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Saturday October 1st, 2022

Sri Lanka trade surplus in June as economy smashed to resurrect soft-peg

ECONOMYNEXT – Sri Lanka recorded a trade surplus in June official data show with private credit smashed to resurrect a soft-peg and a fuel credit line from India running out, but forex shortages persist amid money printing, forced dollar sales and forex sales.

Imports fell 26 percent to 1,226 million dollars in June while exports rose 23.9 percent to 1,249 million dollars, giving a trade surplus of 21 million US dollars with hardly any inflows to the government.

Expat workers remitted 274 million US dollars though official channels. In June there was an lockdown style scenario as the country ran out fuel due to forex shortages.

Non-oil imports collapsed 35.6 percent to 1,026 million US dollars.

Investments goods fell 46 percent to 234 million US dollars in a steep correction.

Consumer goods imports fell 53 percent to 176.5 million US dollars.

Intermediate goods imports were flat at 815.7 million dollars, marginally down 2.8 percent.

Fuel imports were flat at 200 million US dollars, with a credit line from India running out.

In the six months to June imports were flat at 10,028 million US dollars, and exports were up 14.3 percent.

The trade deficit was down to 3,514 million US dollars from 4,316 million US dollars.

The central bank has raised rates to smash private credit and the economy in a bid to restore its soft–peg broken by suppressed interest rates earlier.

In May and June private credit slowed sharply.

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Sri Lanka private credit negative in June 2022, Rs189bn printed

Sri Lanka is however still experiencing severe forex shortages at overall BOP despite the trade surplus with the central bank continuing contradictory money and exchange rate policies involving intervening with borrowed ACU dollars from India, sterilizing them and also imposing a surrender rule on an already-broken peg.

Banks are also settling foreign loans which are not being renewed.

Analysts had warned that it is extremely costly to try and restore a pegged exchange rate system with interest rates alone without floating. An attempt to float the currency was botched with a surrender rule and too low interest rates in March.

Bangladesh and India which also have soft-pegs are also facing forex pressure after cutting rates just as the economy and private recovered after Covid. Pakistan the second worst central bank in South Asia after Sri Lanka has two large central banks that re-financed Covid funds.

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