25 October 2021 12:27 am Views - 176
Sri Lanka’s Balance of Payment (BOP) deficit, which could hit the highest on record this year, eased slightly in August after the direct investments received through the first six months were counted as an inflow with a long lag.
Sri Lanka recorded a deficit in the BOP of US$ 2,423 million in the eight months through August 2021, compared to US$ 722 million in the same period last year, and the US$ 2,755 million in the seven months to July 2021.
In 2020, Sri Lanka recorded a BOP deficit of US$ 2,328 million due to foreign debt repayments to the tune of US$ 6.0 billion amid weakened inflows due to the pandemic.
Sri Lanka also lost about US$ 4.5 billion from tourism and another US$ 2.0 billion from merchandise exports, with further potential to attract another US$ 1.5 billion from direct investments.
During the six months to June 2021, Sri Lanka received US$ 398 million in direct investments, which got incorporated only after a lag many months into the BOP, slightly up from US$ 351 million recorded in the same period last year.
Direct inflows include foreign loans to foreign direct investment enterprises as recorded by the Board of Investment (BOI) and the net direct investments to the Colombo Stock Exchange, the Central Bank said.
Sri Lanka’s record on direct investments has been extremely poor and the pandemic made that worse. The launch of the Colombo Port City and the enactment of the Port City law haven’t drawn the desired foreign direct investments so far, but the government continues to pin hopes on the reclaimed land off Galle Face and other port related investment zones to attract the much needed long term foreign investments.
While Hambantota Port has already attracted some amount of investments with few others in the pipeline, the Cabinet last week gave nod to further stimulate investments into the Port of Trincomalee, without being restricted to its existing policy of ‘one heavy industry to one harbour’, which the government deemed as an impediment to attract investments.
While the BOP still appears to be heading towards a large deficit, the realisation of an ambitious US$ 4.5 billion worth foreign inflows the Central Bank has earmarked for between October and December this year as per the road map enunciated on October 1, has the potential to erase the deficit and turn it into a surplus.
Asked about the progress of these multiple inflows, the Central Bank Governor Ajith Nivard Cabraal fortnight ago abstained from making any revelations, but maintained that negotiations were ongoing and the results would become known soon.
Last week the Cabinet also approved a proposal to obtain a loan worth US$ 3.6 billion to finance oil imports, according to reports. In the same week, Cabraal held discussions with his counterpart of the Qatar Central Bank.
Classical economists blame the BOP deficits to the expansionary monetary policy where the money is printed to finance the bloating fiscal deficits as well as to keep the interest rates low so that money could be loaned to citizens at cheap rates, where both factions then spend such money on consuming foreign made goods and services, creating foreign currency outflows over and above the inflows the country receive.
During the eight months to August, Sri Lanka’s merchandise trade deficit expanded to US$ 5,509 million from US$ 3,812 million in the same period in 2020 as imports continued to surge at a faster pace than exports which are recovering from the dip caused by the pandemic induced-restrictions on domestic economic activities this year.