23 December 2021 03:42 am Views - 405
The balance of payment (BoP) deficit ballooned to an all-time high in the 10 months to October, despite the robust merchandise exports in the recent months, as the outflows by way of imports, loss of services inflows from tourism and worker remittances and consistently poor investment track record deepened the hole in the country’s external current account, causing heightened concerns about a looming debt default.
The BoP, which measures the net of inflows and outflows resulting from foreign currency dealing with the rest of the world, reported a massive deficit of US $ 3,261 million in the 10 months to October, recording the highest deficit in the BoP.
In comparison, the BoP deficit in the 10 months of last year was US $ 2,083.
In the entirety of 2020, Sri Lanka recorded a BoP deficit of US $ 2,328 million, due to the foreign debt repayments to the tune of US $ 6.0 billion, amid weakened inflows largely caused by the pandemic, as Sri Lanka lost about US $ 4.5 billion from tourism and another US 2.0 billion from merchandise exports while its ability to access foreign capital was greatly impaired by the elevated yields of its international bonds in the secondary markets, a condition which hitherto prevailes.
Although on a month-on-month basis, Sri Lanka’s trade deficit has been narrowing since May, the cumulative deficit for the 10 months ballooned to US $ 6,498 million, compared to US $ 4,846 million in the corresponding period last year, weighing on the BoP.
The excessively accommodative monetary policy, which kept the interest rates at ultra-low levels to provide support to the economy beset by the pandemic, is blamed for the higher deficit and all other external sector ills facing the economy, which caused the shortages in imported commodities, elevated prices, loss of worker remittances and the reserves, which fell to new depths in November. With the absence of promised inflows, these conditions rattled the markets while Fitch Ratings last week downgraded Sri Lanka’s sovereign into further default category of ‘CC’,
on increasing probability of a debt default in the coming months, dealing a lethal blow to the perception of the hobbling economy. Although the prospects for tourism look promising, given the last three months’ arrival numbers, the downside risks remain, as the new Omicron variant sweeping the rest of the world could throw a wrench into its recovery, upsetting the plans to achieve the desired numbers next year.
In the 10 months, tourism generated a nominal US $ 82 million, compared to US $ 682 million in the same period in 2020 and US $ 2,806 million in 2019.
Meanwhile, Sri Lanka’s track record in wooing foreign investments has been dismal, as the lagging data indicated that in the first six months, Sri Lanka had attracted only US $ 398 million worth of direct investments. Meanwhile, Malaysia last week revealed that Intel will invest 30 billion ringgit or US $ 7.1 billion in a new state-of-the art facility, as the American chip making giant had chosen the South East Asian nation to expand its manufacturing capabilities.
Economists have repeatedly pointed out finding the answers to the pressing question of why Sri Lanka fails to attract crucial foreign investments when its East Asia counterparts get billions of dollars worth of investments, which can be an ideal starting point to understand what type of reforms the country must embark on. Meanwhile, foreigners have continued as net sellers on the Sri Lankan stock market, despite the aggressive push by local investors. In the 10 months, foreigners have sold US $ 222 million worth of stocks, higher than the US $ 194 million sold in the similar period in 2020.