Sri Lanka set to post highest balance of payments deficit on record this year – Business News

• Seven-month balance of payments deficit eclipses the deficit for 2020 as a whole

Sri Lanka is on track to record its highest balance of payments (BOP) deficit on record in 2021, with the first 7-month deficit of foreign currency inflows and outflows exceeding the deficit for 2020 as a whole.

Sri Lanka recorded a balance of payments deficit of US $ 2,755 million in the seven months to July 2021, compared to US $ 939 million in the same period last year and a deficit of 2,328 million US dollars recorded over the whole of 2020, when the pandemic took a heavy toll on the country’s merchandise exports and direct investment flows while tourism trade, which had the capacity to generate more than 4 , US $ 5 billion, stopped from March.

Meanwhile, the country’s external sector has started to face new concerns over the noticeable slowdown in the pace of workers’ remittances since June, further contributing to the expansion of the balance of payments deficit amid a backdrop of large repayments of the external debt, which were honored by the country’s foreign exchange reserves.

However, some sections argue that the record cash injections made by the Central Bank since the start of the pandemic last year to finance the deficit and also to provide liquidity to the banking system have exacerbated the balance of payments problems, because part of these funds created was used to pay public sector wages while creating cheap credit.

As a result, a considerable part of this money was spent on the consumption of goods and services produced abroad, i.e. imports, which widened the gap between foreign exchange outflows and inflows. foreign exchange, the so-called balance of payments deficit. This created currency shortages, leading to a sharp drop in the value of the rupee when the Central Bank stopped providing convertibility of foreign currency bills thanks to its dwindling reserves.

In order to ease the pressure on the currency and foreign assets, the central bank raised its key rates on August 19 and removed the cap rate on treasury bill yields last week.

In the first bill auction held on Wednesday without a yield check, the yields on 3, 6 and 12 month bills rose 30 basis points to 38 basis points, the Treasury bill rate to 12 month hitting 6.50% from 6.12% in the previous auction, signaling a further increase in market interest rates.