Sri Lanka’s balance of payment deficit on an easing path after tight policies contain trade deficit

• Jan.-Aug. BOP deficit at US $ 3bn, rising by less than US $ 50mn in July levels
• Trade deficit below last year’s high levels; increase in foreign inflows seen

The deficit in the balance of payment (BOP), which reached the highest level in history last year, pushing the economy off a cliff, is continuing to show signs of easing and could be headed for a lower balance than what it recorded in 2021. 

The latest official external sector data available through August showed that the BOP deficit in the eight months reached US $ 3,035 million, rising by less than US $ 50 million from July levels, as trade deficit continued to come below last year’s record high levels while other inflows have started flowing in, into the current and financial accounts of the BOP.  In the eight-month period last year, the BOP recorded a deficit of US $ 2,423 million before the full-year deficit reached to US $ 3,961 million when the importers front-loaded their orders and global commodities prices rose fast while other inflows fizzled out, creating the biggest hole in the BOP Sri Lanka had ever recorded.

 
However, given the recent trend seen in the external account, the country could end 2022 with a lower deficit, due to the continuous decline seen in the incremental monthly increases added to the balance since the second quarter this year.  Since the Central Bank started crushing consumption and investment activities by taking the interest rates to restrictive territory in April, the monthly increase in the deficit in the BOP have been less than the earlier month’s, as imports, which were racing till the beginning of this year, started slowly falling into parity with what the country earns from its exports and remittances.
For instance, in August, Sri Lanka earned a combined US $ 1,549 million from merchandise exports and remittances while the import bill came in at US $ 1,486 million. 

This helped to rein in the trade deficit, which was expanding at a rapid pace, taking away much of the pressure from the BOP.  In the eight months to August, the trade deficit was cut to US $ 3,899 million, from a deficit of US $ 5,507 million in the same period last year.
Meanwhile, the worker remittances, albeit lagging far behind what 2021 brought in, are showing signs of making advances in recent months. 

Further, the earnings from tourism have also risen up to US $ 893 million in the eight months compared to just US $ 64 million in the same period last year. 
In another positive development, the Sri Lankan equities have, after many years, begun to look attractive to foreign investors, as they bought a cumulative US $ 97 million worth of shares in the first eight months, compared to an outflow of US $ 181 million in 2021. 

Foreign inflows into the Treasury bills and bonds have also been at US $ 16 million in the eight months, comparable with last year’s level, although there had been a notable increase in September after Sri Lanka announced a staff-level agreement with the International Monetary Fund. Meanwhile, the long-term foreign currency-denominated loans have also been at US $ 1,743 million, higher than US $ 1,223 million obtained in the same period last year, alleviating the pressure on the BOP.