Housing for presidents vs. housing for people

By Dhananath Fernando

Originally appeared on the Morning

The past week’s talk has been about curtailing housing facilities and other perks for former presidents. Many Sri Lankans are rightly interested in where former leaders live. But here is the real question: why are millions of ordinary Sri Lankans struggling to build their own homes?

Housing is a basic human need. Yet in Sri Lanka, it is not only the poor but even the middle class who fight an uphill battle.

Look around any neighborhood: countless homes remain unfinished. The ground floor is barely complete, steel rods jut out of columns waiting for a first floor that never comes. Walls stand unplastered, kitchens are bare, and curtains are unaffordable. For many families, building a house is a lifelong project, and they often finish only when they are close to retirement.

A few years ago, Advocata research showed just how bad the situation was. Sri Lanka’s housing affordability is among the worst in the world, worse than New York, Tokyo, or London. We rank only behind Shanghai. In simple terms, compared to how much we earn, our housing costs are higher than in some of the richest cities on earth.

Even lifetime savings don’t take us far. A Sri Lankan in the 70th income percentile can only afford a 500 sq ft house. To buy a modest 1,000 sq ft house, you need to be in the top 20% of earners.

Why is housing so expensive? The answer is simple: construction materials are outrageously costly because of sky-high import tariffs. Wall tiles, floor tiles, cement, steel, bathroom fittings, you name it, are all slapped with layers of taxes: CESS, PAL, Customs duty, VAT. Sometimes these add up to over 100%.

Some argue tariffs don’t matter since Sri Lankan companies make many of these products locally. But if that’s true, why do we need tariffs at all?

The reality is that imported materials are often 50–75% cheaper than local products. Once tariffs block competition, local manufacturers raise their prices too. And when tariff rates cross 70% or 100%, imports stop coming in entirely. So the Government doesn’t earn much revenue either; most Customs income actually comes from vehicle imports, not construction materials.

Take the numbers: cement in Sri Lanka costs about 120% more than in China. Steel is 48% more expensive than in Singapore. Tariffs on tiles and bathware are above 70%.

This is not just about houses. High construction costs spill into the whole economy.

Every industry needs buildings and energy. When our costs are higher than the region, our businesses become uncompetitive. Since most construction is financed through bank loans — often at interest rates around 12% — these inflated costs also bleed into debt burdens for families and companies alike.

The Government itself pays the price. Each year, capital expenditure is a major budget item, and inflated costs mean taxpayers get less value for every rupee spent. The tourism sector suffers too. Hotels are expected to renovate every five to seven years, but when construction is so costly, they either delay upgrades or pass the expense onto visitors, hurting competitiveness.

And look at our negative list in trade deals. Most construction materials are excluded, meaning they will stay protected even under free trade agreements. That says a lot about who benefits from keeping costs high.

For small and medium-sized enterprises, the story is even worse. Expanding a workshop, building a new facility, or even basic repairs all become nearly impossible when construction costs are inflated and when credit is tight.

If the Government is serious about helping industries, boosting competitiveness, and giving relief to the middle class, it must bring down the cost of construction. And that means cutting tariffs.

It’s time we cared as much about the housing struggles of ordinary Sri Lankans as we do about the houses of former presidents.

Are plans to lift vehicle import ban truly wise?

By Dhananath Fernando

Originally appeared on the Morning

Many Sri Lankans, including myself, are products of a failed middle-class dream. We aspire to be doctors, lawyers, and accountants because that path seems to promise a reasonable house and a decent vehicle.

Yet, bad economics has turned us into a generation of frustrated, failed middle-class citizens. Among the middle class, one of the most debated topics is vehicle imports – a key symbol of socioeconomic aspirations – which has recently resurfaced as a contentious issue.

While the Government has not clarified its stance on vehicle imports, the economic consequences of restricting them are evident. A black market emerges and people are forced to pay exorbitantly high prices for second-hand vehicles that are 5-10 years old. The economic impact of such inflated vehicle prices often goes unrecognised.

When someone spends three times the vehicle’s actual value, they lose the ability to invest the same amount in other life priorities – building or expanding a home, starting a business, pursuing professional or children’s education, or supporting leisure and the arts. This ripple effect stifles personal aspirations and reduces income opportunities for micro, small, and medium-sized businesses.

While I strongly advocate for relaxing vehicle import restrictions (or any import restrictions), the reasoning often used to justify such relaxation is flawed. Many argue that importing vehicles would boost Government revenue through increased border taxes, especially given the International Monetary Fund’s (IMF) target of raising Sri Lanka’s revenue to 15% of GDP.

However, relying on border taxes for revenue sets a dangerous precedent, making our economy less competitive. This logic paves the way for protectionist measures like tariff hikes, a strategy that failed us during the 30-year war when high tariffs funded fiscal deficits but left our exports uncompetitive and fostered corruption.

Instead, the Government should focus on sunsetting unnecessary tax concessions, eliminating vehicle permit schemes for public servants, and broadening the tax net through investments in digitising the Inland Revenue Department.

The concerns: Currency depreciation and congestion

The two main arguments against vehicle imports are currency depreciation and increased congestion.

Currency depreciation

Currency depreciation is often wrongly attributed to imports. During the Covid-19 pandemic, Sri Lanka banned most imports, including essential medicines, yet the currency depreciated from Rs. 180 to Rs. 360. Before the ban, vehicle imports amounted to around $ 1 billion annually, while fuel imports, at $ 3 billion, should theoretically have had a greater impact on currency depreciation.

In reality, currency depreciation and reserve depletion occur when the Central Bank increases rupee supply by artificially lowering interest rates. When interest rates are kept low, borrowing becomes cheaper, prompting higher demand for credit – for vehicles, housing, and business expansion – which in turn drives up import demand. As a result, people demand more dollars from banks, leading to currency depreciation.

If the Central Bank refrains from artificially suppressing interest rates, banks will need to redirect credit for vehicle purchases from other sectors, naturally balancing the flow of rupees in the economy. Higher interest rates would curb excessive consumption, including vehicle purchases.

Unfortunately, the Central Bank has historically enabled excessive consumption by maintaining artificially low interest rates, which leads to higher import demand and ultimately depletes reserves as it attempts to defend the currency.

Thus, vehicle imports have little direct impact on currency depreciation or reserve depletion. Instead, the focus should be on managing interest rates to balance economic activity. That said, a phased approach to relaxing vehicle imports is advisable to avoid shocks to the economy. Notably, despite import relaxations, the Sri Lankan Rupee has appreciated by approximately 11%.

Congestion

Concerns about increased congestion due to vehicle imports are valid. However, the solution lies in improving public transportation. Significant investment in public transport infrastructure would reduce the demand for personal vehicles. Additionally, mechanisms for exporting used vehicles could help mitigate congestion.

Excessive taxes on vehicles will not develop public transport. On the contrary, such taxes exacerbate issues by suppressing aspirations, limiting personal choices, and further deteriorating the public transport system.

Developing public transport requires policy shifts, such as cancelling the restrictive route permit system, engaging the private sector, and relaxing price controls on bus fares. These reforms, not 300% vehicle taxes or outright bans, will address congestion effectively.

Way forward

Vehicle import restrictions and excessive taxes have far-reaching implications that go beyond economics, affecting aspirations and everyday lives.

While phasing out restrictions and ensuring fiscal discipline are essential, the Government must prioritise structural reforms and long-term solutions like public transport development and tax base expansion. Only then can we create an economy that balances growth, equity, and personal freedom.

Middle class caught in housing dilemma

By Dhananath Fernando

Originally appeared on the Morning

The system in Sri Lanka often categorises many individuals in the middle class as products of failure, not because they have failed themselves, but because the system has failed them. An evident sign of this failure emerges when individuals strive to afford a house, as the decision to build or buy a basic house in Sri Lanka frequently forces them to sacrifice many other life choices due to the exorbitant cost of construction.

Dr. Roshan Perera and Dr. Malathy Knight of the Advocata Institute recently authored a research report revealing that property prices in Colombo exceed the same income-to-property ratio found in New York, Tokyo, Beijing, and London.

The exorbitant cost of construction primarily stems from the steep prices of raw materials in Sri Lanka. For instance, a tonne of cement costs about $ 114 in Sri Lanka, compared to $ 53 in Thailand. Similarly, the cost of a tonne of steel in Sri Lanka is around $ 760, in contrast to $ 561 in Singapore.

Factors behind high costs

Two main factors force consumers to pay higher prices. First, Sri Lankans encounter restricted access to construction materials at lower prices due to import restrictions or tariff barriers, even when Free Trade Agreements (FTAs) are in place, as most construction items remain on the negative list. A negative list refers to an exclusion clause in an FTA that prevents an item from being imported.

Second, the high tariffs or import protection for construction materials are often justified under the narrative of ‘saving dollars’ or ‘preserving valuable foreign exchange’. However, the truth lies in the high cost structures of local manufacturers, making them unable to compete if import bans or tariffs are reduced.

For example, the total tariffs on tiles were approximately 83% in 2021, with para-tariffs such as CESS and PAL making up about 50%. High energy prices in Sri Lanka contribute to the high costs for local companies, and importing tiles may actually reduce foreign exchange expenditure due to energy savings.

Far-reaching impact

The high cost of construction for the middle class results in sacrificing many life choices, including higher education, education for children, investments, and wealth creation. This challenge becomes even more pronounced when faced with an interest rate of 10% for housing loans or business expansion.

The impact of the high cost of construction extends beyond housing to the tourism sector. Hotels require refurbishment approximately every five years to remain competitive, and with high construction costs, room rates tend to be high. This puts a strain on hoteliers, including small and medium-scale hotels, making them less competitive with markets like Thailand or the Maldives.

According to research, a 500 sq ft house can only be affordable for Sri Lankans in the 70th income percentile, while a 1,000 sq ft house is attainable only for those in the 75th income percentile, highlighting the underlying tragedy of the high cost of construction. Many construction inputs in the market exhibit characteristics of monopolies or oligopolies.

The solution to reduce construction costs involves first removing construction materials from the negative list and eliminating imposed para-tariffs. This competitive market approach will lead to lower prices, benefiting consumers. As a result, aspirational Sri Lankans will have more space in life for better choices, rather than spending their entire lives paying off housing loans. When the middle class has more choices in life, their decisions become a source of income for many other industries, fostering economic growth.