SL’s BOP hole deepens as foreign inflows run dry

• SL’s BOP deficit for first four months of 2022 widens to US $ 2,569mn, from US $ 929mn a year ago
• Higher imports, decline in remittance, tourism and FDI inflows and sweeping tax cuts in 2019 identified as key reasons
• Officials who ran economy are clearly culpable for not foreseeing massive storm that was brewing

Sri Lanka more than doubled its deficit in the balance of payment (BOP) in the first four months compared to the same period in 2021, as imports raced, remittances sank, direct investments fizzled out and the expected borrowings didn’t come through.

According to the latest data available, in the first four months, Sri Lanka recorded a BOP deficit of US $ 2,569 million, compared to US $ 929 million in the same period last year, indicating where the root cause of the current economic crisis lies. 

BOP reflects the net effect of the inflows and outflows of a country when dealing with the rest of the world. 
While some may try to depict the current economic malaise solely as a result of the gaping hole in the budget caused by the tax cuts, the data showed it was the persistent BOP deficits, which expanded during the two years of the pandemic in 2020 and 2021, that caused the current economic catastrophe, as the country lost about US $ 20 billion worth of inflows from tourism, remittances, exports, direct and portfolio inflows and commercial 
borrowings. 

The officials who ran the economy are clearly culpable for not foreseeing what was coming and for not taking adequate measures to prevent the collapse of the economy in March this year, after teetering for nine months since June 2021, when the country started experiencing acute dollar shortages in the domestic foreign currency market.

In the years Sri Lanka recorded BOP surpluses or at least contained the deficits to a minimum, they were made possible by the commercial and other borrowings it made. Hence, the BOP surpluses achieved through the borrowed money are also not a good sustainable recipe, as was the 
case in Sri Lanka. 

Sri Lanka borrowed heavily since the end of the war to fund its post-war infrastructure boom, which failed miserably to generate returns and now the country is drowning in an unsustainable debt pile unable to be repaid. 
As the debt-funded projects didn’t make any returns, Sri Lanka raised more borrowings to settle its existing debt until that extremely risky gamble came to a halt when the country was locked out of the international capital markets in 2020. 

Two years after it was cut off from the markets, Sri Lanka declared itself insolvent on April 12 this year, after exhausting all foreign currency reserves.