ECONONYNEXT – Sri Lanka’s balance of payments is still strongly in surplus in 2024 under the current interest rate structure, but is running slightly behind 2023, official data show.
Sri Lanka had recorded a BOP surplus (as defined) of 1,761 million US dollars by June 2024, down from 1,957.6 million dollars a year earlier.
Broadly, the BOP surplus is an improvement in net international reserves, and is a reliable figure unlike numbers like ‘current account’ balances which can be subject to large errors.
Sri Lanka’s central bank has run deflationary policy to collect reserves.
Under IMF programs, a central bank is able to collect reserves soon after hiking rates and contracting domestic credit, but misses reserve targets as the economy recovers and a narrow call money rate is targeted with excess liquidity on mathematical formulae (real interest rates or growth), critics have said.
The problem has become acute after a 2014 decision by the IMF to monitor programs based on a monetary policy consultation clause involving nominal interests 200 to 300 percent of levels seen in countries with monetary stability.
Sri Lanka’s most recent currency crisis, BOP deficits began in the latter part of 2019 within an IMF program, after also running mini-crises in 2018, leading to two ‘stabilization crises’ within the same program.
Similar problems were seen in a 2009 program with a currency collapse in 2012.
From 2022 Sri Lanka’s central bank has laid a strong foundation for growth, by providing stability for economic agents to work, undershooting its inflation target and also keeping the exchange rate stable.
The IMF which was set up originally to help maintain exchange rate stability and free trade under the Bretton Woods system, changed its Articles in 1978, leaving members without a credible anchor for money triggering steep depreciation, social unrest and defaults in countries which had market access at the time. (Colombo/Aug09/2024)