proposing. His argument, he says, has never been about banning imports outright, or about restoring the kind of blanket restrictions that defined the worst of the foreign exchange crisis. What Sri Lanka actually needs, he argues, is a more disciplined model of managing imports, one that ties them more closely to real, confirmed demand. "What I say is, manage imports. It is not a restriction based on banning vehicle imports, banning other imports," he says. "What you do is you manage imports in a way that is compatible with foreign exchange interests. When you manage, the prices will not go up.

What happened with this surcharge is that vehicle prices went up, and it will never come down. Ordinary consumers at the end of the day pay much higher prices than they should. If you properly manage the imports, this must be a policy for the foreseeable future, at least until we get our export sector to be stronger. We have to go for allowing and managing imports, while making sure that the unwanted depreciation won't happen." His point is that a properly designed import management regime, where dollars are released against actual buyers rather than speculative inventory, would protect the currency without handing importers a windfall and consumers a permanently higher price.

Jafferjee returns to the debate with a sharper version of his original objection and with what he sees as a better way to protect those most at risk from any policy adjustment. He warns that the moment the state starts deciding which imports are desirable and which are not, it inevitably begins curtailing economic activity in ways that are difficult to undo. Vehicles, he insists, are not luxuries to be discouraged but assets that the economy actively uses. And on fuel, he is even more pointed, arguing that consumption is far more responsive to price than policymakers tend to assume. "When you decide that a certain imported product is desirable and something else is not desirable, you are curtailing economic activity, because vehicles are economic assets. They enable mobility, they're important for logistics, they are important for many other activities. The fuel imports are three times more than vehicle imports, and unless we have a significant contraction in fuel consumption, which mistakenly people think is inelastic, which is not true, the moment you increase prices to reflect what the world market prices are, consumers will change behaviour. People will carpool; there's a lot of inefficiency even in cargo transport, the stuffing efficiencies, and non-essential journeys will be stopped. Unfortunately, we are not allowing the market mechanism to work. What the government can do instead, if their aim is to give relief to perhaps the bottom 50 percent of the population, we now have Aswesuma. Do a cash top-up so that the very vulnerable who need to be helped do get some kind of income support to meet the very basic needs." For Jafferjee, the policy mix is almost backwards. The market is being suppressed where it should be allowed to work, on fuel pricing, and is being intervened in where the impact will be marginal, on vehicle imports.

The right way to protect the poor, he argues, is not to distort prices for everyone, but to channel direct cash support to those who need it through a welfare instrument the country already has.

Stepping back from the specifics of vehicles, fuel and welfare, Fernando offers a closing frame that applies whichever side of the policy debate one sits on. He returns to a principle that economists call the impossible trinity, the idea that a country cannot simultaneously control its exchange rate, its interest rates and its reserves. And he warns, in particular, against the temptation to burn through reserves in an effort to artificially defend the rupee, a temptation he believes has already begun to shape Central Bank behaviour. "They should not artificially hold the exchange rate, because how they can artificially keep that exchange rate down is by diluting the reserves," he says. "The Central Bank has already sold some dollars, about 95 million if I remember right, to defend the rupee. But if you do it constantly, you dilute your reserves. And after one point, you will realise you really cannot defend. So then you have to float the rupee. The exchange rate will depreciate, inflation will go up, and then you do an interest rate hike. So basically you end up losing everything. You will lose the currency, you will change interest rates, you will lose reserves. Because you can't control everything. You can only control two things at a time. Either the exchange rate, the interest rates, or the reserves. So the best, in my view, is to stick to interest rates and keep the reserves and the exchange rate stable." The warning is, in effect, that defending the rupee at any cost is the surest way to lose it, along with everything else the Central Bank has spent the last two years rebuilding.
Three economists, three different readings of the same falling rupee.

Fernando says the slide is the predictable downstream cost of rebuilding reserves through rupee liquidity, and that the worst response now would be to spend those reserves trying to hold the line. Dunusinghe says importers gamed the depreciation, stockpiled vehicles ahead of the slide, and that what the country needs is not a ban but a properly managed import regime tied to actual consumer demand, sustained until the export sector is strong enough to carry the currency on its own.

Jafferjee says the vehicle surcharge is the wrong tool altogether, that the real fix is cost-reflective fuel pricing combined with targeted cash transfers through Aswesuma, and that the government should resist the urge to play favourites among imports.