Sri Lanka rupee pressured as trade gap shrinks, imports plunge, shattering Mercantilism

ECONOMYNEXT – Sri Lanka’s imports plunged 11.7 percent from a year earlier to 1,523 million US dollars in August 2015 with the trade gap also falling, data showed, while the rupee came under pressure from money printing.

Intermediate goods imports plunged 30 percent to 738 million US dollars in August 2015. Investment goods rose 8.9 percent to 363.8 million US dollars, and consumer goods rose 28 percent to 420 million US dollars.

Exports fell 19 percent to 798.9 million US dollars with prices of commodities falling. There were also some volume declines in tea, the Central Bank said.

The trade gap in August fell 1 percent to 724.5 million US dollars.

In the eight months to August exports fell 3.4 percent to 7,146 million US dollars and imports were flat at 12,558.

However Sri Lanka’s rupee continued to be pressured this year, as the Central Bank released liquidity and then printed money outright from June.

The data shatters the Mercantilist belief that trade or imports cause currency depreciation.

A trade gap is caused when dollar inflows outside the trade account such as remittances, net foreign borrowings are spent and there is no impact on the exchange rate.

However regardless of the inflows, when money is printed, imports can exceed total inflows, triggering foreign reserve losses and currency depreciation.

If inflows through the financial account reduces, or there are capital reversals and foreign government borrowings fall (exports of debt) the trade gap and also the current external account deficit can shrink. The focus on the current account deficit, some analysts say in a form of extended Mercantilism going beyond the Merchandise trade account.

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Gross inflows to Treasuries markets fell to 1,000 million dollars up to August 2015, down from 1,546 million dollars a year earlier and sovereign bond sales were down to 650 million dollars from 1,500 million dollars. There has also been net outflows of capital for which some reserves have been spent. (Colombo/Oct22/2015)

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