ECONOMYNEXT – Sri Lanka’s exports fell 12.4 percent from a year ago to 1,020 million US dollars in July 2023, while imports picked up 7.8 percent from a year earlier to 1,388 million US dollars, official data showed.
Total inflows from remittances which will be saved or spent by their recipients on imports 541 million US dollars.
Estimated tourism inflows which could be spent or saved by workers or hotel owners on imports was 219 million US dollars. Total current inflows available for imports were 1,780 million US dollars.
For savings to be turned into investments and imports, private credit has to pick up.
The correction in the balance of payments came from a fall in the investment and intermediate goods, funded partly buy central bank credit injected to sterilize interventions or keep rates down.
In the seven months to July machinery and equipment imports were down 30 percent to 1,211 million US dollars, building materials were down 37 percent to 350 million US dollars, and transport equipment were down 61 percent to 37 million US dollars.
Base metals, an intermediate good was down 27 percent to 173 million US dollars.
Up to July textile and articles (intermediate good) were also down 29 percent to 1,194 million dollars as exports of apparel fell. There are also value falls after the US tightened monetary policy.
In July there was a pick up in consumer good, non-food consumer goods and also investment goods pointing to a possible economic recovery.
Any capital inflows to the government, which are invested could also turn into imports.
If the central bank cuts rates with inflationary open market operations, as credit picks up outflows will exceed inflows and the currency will come under pressure from a deficit overall balance of payments.
Sri Lanka registered a balance of payments surplus (approximately the rise central bank reserves) in July, with the year-to-date BOP surplus climbing to 2,078 million US dollars by July from 1,958 million US dollars from in June.
In order to collect reserves, the central bank has to run deflationary open market operations.
As soon as the economy recovers and rates are cut with open market operations claiming inflation is low under data driven ‘flexible inflation targeting’ the BOP could turn, forex shortages could re-emerge, Sri Lanka could miss IMF targets and the politicians would get the blame. (Colombo/Sept01/2023)