ECONOMYNEXT – Sri Lanka’s balance of payments deficit increased to 3.6 billion US dollars in November 2021 from 3.26 billion US dollars in October data from the central bank showed, amid low rates and liquidity injections.
Sri Lanka’s began to lose its ability to make all external payments and collect reserves (run BOP surpluses) from around November 2019 when inflationary policy in the form of bond purchases began.
Liquidity injections worsened sharply from around February 2020 as rates were cut and budget deficit was widened with tax cuts.
Sri Lanka then pursued unusual liquidity injections and statutory reserve ratio cuts, supposedly similar to Modern Monetary Theory, worsening BOP deficits.
By November BOP deficit are being run for around two years. In the past, money printing has been abandoned in the second year of deficits.
However in January the central bank raised policy rates by 50 basis points to 6.50 percent.
A BOP deficit is roughly the fall in net international reserves. Reserves of the central bank deteriorate as new rupees are redeemed for dollars and the ability to generate dollars (reserves) for capital payments is lost.
Sri Lanka has shored up reserves with swaps and borrowings instead of sterilizing current inflows by reducing credit and consumption and boosting domestic savings. (Colombo/Jan25/2021)