ECONOMYNEXT – Sri Lanka’s current dollar revenues from merchandise exports, remittances, tourism and other services exceeded imports by US$542 million in April 2024, official data showed.
Sri Lanka’s household goods exports in April were $877.6 million, up from $848.6 million a year earlier, despite it being a holiday month that typically sees a 20 percent drop.
Remittances totaled $543.8 million, up from $454 million last year.
Tourism receipts in April were estimated at US$225.7 million, but this is based on a survey, which may not be as reliable as import/export data from customs or remittance data from banks.
Total services, including tourism, was US$558 million.
In April 2024, Sri Lankans earned US$1.977 billion in foreign exchange from exports, remittances and total services.
Merchandise imports were just $1.435 billion, resulting in a surplus of $542 million.
The Central Bank of Sri Lanka has begun publishing more services data in 2024 that shows a broader picture beyond the merchandise trade account.
Are they writhing in their graves?
There is a strong belief in trade deficit in Sri Lanka.
Macroeconomists, too, after printing money to force lower interest rates, are digging up classic 17th century mercantilist theory, dressing it up with new labels (current account deficit vs. commercial balance), and invoking “current account deficit” as an excuse for currency instability.
Analysts say economics textbooks may be the direct cause of the resurgence of mercantilism and bureaucratic interest rate policy.
The mercantilist theory of the balance of payments was comprehensively refuted by classical economists such as Smith, Hume, Mill, Thornton, and Torrens, who had microscopic knowledge of the paper money issuing business.
Although German-Austrian and Swedish economists challenged Keynes directly in the last century, the theory has held firm, especially among English-speaking scholars, since the 1960s as aggressive Federal Reserve policies have exacerbated inflationary trends.
In countries with inflationary central banking, large numbers of perfectly sane people believe they can import goods indefinitely without earning a dollar (the seller never receives one), creating a chronic merchandise trade deficit.
They also believe it is a “problem” and that trade deficits lead to external instability and a weaker currency.
The obsession with trade deficits seems to be driven by the belief that hard goods are “superior” to services.
Historians say a similar attitude was evident in nationalist writings that criticised the shift away from coconut as a commercial crop in areas such as Kurunegala during British rule.
However, the Central Bank of Sri Lanka has not discriminated against the hard work of its citizens or suggested that service workers are inferior.
Sri Lanka’s private savings rate is about 30 percent of GDP, and this applies broadly to those with foreign income.
Savers can invest the money directly in assets, convert it into rupees and deposit it in a bank, or deposit it as dollars in a foreign currency account.
Banks provide funds to borrowers as investment credit, which can then be used to purchase imports or invested overseas to build up dollar balances.
The Central Bank of Sri Lanka withdrew around US$420 million from the banking system in April, generating liquidity for the rupee.
Domestic Business
When private credit is weak, or when statistics show inflation is low contrary to economic principles and money is not being printed to enforce policy rates, the central bank can soak up liquidity by selling sterilized securities (in this case government bonds in its portfolio) to banks and build up foreign exchange reserves through deflationary domestic operations in the East Asian style.
The government will also be able to borrow rupees through Treasury bills, buy dollars, settle foreign loans, and have rupee-denominated debt rather than dollar-denominated debt, as was the case before potential output targeting and flexible inflation targeting were introduced, thus preventing the accumulation and eventual default on dollar-denominated debt.
At the moment, there is a large amount of excess liquidity remaining in the banking system that may be used up as private credit recovers, putting pressure on the exchange rate unless the dollars that created the liquidity are sold (unsterilized intervention).
If a central bank wants to maintain its reserves, it can also prevent imports from occurring through investment credit by steadily selling its securities portfolio.
Imports are also likely to rise as foreign aid resumes and the government restarts infrastructure projects. The Sri Lankan government’s net external borrowings have typically been positive, except during periods of stability.
After the loan restructuring, Sri Lanka’s debt service will be reduced and it will only have to pay interest for a few years. (Colombo/1 June 2024 – Recalculated with revised data to show total services including tourism. Total services data is available for only two months)
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