Sri Lanka trade gap sharply down in July; currency in trouble amid monetization

Sri Lanka trade gap sharply narrows in July; currency hit amid monetization ECONOMYNEXT – Sri Lanka trade deficit narrowed 31 percent to 601 million US dollars in July 2015, partly due to a higher base last year, with imports falling 16.9 percent, while the country’s currency remained under pressure amid monetization of debt.

Exports fell 2.6 percent to 932.1 million US dollars with textiles and garments falling 0.3 percent to 413.1 million US dollars, rubber products down 9.9 percent to 71.8 million US dollars.

Some of the export values were down also due to falling commodity prices.

Tea fell 14 percent to 126.5 million US dollars and seafood exports dived 32 percent to 15.1 million US dollars amid a ban by the European Union. But spices exports rose 80 percent to 48.5 million US dollars.

Imports fell 16.9 percent to 1.53 billion US dollars with dairy products down 40 percent to 23.4 million US dollars, non-food consumer gods rose 36 percent to 282 million US dollars with vehicle imports rising 107 percent to 147 million US dollars.

Fuel imports fell 66 percent to 174.8 million US dollars.

Total imports fell 16.9 percent to 1,533 billion US dollars in July, party due the higher base last year, where imports surged in June.

In the 7-montht to July imports rose just 1.9 percent to 11.03 billion US dollars, with lower revenues to spend from exports, anaemic growth 1.6 percent growth in remittances to 4.0 billion US dollars and a sharp reduction in net government borrowings.

A country’s trade deficit is driven by non-merchandise ‘export’ earnings such as remittances and tourism, which are classified as being in a so-called ‘current account’ and net foreign borrowings.

When net foreign inflows fall either due to lower foreign borrowings or due to capital outflows, imports will also shrink in the absence of any central bank accommodation.

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However if the Central Bank buy Treasury bills to monetize debt (print money to finance deficit spending or keep rates down) imports will exceed inflows and generate balance of payments deficits and currency weakness, even if imports and the current account narrows from a year earlier.

The Central Bank said gross inflows to the government was down 54 percent to 1.8 billion US dollars in the first 7 months of the year.

Though there is a strong Mercantilist belief in Sri Lanka and some other coutnries that balance of payments troubles come from imports, or the trade gap, currency troubles are a money and credit issue, and imports are simply a symptom.

In July Sri Lanka spent 350 million US dollars defending the currency and official foreign reserves (which include non-monetary fiscal reserves) fell to 6.8 billion US dollars from 7.4 billion a month earlier.

Out of which 400 million was borrowed from the Reserve Bank of India through a swap.

In September another 1.1 billion US dollars was borrowed, and on September 04 heavy intervention in the rupee soft-peg was reduced in a bid to float the currency.

Sri Lanka has printed 170 billion rupees over the past three months, but a part of it has been to accommodate capital flight and debt repayment, and not all of it has triggered unsustainable imports. (Colombo/Sept27/2015)

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