BoP deficit shows signs of deceleration as demand destruction policies take root

• Five-month BoP deficit up marginally to US $ 2,595, from US $ 2,569 in Jan.-April 
• Potential IMF programme and resulting bilateral and multilateral funding could further narrow SL’s BoP deficit

The deficit in the balance of payment (BoP), which still runs more than double the level of last year, has shown signs of deceleration after the imports fell amid the rising exports, narrowing the deficit in the trade account. 

According to the data available through the first five months, the BoP deficit reached US $ 2,595 million, slightly up from US $ 2,569 million in the first four months, reflecting the demand destruction policies instituted since April onwards are taking hold fast to crimp the trade deficit, which has been growing until recently. 

Mirror Business last week showed that the imports are gradually reaching parity with the merchandise exports, as the country was compelled to cut down severely on its consumption binge to levels of what it earns in dollars by way of exports, after it ran out all of its external reserves by early March, due to several external and internal factors.

However, in this process, several millions would become victims of job losses and incomes, which leads to poverty, signs of which have already been seen. 

The root cause of the current economic crisis, the worst Sri Lanka has ever faced, is attributable to the BoP deficits, which the country had to run in the two years of the pandemic, 

as its key service inflows from tourism and remittances, which absorbed the entirely of the trade account deficit till then, dried up, while the country was cut off from the international capital markets, preventing it from rolling over its commercial debt. 

However, a potential International Monetary Fund programme could unlock several billions of dollars-worth of bilateral and multilateral funds, further narrowing Sri Lanka’s BoP deficit. However, what is more durable is to make the most of the reform window that is available now to attract foreign investors to set up operations to create better and skilled jobs and produce goods to the global markets, which can create resilient foreign inflows.