ECONOMYNEXT – Sri Lanka is projecting exports of 12.5 billion US dollars for 2021 up from 10.0 billion in 2020 and forex reserves of 3.2 months for 2021 down from 3.2 months in 2020, along with 6 percent economic growth.
“Earnings from exports are expected to strengthen in the period ahead with the envisaged recovery in global demand and the policy drive to improve the tradable sector,” the Central Bank said in its newly released 2020 annual report.
Sri Lanka is under the worst import controls since 1970 amid an unprecedented bout of money printing which had led to forex shortages.
“The envisaged improvement in earnings from exports is expected to result in a contraction of the trade deficit in the medium term,” the Central Bank claimed.
According to classical economists however exports tend to increase imports as more income is placed in the hands of domestic economic agents, and the trade deficit is driven by services income (tourism, remittances) and foreign financial account net inflows (net foreign borrowings and FDI invested).
The central bank is expecting imports to grow to 17.8 billion US dollars in 2021 from 16.1 billion US dollars in 2020.
The central bank is projecting foreign reserves of 3.2 months in 2021 down from 4.2 months in 2020.
Based on projected imports for 2021, the year end foreign reserve figure is around 4.5 billion US dollars. Around mid this year Sri Lanka is expected to get a International Monetary Fund special drawing rights allocation of around 800 million US dollars.
Sri Lanka’s forex reserves fell to 4.05 billion US dollars in March 2021, from 5.6 billion dollars in December, as the central bank continued to print money and the government found it difficult to re-finance maturing foreign debt following downgrades.
Sri Lanka’s external projections and also GDP have proved to be wildly off target in years that the central bank printed money to keep rates down triggering monetary instability, even when the government was not locked out of international capital markets.
Sri Lanka has been following intensified ‘stop-go’ policies since 2015 printing money to boost growth (go policies) and putting the brakes when the country’s soft-peg collapsed busting the balance of payments.
In 2015 when the central bank printed money pro-cyclically into a strong private credit recovery and massive expansion in deficit spending claiming inflation was too low, triggering a currency crisis, foreign reserves fell to 4.6 months of imports at the end of the year from a 6.2 month projection.
GDP growth fell to 4.8 percent from a projected 7.0 percent as money printing started.
In 2017 policy was mostly deflationary (building reserves) but in 2018 money was again printed to close an output gap (go-policies) blowing the external sector apart
In 2018, foreign reserves fell to 3.7 months of imports from a projected 4.8 percent. GDP growth fell to 3.2 percent from a projected 5.0 percent.
In 2020 Sri Lanka ended the year with foreign reserves of 4.2 months of imports after projecting 4.2 months.
Imports collapsed in 2020 as tourism receipts disappeared and the government found it hard to borrow abroad and consumption and private credit collapsed in the second quarter amid Coronavirus lockdowns.
In 2021 Sri Lanka’s private credit is recovering but money is still being injected to the credit system. (Colombo/May04/2021)