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ECONOMYNEXT – Sri Lanka’s current major external inflows exceeded imports for the fourth consecutive month as tighter monetary policy led to private sector deleveraging and state-owned enterprises also reduced credit-financed losses thanks market sales pricing.
In September, imports, exports and remittances were US$1,438 million, which was US$154 million higher than imports of US$1,284 million.
In August, imports stood at US$1,486 million against total exports and remittances of US$1,549 million.
In July, total imports and remittances were US$1,444 million, compared to imports of US$1,287 million.
In June, total exports and remittances amounted to US$1,522 million, exceeding imports by US$1,226 million.
Since most economic agents in the private sector are net savers, credit must be positive to transform all inflows into imports.
Loans to cover the losses of state energy companies turn directly into imports.
In June, total credit to private and public enterprises turned negative by US$61.4 million, in July it was negative by Rs.15.9 billion, in August by Rs.113.1 negative and in September by Rs.34. .1 million negative rupees.
“Central Bank foreign exchange purchases from commercial banks have been positive on a net basis for two months,” said Udeeshan Jonas, chief strategist at CAL Group, a Colombo-based investment bank.
“Now the balance of payments is starting to turn positive again. Rates have been raised and interest rates are now high,”
“Energy is at market price, private credit has fallen and taxes have also been increased to contain the deficit and monetary financing is down.
“Banks are also rebuilding their net open positions, which were negative six months ago. Currency adjustment is also helpful in the short term.
“The combined improvement is reflected in the trade balance. There have also been capital inflows in equity and debt markets. We can reasonably say that there is also an improvement in the current account.
If credit was strong, inflows to the financial account also turn into imports. However, at present, some banks, while building their NOP, are also paying down their debt, which tends to contribute to a current account surplus.
Currency shortages arise when a loosely pegged central bank injects money through open market operations to suppress interest rates and trigger credit with what classical economists called “fictitious capital”. “, putting pressure on the rupee.
Since ordinary people – or the government through its budget deficit – cannot print money, the central bank is the only agency that creates currency shortages.
The Sri Lankan rupee crashed from 200 to 360 against the US dollar in 2022, after two years of money printing by macroeconomists to keep interest rates low and boost growth or target a currency gap. production.
The International Monetary Fund, in an extraordinary move, provided technical support to Sri Lanka’s central bank, an agency of the middle regime that had printed money and opted for IMF bailouts 16 times earlier, to calculate a output gap, with foreseeable consequences.
Sri Lanka has experienced consecutive currency crises from 2015 as money was printed under flexible inflation targeting, an aggressive soft peg strategy in which floating rate type monetary policy rampages on a reserve collecting pegged rates to mistarget rates as part of a “data-driven” policy.
Policy mistakes are then offset by depreciation (known as a flexible exchange rate) and rates are hastily raised, triggering a production shock and social unrest.
In 2019, after output shocks resulting from two currency crises, taxes were also cut by economists who said there was a “persistent” output gap (low growth) and historically large volumes of money were printed to prevent rates from rising to finance the deficit. (Colombo/06 November 2022)