The current account is swinging back from a 3.7 billion dollar deficit in 2008, when Sri Lanka entered a balance of payments crisis. The island is prone to balance of payments crises since it follows a soft pegged exchange rate regime.
A steep contraction in the current account also occurred in the wake of a severe balance of payments crisis in 2001, when a deficit of 1,066 million US dollars in 2000, dwindled to just 215.1 million in the following year.
Sri Lanka started to register large and persistent trade deficits after 1977, when the economy was opened up and people went abroad for foreign jobs, increasing incomes.
Remittances started to increase the spending power of the people and capital inflows - especially foreign aid - also added to domestic purchasing power, driving import demand.
In Sri Lanka, the current account - especially imports via the trade account - is the key escape valve for foreign inflows as the capital account is restricted.
Money also flows out when the central bank sterilizes current inflows to build up foreign reserves, further restricting the spending power of the economy in the wake of a balance of payments crisis.The central bank has locked up over five billion US dollars in reserves this year. Some were from the IMF and some were borrowed reserves directly swapped for government bonds, bypassing the domestic economy.
During and soon after a balance of payments crisis, imports collapse also because interest rates shoot up and banks are hit by liquidity shortages. This increases bad loans, banks restrict credit, slowing the economy and import demand.
It is also usual for the government to impose trade controls, in the form of punitive taxes, or additional margins for letters of credit amid a balance of payments crisis, until a float of the currency and International Monetary Fund help comes.
In 2009, however the demand for Sri Lanka's exports also crashed amid a global slump, further reducing the incomes and spending power in the domestic economy.
But credit growth and economic activity, is now starting to pick up.
The Central Bank has also said it was planning to relax capital controls.