- Rerecord high liquidity injections and historically low interest rates are blamed for widening BOP deficits in last two years
- SL’s direct investments record has continuously been a sour spot compared to its Asian peers
The balance of payment (BOP) deficit continued to widen from its previous high, as the 11-month deficit in 2021 reached a record US $ 3,674 million, reflecting the continuous bleeding of foreign exchange in the country’s dealings with the rest of the world than what it earns.
This was higher than the US $ 3,261 million recorded for the 10 months through October and way above the US $ 2,203 million recorded in the same period in 2020. Rerecord high liquidity injections and historically low interest rates were blamed for the widening BOP deficits in the last couple of years, as excess liquidity creates pressure on the currency when such moneys generate higher imports of goods and services as seen from the record high merchandise imports
in 2021.
When excess rupees demand dollars, it hits the BOP and when there is insufficient dollar supply in the market, it requires convertibility from foreign reserves.
Sri Lanka’s reserves fell to dangerous depths of US $ 1.6 billion in November before recouping to US $ 3.1 billion in the final days of December after the authorities drew down a Chinese yuan swap equivalent to US $ 1.5 billion. Despite extremely high deficits in the trade account, Sri Lanka typically manages to have a positive BOP from other services inflows such as tourism and remittances, both of which lost steam in the last two years.
Further, direct and portfolio investments dried out while borrowing in foreign currency wasn’t possible, as the country fell out of favour with investors in the last two years, due to the macroeconomic risks, which worsened with the pandemic.
The Colombo Stock Exchange recorded an outflow of US $ 242 million in the 11 months for the second year running. Meanwhile, investments in government securities by foreigners also remained lacklustre, with such instruments attracting only US $ 16 million, compared to US $ 103 million in the same period in 2020, which wasn’t impressive either.
The gross long-term loans recorded for the 11-month period was US $ 2,049 million, slightly higher than US $ 1,801 million in the similar period in 2020. Such loans consist of various bilateral, multilateral and syndicated loans.
Meanwhile, foreign direct investment again was a major disappointment last year, with only US $ 567 million being accounted for in the nine months, according to the latest data compiled, not much different from the US $ 543 million in the same period, last year. Sri Lanka’s dismal investment record has been a conspicuous sign among the rest of the South and East Asian counterparts, who attracted higher investment flows regardless of the challenges coming from the pandemic.
