Sri Lanka's deficits in its trade and current accounts reached historical proportions in 2011, the Central Bank (CB) has said in its latest 2011 annual report. But a surplus is expected this year in its balance of payments.
CB Governor Ajith Nivard Cabraal said he believes there would be a positive turn in the balance of payments that is expected to recover from a negative of US$1061 million to a plus of US$1250 million in 2012.
The trade deficit widened to US$9.7 billion in 2011. Mr Cabraal told the Business Times said they would be looking at reducing it to US$9.1 billion this year.
However, he observed that imports would remain relatively the same with the import expenditure expected to reach US$20.8 billion in 2012. Import expenditure in 2011 stood at US$20.2 billion.
In the future, the Bank would in the medium term look to tap on the services account, a major component of which is transportation, to positively impact on the current account balance, the report states.
Other areas expected to service the country's current account would be revenue from tourism and the IT/BPO in the services account, the report indicates.
This clearly indicates a significant reliance on the services account as opposed to the worker remittances that seeks to offset the trade deficit. In this respect, the Bank notes that its medium term strategy would be to improve the surplus in the services account, thereby reducing the current account deficit to a "sustainable level." The country's deficits in the trade account and current account were above the historical average, mainly due to the sharp growth of import expenditure (about 51% compared to 2010), the report stated.
Sri Lanka's trade deficit had averaged around 11% of GDP since 1977 while the current account deficit was around 5% of GDP on average during the same period. The country has been experiencing a deficit in both its trade account and external current accout during the last five decades.
These deficits widened substantially since 1977 and this phenomenon the report notes is common to most developing economies that are exporters of primary agricultural products and importers of essential commodit6ies. The Bank blamed the high deficit due to the sharp growth of import expenditure despite an impressive growth in exports by about 22% over the previous year.
The high import expenditure was caused due to the increased demand for intermediate and investment goods, owing to rapid infrastructure development activities and also sharp increases in price and volume of petroleum imports. It pointed out the need to reduce its current account balance through other measures without entirely depending on the reducing the trade deficit. The services account is expected to come down from US$8.6 billion to US$7.5 billion and the current account deficit is expected to drop from the present US$4.6 billion to US$2.3 billion.
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