By: Staff Writer
February 03, Colombo (LNW): Sri Lanka’s imports surged to $1.92 billion in December 2024, significantly higher than the $1.5-$1.6 billion range seen in previous months. This sharp increase followed a surge in credit and came just weeks after warnings against excessive money printing through open market operations (OMOs). The last time imports were this high was in December 2021, when they peaked at $2.24 billion due to large-scale central bank interventions aimed at suppressing interest rates.
In October 2024, analysts had warned that the central bank injected approximately 100 billion rupees into the economy, increasing excess liquidity in money markets to around 200 billion rupees—levels similar to those seen before Sri Lanka’s economic crisis.
Meanwhile, the country’s foreign exchange inflows in December, comprising exports, tourism, and remittances, amounted to $2.41 billion, exceeding merchandise imports by $488 million. However, these inflows also had to cover service outflows, interest payments, dividends, and debt repayments, narrowing the net surplus to $160 million from $319 million in the previous month.
December traditionally benefits from increased tourism earnings, but these funds are later used to finance imports, diluting the initial surplus. Concerns were raised in October when an economic analyst highlighted that the central bank had injected liquidity through OMOs, effectively allowing banks to extend credit without corresponding deposits.
This type of credit expansion ultimately impacts the balance of payments through multiple rounds of investment credit, regardless of whether it funds consumer goods, capital goods, or infrastructure projects.
Interestingly, vehicle imports—often criticized for straining foreign reserves—generate significant tax revenue and reduce government borrowing pressures. In contrast, imports of investment goods and raw materials, which totaled $455.9 million in December, create higher credit burdens since they enter at lower tax rates. The last comparable surge in investment goods imports was in January 2022, when excessive money printing also fueled economic instability.
Attempts to regulate trade by restricting specific imports are ineffective in addressing balance of payments issues. The fundamental problem lies in liquidity injections from OMOs and other monetary policy tools. Although excess liquidity has recently declined, analysts warn that the central bank’s single policy rate could lead to renewed money printing and a second economic default—similar to what occurred in the post-civil war period when mid-corridor rate targeting resulted in a Latin American-style financial collapse.
The misconception that specific imports, such as vehicles, are the root cause of balance of payments deficits persists. However, the true issue stems from central bank credit expansion. Historical patterns show that economic instability often follows excessive monetary injections, as seen in the 1930s when the Federal Reserve’s OMOs led to inflation and currency devaluation.
Currently, Sri Lanka is navigating a delicate monetary balance. The central bank had maintained a tight reserve regime until October 2024, which supported exchange rate stability and economic recovery. However, a shift toward an “ample reserves” regime—where excessive liquidity is injected into the economy—could destabilize the external sector, triggering another crisis.Although private sector credit growth has only recently resumed, a substantial volume of undisbursed credit remains. If released under current conditions, it could challenge external stability and necessitate yet another round of financial stabilization measures.
