ECONOMYNEXT – Sri Lanka continued to record a surplus in the current account in the third quarter of 2024, central bank data show as new borrowings were halted by bilateral lenders and debt repayments continue to multilateral lenders and foreign reserves were built.
Sri Lanka recorded a 303 million dollar surplus in the current account in the third quarter, down from 432 million dollars (revised) in the second quarter.
The financial account was and Capital Accounts were 303 million dollars negative (subject to errors and omissions).
A country will run a current account deficit if its get foreign investments and borrows abroad for domestic investments.
A country will run a current account surplus if debts are repaid in on a net basis or foreign reserves are built (or outward investments are made) turning the financial account into a deficit.
Sri Lanka got the ability to repay debt on a net basis in the third quarter of 2022, after rates were hiked and domestic credit was reduced.
Sri Lanka only got loans from multilateral lenders, who also had to be repaid without default.
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Sri Lanka has also been making repayments to the Reserve Bank of India on a net basis for loans taken by the central bank to intervene in forex markets and print money to offset the interventions.
Other side of the coin
The current account is as mirror image of the financial account. In balance of payments accounting, an errors and omissions number is inserted as a balancing figure, based on the remaining foreign reserves number, which can be accurately measured.
A country with a reserve collecting central bank will run a bigger current account deficit than its financial account receipts if the agency cuts rates with inflationary direct or open market operations, boosting domestic credit and investments and running down reserves.
Central banks that get International Monetary Fund technical assistance tend to print money to keep rates down based on some statistical formulae, including potential output (print money to boost growth) or flexible inflation targeting (print money to drive up cost of living), critics say.
The injections then turn the balance of payments into deficit and the country loses the ability to repay foreign debt.
As long as the country has a credit rating, more money can be borrowed to repay maturing debt, instead of raising money domestically to buy dollars at an interest rate compatible with the balance of payments, but eventually the country will default as market access is lost.
When open market operations are deployed by reserve collecting central banks (independent monetary policy), currencies will depreciate and the ability to repay debt will will be lost as reserves are run down to mop up the injected money to keep rates down.
Inflationism
The mis-understanding emerged among policy makers in English speaking Allied nations after the World War I with the advent of indiscriminate open market operations to target a policy rate for central bank ideology (a type of price control), ignoring its effects on the balance payments.
Anglophone inflationary macro-economics which was in its infancy at the time. UK’s J M Keynese claimed that there a ‘transfer problem’ and that a trade surplus or more exports were needed to make outward payments.
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Swedish (Bertil Ohlin), French (Jacques Rueff) and Austrian economists (Ludwig von Mises) insisted that it was not so.
The action of making external payments (at a market interest rate undisturbed by inflationary operations) automatically reduces domestic savings from being turned into investment and imports. The action generates the required foreign exchange.
“In a country, which neither borrows from nor lends to other countries and which maintains equilibrium on its capital market, ‘buying power’ is identical with ‘aggregate of money earnings,’ Ohlin told Keynes in a landmark debate in the 1920s as Germany borrowed abroad like Sri Lanka and failed to make reparations payments.
“Foreign borrowing, however, increases and loans (to foreigners) reduce buying power. Similarly, inflationary credit policy (central bank purchases of Treasury bills) and deflationary policy (CB securities sales) reduces it.
“In the former case new buying power is created by the banks; in the latter, money which is earned and save is not lent by the banks to others, – it vanishes (is sterilized) and buying power falls off.”
Under inflationary policy Sri Lanka not only borrowed abroad to maturing debt, but the Ceylon Petroleum Corporation also borrowed through supplier’s credit to make current payments, also helping keep down rates and driving up current account deficits.
These debt have also ended up in central government debt now.
The central bank’s deflationary policy has shown up in the balance of payments since the last quarter of 2022. In late 2024 analysts have warned against the re-emergence of inflationary policy and build up of excess liquidity though private credit is weak. (Colombo/Jan03/2024)
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