ECONONYNEXT – Sri Lanka’s imports fell 179 million US dollars to 1,507 million US dollars in May 2025 from a month earlier, amid fall in services receipts, even as vehicle imports went up, central bank data shows.
Gross inflows from exports of goods, labour (remittances) and services including remittances were 2,140 million US dollars in May 2025, which was 633 million US dollars above goods imports.
Services inflows fell to 464.6 million US dollars, from 602 million US dollars, with tourism earnings falling to 164 million US dollars in May from 256 million in April.
IT/BPO services also fell to 61.6 million US dollars from 85.4 million dollars in April.
Sri Lanka started taxing foreign earned dollars income from April, after money printing triggered an external default ending a policy which encouraged services income to come to the country.
It is not clear whether the tax played a role in reducing services incomes. Holidays in April could reduce sales and subsequent earnings.
Sri Lanka starts ad hoc taxation under IMF programs when forex crises are triggered by inflationary rate cuts for mid-corridor targeting, flexible inflation targeting, or potential output targeting now, or central bank re-financed credit schemes and sterilized forex sales in the past.
Personal vehicle imports were 118 million US dollars in May 2025, down from 134 million US dollars in April.
If the central bank does not print money to keep rates down, vehicle imports would ‘crowd out’ other imports, keeping the external sector in balance.
There are however concerns that current interest rates may not be sufficient to generate resources to meet interest and loan payments, as well as reserve collections.
This can lead to a run down of reserves (making it possible to keep rates down) or make Sri Lanka miss reserve targets as had happened during two IMF programs in 2011/12 and under flexible inflation targeting (cutting rates on historical inflation ignoring domestic credit developments) in 2018.
Vehicle imports are also partly financed by credit.
Sri Lanka’s investment goods and base imports were 344.3 million US dollars, only marginally down from 371 million US dollars in April.
Investments goods are typically financed by credit and there can be mis-match with inflows, if they are financed with central bank credit or unsterilized excess liquidity in the banking system from previous dollar purchases represents ‘uncollected’ reserves, analysts have said.
In recent crisis years, investment goods imports have surged to 600 million dollars a month as the central bank bought bills an injected liquidity into banks to keep rates down.
Construction financed by printed money from open market operations will in turn boost incomes of workers, and fuel for vehicles in addition to boosting building materials, making it difficult to make interest or debt repayments.
Sri Lanka has exchange controls which means the central bank’s operating framework is deeply flawed and when anchor conflicts intensify there is a full-blown currency crisis and also import controls.
(Colombo/July13/2025)
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