ECONOMYNEXT – Sri Lanka’s current foreign exchange earnings from exports, gross services and remittances rose to 2,362 million US dollars in July 2024 from 2,003 in June, which exceeded imports by 619 million US dollars, official data show.
Imports also rose to 1,743 million US dollars in July 2024 from 1,446 million US dollars, with investment goods and base metal imports picking up to 401 million dollars from 258 million dollars the previous month.
In intermediate goods, textiles and textiles articles rose to 279 million US dollars, about 233 million US dollars from last year with intermediate goods rising to 1,066 million US dollars in June from 974 million US dollars.
Sri Lanka’s gross services inflows were reported at 664.9 million US dollars, with tourism estimated at 323.3 million US dollars and computer services of 93.1 million US dollars.
Travel abroad was reported at 75. 1 million US dollars compared to 11.3 million dollars last year.
Net services inflows were 374.6 million dollars.
When recipients of services inflows spend the money on imported goods, or travel around in the country using fuel, imports are generated triggering a trade deficit.
When family members of expatriate workers buy goods, or building materials, imports are generated contributing to the trade deficit.
If the government borrows abroad to invest in infrastructure, imports will also be generated. If the government repays foreign debt on a net basis by taking domestic savings imports will be reduced.
Sri Lanka has a high private savings rate, indicating that most people save. As a result for all inflows to be spent on imports, the savings has to be invested through bank credit.
If the central banks sells securities it holds to banks and takes away the savings preventing them from being invested in the domestic economy, a balance of payments surplus will be generated and it can build reserves.
However, if the central bank prints money to generate 5 percent inflation under ‘flexible’ inflation targeting, or prints money to target potential output under the new monetary law (inflationary policy), there will be a balance of payments deficit and the demand for dollars will exceed the inflows.
The rupee the rupee will depreciate, confidence will be lost, and social unrest will come as food and energy prices go up.
If the central bank buys large quantities of dollars and allows the liquidity generated from dollars purchases to build up without selling its securities (unsterilized dollar purchases) and does not intervene in the forex market to redeem the rupees due to the ‘flexible exchange rate’, the rupee will come under pressure despite the recent BOP surplus in the previous month as it did recently.
The central bank since September 2022 has run broadly deflationary policy, despite some mis-steps which it was able to overcome due to weak weak private credit as well as its own cautious rate cuts.
Since September 2022, the central bank has generated only 0.9 percent inflation helped by broadly deflationary policy, and currency appreciation it allowed, which reversed some commodity prices despite services prices moving up to account for previous currency collapse.
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The Fed invented the policy rate and open market operations in the 1920s, triggering the Great Depression in the process. Centrally planned interest rates then spread to other central banks giving rise to the ‘age of inflation’ of chronic balance of payments troubles and peacetime economic crises.
The powers of unelected bureaucrats to destabilize nations also expanded after central banks were nationalized and ‘full employment’ policies mainstreamed from the 1960s.
‘Independent’ central banks then busted the Bretton Woods, triggering oil shocks and then Great Inflation with un-anchored policy.
The Housing bubble was later triggered also due to record low rates for reflation.
Mercantilist doctrines of the 17th century which were defeated by classical economists started to re-emerge in the last century such as that trade deficits (now called the current account deficit) created external troubles and not badly anchored or un-anchored central banking.
After the 1960s in particular due to full employment policies pursued by ‘independent’ central banks, ideas such as ‘wage spiral inflation’ (Nixon era failed controls), oil shocks also re-emerged in a revival of 17th century cost push ideas.
An unusual doctrine that even classical Mercantilists did not spread, that inflation was partly cost-push was also developed, despite monopoly central banks of the 20th century having full control over reserve money.
Anglophone central banks also started other tactics to deflect blame to their victims including ‘inflation expectations’ critics say. (Colombo/Aug31/2024)