Sri Lanka capital outflows near US$600mn in 2016 1Q

ECONOMYNEXT – Sri Lanka has seen capital outflows of nearly 600 million dollars in the first quarter of 2016, with sales by foreign investors in Treasury bills driving the flight, though in the second quarter a deal with the International Monetary Fund is expected to boost confidence.

The central bank said outflows from rupee government securities, the stock exchange and long term government loan market reached 595.7 million dollars in the first quarter of 296.

Outflows form the rupee government securities market rose to 572.3 million dollars from 15.4 million dollars a year earlier.

In 2015 there was some uncertainty among foreign investors in rupee securities and some investors were buying in up to April 2015, when there was as rate cut in the midst of large expansion in the budget deficit, which indicated that a balance of payments crisis was inevitable.

The rate cuts was preceded and followed by large liquidity releases and outright expansion in central bank credit.

However a deal with the International Monetary Fund which is expected to improve confidence.

The IMF deal has put some restraint on the central bank’s ability to print money and worsen a BOP crisis, through a monetary consultation clause from June, though analysts warn that it is a less certain control than an absolute ceiling on domestic assets of the monetary authority.

There was also 13.8 million dollars in outflows from the stock market in the first quarter of 2016. However 1.3 million dollars had flowed into the primary market, the central bank said.

Long term government inflows were also negative by 9.6 million dollars. In 2015, there was a 500 million dollars net repayment in a sovereign bond.

If capital outflows are absorbed by printing money and currency defence or direct reserve appropriation, foreign reserves will fall.





However if monetary policy is not very oose (if liquidity is not injected in a large scale through an expansion of central bank credit), a part of the outflows is absorbed by a reduction in domestic credit, which will reduce consumption and imports, rather than foreign reserves.

In the absence of steep growth in tourism and remittances, the trade deficit can also fall if capital outflows are absorbed by a reduction in domestic credit and a growth in bank deposits.

In the first two months of the year, the trade deficit fell 11.9 percent to 551.7 million US dollars.

In February 2016, the balance of payments was estimated to have reached a deficit of 534 million US dollars, the Central Bank said, down from 692 million dollars in 2016. (Colombo/June25/2016)

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