ECONOMYNEXT – Sri Lanka has posted a 1,958 million US dollar balance of payments surplus up to June 2023, compared to a deficit of 2,814 million US dollars a year earlier, central bank data shows.
Based on the data released a BOP surplus rose by 361 million US dollars in June from 1,597 million dollars a month earlier.
A BOP surplus is roughly an increase in the central bank’s reserve assets.
A country generally runs a BOP deficit when a central bank cuts rates with printed money (inflationary open market operations) despite having a reserve collecting peg.
Sri Lanka started to run BOP deficits from after August 2019 when rates were cut and the central bank also bought Treasury bills outright from banks to target the yield curve.
The BOP crisis continued until the third quarter of 2022, as the central bank printed money to keep rates down in the pursuit of the worst case of macro-economic policy deployment seen the country (output gap targeting).
The 2019-2022 currency crisis ended in sovereign default and the central bank is now in its 17th IMF program.
In order to run a BOP surplus a pegged central bank has to operate deflationary open market operations. It is not possible to have a BOP surplus or deficit without a pegged exchange central bank, as floating rate central banks do not intervene in forex markets or sterilize them.
Analysts have warned that the Sri Lanka’s IMF programs start to unravel in the second year, as private credit recovers and rates are cut and enforced with aggressive open market operations.
The injections are later blamed on the deficit. (Colombo/Aug13/2023)