Sri Lanka June 2021 imports, trade deficit hit 3-year high as injections defeat controls
From：Taipei World Trade Center Liaison Office In Colombo
Sri Lanka’s imports hit 10,015 million US dollars in the six months to June 2021, the highest since 2018 and the trade deficit hit 4,316 million dollars, also a three year high, official data showed as the central bank ran unusually inflationary policy, injecting liquidity.
Sri Lanka’s imports hit 1,659 million US dollars in June 2021, up from 1,055 million in 2020, when credit collapsed in a lockdown. Of the total imports, 1,592 were non oil imports in June 2021 despite import controls.
Analysts had warned that import controls were damaging and also useless as long as liquidity was injected. The June 2021 imports were higher than the 1.4 billion recorded in 2019, but lower than the 1.8 billion seen in June 2018.
In 2019 Sri Lanka’s central bank was sterilizing inflows, slowing domestic credit below potential and buying dollars and sterilizing the inflows (sterilized purchases of forex) which classical economists call ‘deflationary policy’ in a pegged exchange rate regime.
In 2018 the central bank was running heavily inflationary policy printing money and sterilizing dollar sales, amid a strong pick up in credit.
Up to June 2018 Sri Lanka ran a trade gap of 5.7 billion US dollars, on total imports of 11.4 billion US dollars, which fell to 3.59 billion US dollars in 2019 on total imports of 9.5 billion as the monetary authority ran deflationary policy.
The central bank began to print money after July 2019 buying Treasury bills and bonds from commercial banks to target an ‘output gap’ (running inflationary policy) despite having an IMF program with a forex reserve target. Up to the third quarter of 2019 Sri Lanka ran a balance of payments surplus. Output gap targeting of 2018, turned to full blown modern monetary theory injections in 2020.
A trade deficit is the result of services income such as remittances being spent by domestic economic agents. It pressures neither the exchange rate, nor the balance of payments.
A current account deficit is the result of foreign borrowings or foreign direct investments being invested by domestic economic agents and is also neutral on the exchange and the BOP.
However when liquidity is injected (inflationary policy is followed), outflows exceed inflows triggering foreign exchange shortages, leading to a running down of reserves to maintain a peg.
“In a country which neither borrows from nor lends to other countries nd which maintains equilibrium in its capital market, “buying power” is identical with “aggregate of money earnings”,” Bertil Ohlin, a Swedish economist – and later Nobel winner – tried in vain to explain to John Maynard Keynes in 1929 why Weimar Republic Germany was defaulting on foreign payments.
“Foreign borrowings however, increases and (outward) loans reduce buying power. Similarly, inflationary credit policy increases and deflationary policy reduces it.
“In the former case new buying power is created by banks; in the latter money which is earned and saved is not lent by the banks to other – it vanishes and buying power falls off.”
Most East Asian central banks followed deflationary policy, building forex reserves and exporting savings ‘below the line’ to the US which in turn used them to run a trade deficit and buy goods from East Asia.