ECONOMYNEXT – Sri Lanka has recorded a 706 million US dollar current account surplus in the first quarter of 2024 as the financial account recorded a deficit amid private and official debt repayments and reserve collections, data show.
Sri Lanka has recorded current account surpluses, since the last quarter of 2022 when monetary stability is reached.
The current account is a mirror image of the financial and capital accounts, subject to errors and omissions.
The way external accounting is calculated, only the balance of payments surplus and deficit (as defined) can be accurately measured.
Whether there is a balance of payments deficit or surplus depends on the note-issue activities of the central bank.
When money is printed through reverse repo or standing facilities, regardless of a budget deficit or surplus, there are foreign exchange shortages, making it difficult to make foreign payments, especially in the capital account, leading to a run down of reserve and eventual default.
Sri Lanka reached monetary stability in the last quarter of 2022 and got the ability to repay foreign loans. Private sector banks have also repaid loans or collected dollars for government debt repaid in rupees and sovereign bond provisions.
Countries get into forex shortages due to a doctrine (called economics) taught in universities mainly in the UK and US, that emerged due to a mis-understanding of central banking and balance of payments primarily by Cambridge academic J M Keynes in the 1920s.
After World War II, both UK and US experienced severe monetary troubles that led to the collase of the Bretton Woods and floating exchange rate, while Germany escaped after World War II due to understanding of what happened to the country in the 1920s.
Most modern ‘macroeconomists’ also believe that external repayments are due to trade or current account flows as Mercantilists before Adam Smith did.
“The truth is that the maintenance of monetary stability and of a sound currency system has nothing whatever to do with the balance of payments or of trade,” explained classical economist Ludwig von Mises, after Keynes claimed there was ‘transfer problem’
“There is only one thing that endangers monetary stability—inflation. If a country neither issues additional quantities of paper money nor expands credit, it will not have any monetary troubles.
“An excess of exports is not a prerequisite for the payment of reparations. The causation, rather, is the other way round.
“The fact that a nation makes such payments has the tendency to create such an excess of exports.”
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In the last century hard goods were the major current account item. However in this with services trade, macro economists have switched from the commercial balance (trade balance) of classical mercantilism in to the current account. (Colombo/July02/2024)