ECONOMYNEXT – Sri Lanka’s imports surged to 1,924 million US dollars in December 2024, up from around 1500 to 1,600 million dollars in previous months amid a steep spike in credit and shortly after warnings not to print money through open market operations, a few weeks earlier.
The December spike came amid port congestion where backlogs are cleared in some weeks.
The December 2024 imports are the highest since the 2,241 million US dollars in December 2021 as the central bank injected large volumes of money to suppress rates through open market operations, sterilizing interventions.
In December private credit surged by 193 billion rupees, also not seen since the crisis period.
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Warnings were issued in October that the central bank had injected around 100 billion rupees, driving up excess liquidity in money markets to around billion rupees, seen in the crisis period.
High Current Inflows
Sri Lanka’s gross current foreign exchange inflows in December made up of exports, services (including tourism) and remittances were 2,413 billion dollars, which was 488 million dollars above merchandise imports.
However, that has to finance services outflows, interest payments and dividends and debt repayment.
After services outflows the gap narrowed to 160 million dollars from 319 million dollars a month earlier. December is a tourism earnings month, bringing inflows, but the money is spent on imports by their recipients later.
In October EN’s economic columnist warned that the central bank printed 100 billion rupees through open market operations giving cash to all comers through an auction at the lower end of the corridor and driving up excess liquidity.
Open market operations that re-finance private banks, allowing them to give credit without deposits eventually hit the balance of payments through several rounds of investment credit.
It is not relevant whether cars or other equipment or building materials come as long as the credit is not re-financed by open market operations.
In fact, cars bring high levels of taxes and reduce credit pressure from the government unlike building materials and other capital imports which come at low rates.
Money is Fungible
Imports of investment goods and base metals hit 455.9 million US dollars, also the highest since the January 2022 number of 462 million dollars, when the central bank was printing money to suppress rates.
Banning individual items or groups of imports does not solve balance of payment problems as it is a result of liquidity injections, from open market operations or other tools.
Excess liquidity is now down, but the single policy rate can trigger more money printing and a second default as did the mid-corridor targeting after the end of a civil war leading to a peacetime Latin America style default, analysts have warned.
The obsession with vehicles is a mistaken idea, as balance of payments deficits come from the use of central bank credit through open market operations or any other means, and not the actual type of goods that are imported.
In 1969, when the Import and Export Control Law was gazette, liquidity was injected to rural and industrial credit programs re-financed by the central bank.
The age of inflation and exchange rate collapsed in the 1930s after the invention of open market operations by the Fed in the 1920s where a central banks board made a political decision to cut rates and inject money in the expectation of boosting growth.
End of Scarce Reserve Regime
The single policy rate results in injecting vast amounts of excess liquidity when the rate is pushed towards the floor, which then hit the forex market through cascading (several rounds) of credit analysts warn.
“The single policy rate essentially turns the monetary regime from a prudent scarce reserve regime to an excess reserve one, or as it is said in the Saltwater inflationist quantity easing era, an ‘ample’ reserves regime,” Bellwether says.
“Such a regime is deadly to a country that is emerging from default and has to collect reserves to repay debt.”
The death of the scarce reserve regime, like the introduction of potential output was also marked by IMF technical assistance. Similar regimes are found in defaulting African countries.
Even the Fed has a 25 basis point gap in its policy rate, which allows interbank markets to function somewhat. It was wider before the housing bubble and the Great Moderation period. At the moment however the Fed is running deflationary policy with market participants depositing vast amounts of excess money.
Until October, Sri Lanka’s central bank ran an exceptionally scarce reserve regime, (running active deflationary policy) ensuring exchange rate stability and providing the basic tool for a market economy to recover with money that is a means of deferred payments and a store of value undershooting its 5 percent inflation target.
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Excess liquidity is now down, but the single policy rate can trigger more money printing and a second default as the mid-corridor targeting after the end of a civil war leading to a peacetime Latin America style default.
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Sri Lanka vehicle imports not a threat to rupee but inflationary open market operations will be
In the absence of inflationary open market operations and a capital outflow automatically compresses the current account balance through credit sequencing.
Sri Lanka’s private credit only started to expand a few months ago, but when there is a large volume of approved but undisbursed credit it becomes impossible to maintain external stability in an ample reserves regime without triggering a stabilization crisis. (Colombo/Feb01/2025)
