Dec 14, 2009 (LBO) – Sri Lanka’s external current account is expected to swing into a surplus in 2009, for the first time since 1977, the central bank said, as the island was gripped by a severe trade contraction and economic slump. 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 plannin