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Sunday May 22nd, 2022

Sri Lanka BOP deficit tops billion dollars in May, trade gap soars amid money printing

ECONOMYNEXT – Sri Lanka’s balance of payments deficit hit 1,053 million US dollars in the five month to May 2021 amid money printing while the trade deficit has exceeded the 2019 level despite import controls, official data show.

Sri Lanka’s BOP deficit or the excess outflows of dollars in current and financial transactions rose to a record 2.3 billion US dollars in 2021, as liquidity was injected through a combination of outright Treasury bill purchases and reserve ratio cuts.

Reserve money and notes and coins held by the public also rose absorbing some of the liquidity while provisional advances – a type of printed money overdraft – was also cut.

At the beginning of 2021 over 266 billion rupees of excess liquidity, printed in 2020 remained in the banking system, amid historic low interest rates.

The central banks Treasury bill stock rose from 725 billion rupees at the beginning of 2021 to 856 billion rupees by end May as more money was printed.

In addition around 45 billion rupees had been printed via provisional advances.

In 2021 also public currency holdings had gone absorbing some of the liqdity.

Related Sri Lanka public currency holdings spike in Covid-19 amid money printing talk

But by end May 2021 excess liquidity had dropped to 116 billion rupees from over 200 billion rupees in the first week of January as dollar reserves were redeemed against the rupees (convertibility) mostly in financial account flows.

There are ‘forex shortages’ and banks are rationing dollars as market participants armed with the printed rupees taken as loans or paid as salaries to state workers come to forex markets demanding dollars.

The trade deficit up to May had soared to 3.6 billion rupees with private credit financed by liquidity injections and the consumption of state workers paid with printed money.


Sri Lanka import controls shattered by credit, money printing in May

The trade deficit in May 2021 was higher than the 3.28 billion US dollar deficit in 2019 where there were no import controls and also in 2020, when the deficit narrowed amid a fall in domestic credit.

Sri Lanka’s balance of payments moved into deficit from after July 2019 when the last administration started to inject liquidity (stimulus) to target an output gap. In 2020 full blown modern monetary theory stimulus began. (Colombo/July22/2021)

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