Dec 05, 2012 (LBO) - Sri Lanka is expecting a 'balance of payments' surplus of 380 million US dollars in 2012 the latest Central Bank projection said, down from a 1.25 billion US dollar projection in May.
For 2013 the Central Bank is projecting a BOP surplus of 780 million US dollars, according to a presentation made by Central Bank Governor Nivard Cabraal to executives of Sri Lanka's finance companies Monday.
A so-called BOP surplus roughly corresponds to an increase in Central Bank's foreign reserves adjusted for items such as valuation changes.
Foreign reserves can increase steeply if there are reserves are captured and locked by a sell down of Central Bank's Treasury bill stock preventing the converted rupee proceeds from being spent, either directly by the recipients or others through credit.
Foreign reserves fall rapidly in the Central Bank prints money by purchasing large volumes of Treasury bills either to finance a deficit budget or to continuously sterilize foreign exchange sales.
During the last balance of payments crisis, the Central Bank held Treasury bill stock rose from almost zero to around 240 billion rupees.
In the absence of a sell down of T-bills reserves will increase by the equivalent increase in domestic reserve money or interest earnings on forex reserves and any International Monetary Fund receipts which occur outside the domestic monetary system.
The Central Bank's Treasury bill stock has been roughly stable at around 200 to 220 billion rupees from May until the first week of December and credit growth has been positive.
A balance of payments surplus is a legacy term dating back to the gold standard era when gold accumulated as a domestic asset in country when credit growth was low.
In modern paper fiat money systems, where gold is insignificant all inflows go out either as transactions by people, the government or reserve investments by the Central Bank and the balance of payments balance almost exactly.
But Central Bank monetary movements are considered 'below the line' and labeled as a balance of payments 'surplus', though the money has already moved out of the country usually to be invested in gilts of reserve currency countries.
The Central Bank is projecting a deficit in the current account of the balance of payments to narrow to 5.1 percent of gross domestic product in 2012 from 7.6 percent in 2011.
In May the Central Bank expected the current account to narrow to 3.8 percent of GDP, in 2012 despite projections of large inflows through the capital account.
A large surplus in the capital account (not counting IMF inflows) however generates a roughly equal deficit in the current account if bank credit is positive and there is no sell down of Central Bank held Treasury bills.
In 2013, the Central Bank is projecting the current account of the balance of payments to narrow to 3.6 percent of GDP.