Sri Lanka has recorded a surplus of 1,559 million dollars in the external current account official data show, amid reserve collections by the central bank and private banks repaying debt.
In the December 2023 quarter Sri Lanka recorded a current account surplus of 237 million US dollars.
Revised central bank data show that a current account surplus of 687 million US dollars was recorded in the third quarter, 51 million dollars in the second quarter and 584 million dollars in the first quarter.
Sri Lanka started to record a current account surplus from the third quarter of 2022, with monetary stability also being restored around the same time and the overall balance of payments also going into surplus with deflationary monetary policy.
The current account surplus is roughly the mirror image of the financial (and capital) accounts, subject to errors and omissions (a balancing item).
The financial account was about 1.3 billion US dollars in deficit in 2024 before errors and omissions.
Sri Lanka has seen outflows through central bank reserve collections, swap repayments, ACU repayments, IMF loan repayments, and also private bank dollar collections and paying down of credit lines.
Unless monetary stability is restored by ending inflationary open market operations it is not possible to repay debt and even for imports, as forex shortages take place.
To make outward payments using current account flows, domestic investment has to be curtailed at an appropriate interest rate.
To collect monetary reserves or repay central bank debt, deflationary monetary policy has to be operated at an appropriate interest rate, otherwise the exchange rate depreciates as attempts are made to collect monetary reserves.
Unlike forex purchases by other agents, including the government, central bank dollar purchases leads to an expansion in reserve money.
Analysts have warned that if the central bank cuts rates with inflationary open market operations claiming that index inflation is low (flexible inflation targeting) as private credit recovers, the country will miss IMF reserve targets and the balance of payments could turn into deficit again, leading to a currency collapses, a default in re-structured debt and eventual higher interest rates.
The effect inflationary policy is generally described as the ‘transfer problem’ in post 1920s Keynesianism, or the spurious belief that a debt repayments require a trade account (now current) surplus driven by a surge in exports and competitiveness (a price effect rather than an incomes effect).
Sri Lanka’s government has seen inflows with International Monetary Fund and budget support loans from the Asian Development Bank and World Bank, through loans from some bilateral partners have been suspended.
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