Sri Lanka should reconsider cross-border LC approach

By Thabith Naja

Sri Lanka’s decision to reopen vehicle imports earlier this year was an important and positive step. It restored confidence, supported Treasury revenue and contributed to meeting the International Monetary Fund commitments. The safeguards introduced to control hoarding and manage pressure on foreign reserves were understandable in a period of recovery. The initial surge in imports that followed was simply the result of five years of pent-up demand and has already begun to normalise.

A key issue now emerging, however, is the treatment of cross-border Letters of Credit (LCs). The recent restrictions on LCs opened in favour of suppliers in third countries, such as the UAE or Singapore, have created uncertainty for both importers and exporters. In the global vehicle trade, sourcing through regional hubs is a long-established and efficient practice. Many major exporters from Japan, the United Kingdom and Australia operate through hubs like Dubai or Singapore because these centres offer faster logistics, centralised stock, competitive financing and lower operational costs. For Sri Lankan buyers, this often translates into better prices and shorter lead times.

The current interpretation of an older gazette to limit such transactions does not reflect how the international re-export market functions today. What is particularly challenging for the industry is that these changes are implemented without notice despite the practice having been followed for well over a decade. Altering an established and widely understood process in this manner creates uncertainty and undermines confidence among both local importers and international suppliers. Importantly, there is no loss of revenue to the government when a vehicle is sourced through a hub. Customs applies the same valuation method and the same duties regardless of where the invoice originates. Vehicles are also pre-inspected by government-accredited bodies such as Bureau Veritas or JEVIC, ensuring accurate verification of model year, chassis details and condition.

The importers affected by the recent policy interpretation have now sought legal recourse, filing a case in the Court of Appeal to challenge the position taken by Sri Lanka Customs. The court has since granted temporary relief, allowing these vehicles to be released on bank guarantees while proceedings continue. However, the authorities have maintained that the vehicles cannot be registered during this period unless the disputed penalty amount is paid in cash. This has created a deeply inequitable situation. The importers who have paid the full value of the vehicle to the supplier, all duties under the current tax structure and substantial demurrage accumulated due to delays, are still prevented from selling or even registering their stock despite having provided a bank guarantee backed by a recognised financial institution. A guarantee is a secure undertaking universally accepted in international trade. Rejecting it while insisting on cash payments lacks clear policy logic, places disproportionate burdens on compliant businesses and undermines confidence in the fairness and consistency of regulatory decision-making.

At the same time, global trade hubs are advancing rapidly. The UAE has just launched what is being described as the world’s largest car trading hub, a 22-million-square-foot automotive marketplace designed to handle vast volumes and streamline every aspect of the export process. Facilities of this scale integrate showrooms, auctions, logistics, financing and government services in one ecosystem, making hubs such as the UAE even more central to the global re-export market. If Sri Lanka restricts cross-border LCs and limits access to these established and emerging trade centres, the country risks losing out on competitive pricing, faster supply chains and the wider opportunities created by modern automotive trading infrastructure.

What the industry now requires is clarity, predictability and open consultation. Cross-border LCs operate under globally recognised standards such as the ICC’s UCP 600 and it is important that Sri Lanka’s regulations align with contemporary trade practices. The country has made meaningful progress in stabilising its economy. Maintaining that momentum depends on regulatory approaches that enable legitimate trade rather than unintentionally constraining it. Allowing cross-border LCs within a clear and modernised framework would support competition, ensure fair pricing for consumers and strengthen Sri Lanka’s integration with global supply chains.