Sri Lanka now knocks at the door of a balance of payments crisis
By: Staff Writer
Colombo (LNW): At the time of the national budget 2024 presentation in parliament Sri Lanka is now knocking at the door of a balance of payments crisis and for all intents and purposes seems to have passed the point where the problem cannot be solved by only raising policy interest rates, several eminent economists and rating agencies said.
Moody’s Investors Service said that Pakistan and Sri Lanka are among the South Asian countries that are most vulnerable to balance of payments (BoP) crises.
The international credit ratings agency issued the report citing low exports and the lack of foreign direct investment.
Moody’s said India was the least vulnerable country to BoP crises due to its larger and more diversified export sector, adding that New Delhi also had better macroeconomic policy management in place.
In its latest report, Moody’s said, “Bangladesh, Pakistan and Sri Lanka have much weaker infrastructure compared with India, contributing to high costs to trade,” adding that the South Asian nations’ market access to other countries is limited on account of them having fewer trade agreements.
Sri Lanka’s balance of payments slipped deeper into deficit in September 2023, after recording a marginal gap in the month before, official data showed.
Sri Lanka balance of payments surplus steadily increased to 2,078 million US dollars up to July 2023 but fell in August.
In September the surplus fell to 1,863 million dollars indicating a deficit of 171 million US dollars.
Analysts have warned that IMF programs tend to fail in the second year as rate cuts are enforced with money printed through open market operations, on the claim that inflation is low, as private credit picks up, even as budget deficits fall in real or nominal terms.
The rupee then slides, energy and food prices go up, the entire reform program is discredited and the government in power is ousted.
Sri Lanka’s private credit is still weak, but in August the central bank injected large volumes of money on a net basis in August by cutting the reserve ratio.
If the printed money is used to give credit or buy Treasury bills which are then spent by their recipients on imports, the new money will create a BOP deficit as the exchange rate is defended.
If the exchange rate is not defended the currency will fall and the reforms are discredited. Exchange rate instability also discourages private inflows and may then trigger flight of any capital that has come.