Sri Lanka services surplus exceeds trade deficit in Feb 2024: analysis

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ECONOMYNEXT – Sri Lanka has posted a services account surplus of 400 million US dollars in February 2024, higher than a trade deficit of 319 million US dollars, central bank data shows.

Sri Lanka’s exports in February 2024 was 1,059 million US dollars, up 7.9 percent from 982 million dollars a year ago while imports surged 35 percent to 1,378 million US dollars, giving trade deficit of 319 million dollars.

Academics, politicians and many commentators rail against trade deficits, claiming it leads to currency depreciation or that it is a ‘problem’ of some kind, regressing back to classical mercantilism, though no foreign shipper will actually send goods to Sri Lanka without being paid in dollars, except for short term suppliers credit.

The trade deficit is triggered when people spend income from tourism, BPO services and worker remittances, or when government borrowings to finance infrastructure, none of which create any pressure on the currency.

Services inflows for February were calculated at 593 million dollars for February, and outflows 193 million dollars, giving a services account surplus of 400 million Us dollars.

Worker remittances were another 476 million dollars.

Modern ‘economists’ usually rail against the ‘current account’ deficit, claiming that it leads to currency depreciation or that it is a ‘problem’ of some kind in a neo-Mercantilist revision of the classical idea.

The central bank is has started releasing broader balance of payments data from February 2024, which can help bust mercantilist myths, dating back to the 17th century, before classical economics was devised by the likes of Adam Smith and David Ricardo.

In most countries current account deficits are mostly driven by government borrowings, which are invested or spent domestically. Countries like the US, which receive large volumes of FDI may also have current accounts driven by private flows.

Third world countries with bad central banks also have capital controls, which means domestic savers can only invest abroad, therefore private citizens cannot contribute a current account surplus by investing out.

Therefore, outward financial payments take place through central bank reserve collection or government debt repayments.

Countries with third world countries when governments borrow abroad, with private parties being blocked from investing out due to exchange controls.

In countries with depreciating central banks, where domestic lifetime real savings are destroyed by currency depreciation and governments usually borrow abroad, despite 20 percent plus private savings rates.

Currencies weaken due to balance of payments deficits triggered from central bank domestic operations to cut rates artificially through inflationary open market operations and standing facilities or both.

Inflationary open market operations to mis-target rates makes it impossible to make outward payments including to repay debt, leading to defaults.

To repay debt or collect reserves, domestic investments have to be curbed at an appropriate rate, which cannot be done if money is printed to cut rates claiming inflation is low, through spurious monetary doctrines involving anchor conflicts, critics say.

To run a balance of payments surplus, domestic operations of a note issue bank has to be deflationary.

Up to February Sri Lanka’s central bank ran a 317 million US dollar balance of payments surplus with the help of deflationary policy and also allowed the currency to appreciate.

Third world bad money central banks usually do not allow currencies to appreciate even when in the inflationist-devaluationism belief that debasement help exports, despite overwhelming evidence from East Asia that it is long term stability that helps drive foreign and local investments to build the required capacity and know-how.

Most East Asian reserve collecting central banks run consistently deflationary operations, selling their own securities (Bank Negara Bills, MAS Bills, HKMA Exchange Fund bills and notes) to mop up inflows instead of conducting inflationary open market operations with government securities and scapegoating budget deficits under flexible inflation targeting to mis-target rates critics say. (Colombo/Apr10/2024)

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[[{“value”:” ECONOMYNEXT – Sri Lanka has posted a services account surplus of 400 million US dollars in February 2024, higher than a trade deficit of…

[[{“value”:” ECONOMYNEXT – Sri Lanka has posted a services account surplus of 400 million US dollars in February 2024, higher than a trade deficit of…