ECONOMYNEXT – Sri Lanka’s external current account recorded a 415 million US dollar surplus in the second quarter of 2024, central bank data shows, as debt repayments and reserve collections at an appropriate interest rate, allowed outflows from through the financial account.
So far in 2024, the current account is about 1.1 billion US dollars in surplus and economy is staring to recover.
Sri Lanka started to record current account surpluses from around the third quarter of 2022 when the central bank stopped printing money and its deflationary policy started to show up in the balance of payments.
The financial account officially (subject to errors and omissions) started to show a deficit (outflows) from the fourth quarter for 2022 as loans were repaid on a net basis, and private banks also repaid syndicated loans and later built dollar reserve to cover net open position shortfalls.
The financial account is the mirror image of the current account (subject to errors and omissions).
In the way external accounts are prepared, the so-called ‘deficit’ in the balance of payments is known accurately as it largely reflects changes in the balance sheet of a reserve collecting central bank with a policy rate.
Other items, including tourism are estimates.
However the balance of payments always ‘balances’ whether current account deficits are created by borrowing aboard and investing or spending domestically or ‘BOP deficits’ are created by printing money and running down reserves.
In countries weighed down by anglophone Mercantilism where reserve colleting central banks target a single policy rate and trigger chronic balance of payments deficits and depreciation destroying domestic capital, current account surpluses (and ‘saving’ foreign exchange) is the holy grail of economic policy.
Before classical economics started to develop in the early 19 century, classical mercantilists also had similar ideas about the trade deficit (commercial balance) as service trade was minimal at the time, and specie losses (now ‘saving’ foreign exchange).
As the policy rate (first proposed by John Law in 1706 and opposed at the time) along with open market operations which was suddenly invented by the Fed in 1920s, spread to other banks triggering devaluations without war in the 1930s, Mercantilism returned in full force.
John Maynard Keynes for example, claimed that, Germany could not make external reparations payments due to the lack of trade surplus.
German, French and Swedish economists however pointed out that it was the act of making outward capital payments that reduced domestic investment (or consumption when money is raised to buy forex or gold).
The reduced investment then contracted the current account balance as long as the Reichsbank did not print money.
The spurious Keynesian/Cambridge economics doctrine, which was accepted by Allied Nations, is known as the ‘transfer problem’.
Sri Lanka’s Active Liability Management Law, where money was borrowed abroad to settle foreign debt after triggering forex shortages by printing money to target the average weighted call money rate, was also based on similar doctrine, EN’s economic columnist Bellwether says.
Sri Lanka debt crisis trapped in spurious Keynesian ‘transfer problem’ and MMT: Bellwether
Inflationary open market operations to target a single policy rate leads to forex shortages in about 6 to 8 weeks when private credit is strong and the central bank can neither build reserves, nor generate dollars to repay government or its own debt.
When the problem started to aggravate as money was printed to boost inflation (flexible inflation targeting) and growth (potential output) economic analysts warned that like the Weimar Republic Sri Lanka could default in peacetime.
The statistical IMF backed doctrines, jettisoned laws of nature involving the balance of payments, which were described by classical economists and prevented external imbalances up to World War I in the UK and up to around 1950 in the US.
When a reserve collecting central bank deploys inflationary OMO to supress rates, a then loses the ability to use savings from current inflows to repay debt, or even pay for current imports like oil.
Under flexible inflation targeting/average weighted call money rate targeting, Sri Lanka’s Ceylon Petroleum Corporation also borrowed dollars heavily including when fuel was market priced.
To maintain external stability and stop the deprecation of the rupee, a reserve collecting central bank has to allow sufficiently high rates not only to allow rupee savings to be made to cover domestic credit but also meet an IMF’s reserve target.
The IMF having given technical assistance to calculate potential output to a country at peace (a type of full employment policy), is now giving technical assistance for a ‘single policy rate’ even before the debt restructure of the first default is over.
REALTED
Sri Lanka told to go for single policy rate by IMF, target middle corridor rate
Maintaining stable exchange rates, avoiding social unrest, is the simplest of all monetary regimes, as long as the parliament is prepared to enact laws to restrain inflationary open market operations of a reserve collecting central bank as UK did before the policy rate, analysts say. (Colombo/Oct06/2024)