SL records nearly a billion-dollar trade deficit in January

Sri Lanka recorded nearly a billion-dollar deficit in the trade account of the balance of payment in the first month of 2022, as the imports continued to run stronger while merchandise exports recorded its eighth consecutive month of over a billion-dollar earnings. 

According to the latest data available through January 2022, Sri Lanka imported goods worth of US $ 1,959 million while exported goods worth of US $ 1,101 million, resulting in a US $ 858 million defect in the trade account. 
This is however a decrease from US $ 1,085 million in December 2021. 

Nevertheless, the depreciation of the rupee since March 7 is expected to turn the trade deficit narrower in 2022, as President Gotabaya Rajapaksa in a televised address last week spelt out the revised numbers for both imports and exports after the impact of the rupee depreciation was baked in. 

He said the government estimates a trade deficit of US $ 7 billion, as opposed to US $ 8.1 billion recorded in 2021, from revised import and export values of US $ 20 billion and US $ 13 billion, respectively. 

Sri Lanka’s external and economic woes aren’t necessarily stemming from a higher trade balance, as believed by diehard mercantilists but through unrestrained monetary injections to the system by the Central Bank conducted through their open market operations. 

Injected money creates additional credit and demand over and above the savings of the people and thereby causes outflows of foreign exchange over and above what the country earns from exports and other services inflows such as tourism, IT/BPO services and remittances. 

This makes the government to make borrowings from both the foreign and domestic markets, creating an additional debt burden on the people. 

Past data showed that Sri Lanka’s annual foreign borrowing component has tallied with the deficit in the current account of the balance of payment. 

Meaning, Sri Lanka will have to direct its fiscal spending towards industries and avenues, which can create foreign exchange earnings through merchandise and services exports while inviting foreign investments towards these areas instead of foreign debt for non-revenue generating projects, to gradually reduce its reliance on foreign debt as a percentage of GDP.

This changing dynamic will then reduce the outflows from the state revenues as annual interest payments, thereby leaving resources that could then be spent on critical infrastructure projects, other public goods and targeted assistance and welfare on the most economically vulnerable.  

The entrenched corruption, nepotism, bribery and regime uncertainty such as expropriation laws brought in from time to time, have kept foreign investors away from Sri Lankan shores for years and it didn’t pick up to the desired levels even after the end of three-decade-old war in 2009. 

Sri Lanka, at a minimum, must attract foreign investment in the range of US $ 4-4.5 billion per annum, which is equivalent to 5 percent of GDP to ensure that it can offset the impact coming from a similar amount of annual debt repayment scheduled for the next four to five years.