Business Times

Current account surplus due to rising budget deficit, falling growth

Rising budget deficit and a drop in economic growth are the trade-offs of the current account surplus in the balance of payments (BOP), a leading economist stated. Principal Researcher at the Point Pedro Institute of Development Muttukrishna Sarvananthan told the Business Times this week that the announcement by the Central Bank (CB) that Sri Lanka will have a current account surplus in 2009 for the first time since 1977, conspicuously hides the cost or trade-offs of such a surplus in the current account. According to the CB, Sri Lanka had a surplus of US$393 million as at end September 2009.

Dr. Sarvananthan said that according to data in the 2008 CB Annual Report, Sri Lanka has had a current account surplus only in 1950, 1951, 1954, 1955, 1956, 1965 and 1977. It should be noted that data is only available from 1950 when the CB was established in then Ceylon. The highest current account surplus of US$144.1 million was recorded in 1977, thus far.

Dr. Sarvananthan explained that there are a few reasons for the current account surplus by end September 2009. Firstly, imports during the first nine months in US dollar value recorded a 35.3% drop while exports during the same time period in US dollar value recorded only a 16.8% drop compared to the corresponding period in 2008. Secondly, net private remittances (current transfers) increased by 11% during the first nine months of 2009 compared to the same period last year.

Although the CB claims that there were higher earnings from external services up to September 2009, there is no data publicly available so far to confirm this. Going by the available data, Dr. Sarvanathan stated that it is most likely that Sri Lanka would have a current account surplus for the fiscal year 2009, which is first time after 1977. Whilst it is good for the economy to have a current account surplus, the crucial issue is at what cost? What were/are the trade-offs for having a current account surplus. Dr. Sarvananthan noted that the drop in imports were double that of the drop in exports.

This is the primary reason for the current account surplus in the BOP. Moreover, the drop in the imports of intermediate (petroleum, raw materials for the garments industry, etc and investment goods were higher than the drop in the imports of consumer goods. That is, while consumer goods imports dropped by 28.8% up to September 2009 compared to the same period last year, intermediate goods imports dropped by 40% and investment goods imports dropped by 28.5% (all in US dollar value terms).

The foregoing is a negative consequence of the current account surplus recorded by end September 2009, because the drop in the imports of intermediate and investment goods has contributed to the reduction in economic growth. Dr. Sarvananthan added that another negative consequence of the drop in overall imports is that it has reduced the government revenue earned from import duties, value added tax, excise duty, and other tax incomes from imports, which in turn has increased the budget deficit. During the first-half of this year, the budget deficit was about 11.5% according to an unofficial estimation. By the end of this year the budget deficit is likely to be in double-digits for the first time since 2001.

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