Sri Lanka trims balance of payment deficit amid suppressed imports

•  Jan-Nov. 2022 BoP deficit at US$ 2.9bn compared to US$ 3.7bn a year ago
• In 2021, Sri Lanka had highest BoP deficit of US$ 3.9bn
• SL awaiting IMF bord approval for US$ 2.9bn bailout package which could be used as both BoP and budget support
• Delays are expected obtaining financing assurances from bilateral creditors which are vital to unlock IMF funds

Sri Lanka has cut its balance of payment (BoP) deficit, the balance between inflows and outflows from all its transactions with the rest of the world, after imports were suppressed through tight policies when the economy collapsed exhausting all its foreign exchange reserves. 

The data available through November showed that the BoP deficit in the first eleven months came in at US$ 2,888 million compared to the deficit of US$ 3,674 million in the same period last year on the back of an 8.3 percent decline in imports.

Sri Lanka imported US$ 16.9 billion worth goods up to November 2022, almost entirely due to the soaring import prices as the country brought down only a fraction of what it did in 2021 as demand was killed through tight monetary and fiscal policies while import bans were imposed on many items.

In 2021, Sri Lanka ran its highest BoP deficit of US$ 3,961 million, which paved the way to the subsequent collapse of the economy in March 2022 firing runaway prices, power cuts, fuel and other key commodities shortages. 

After announcing a debt standstill in mid-April and then jacking up the policy rates by mega 700 basis points to crush demand, Sri Lanka has been able to stabilise the economy to a certain extent, but inflation is still running at massively elevated levels.

At the same time, with the government relaxing restrictions on certain imported items, the last couple months’ external data showed imports gaining back 
their momentum.

Sri Lanka’s is awaiting financing assurances from its official foreign creditors to unlock a US$ 2.9 billion bailout package from the International Monetary Fund (IMF), which could be utilised as BoP support and budget support.

However, these assurances, appear to be getting delayed as Sri Lanka’s largest bilateral lender China’s position regarding debt restructuring remains elusive.

China’s government appears to have designated China Exim Bank and China Development Bank as the lead negotiators on its behalf, but progress has been slow.

Chinese embassy in Colombo yesterday said President Ranil Wickremesinghe, who is also the Finance Minister, held talks with the Chairman of the Export-Import Bank of China Wu Fulin on Tuesday via video conferencing. 

An embassy statement said the two sides agreed to further strengthen exchanges and collaboration on the resolution of Sri Lanka’s debt issues, and help the island’s economic recovery and sustainable development.

Despite the earlier plans of unlocking IMF funds in January or within the first quarter of this year, the authorities now expect IMF board approval in the second quarter due to delays in obtaining financing assurances from creditors.