The central bank printed money in 2015, cutting rates and pouring liquidity into money markets, as a budget deficit and domestic credit surged triggering a balance of payments crises and capital flight.
Sri Lanka exported 11.3 billion dollars of exports, up 10.2 percent from a year earlier, and imports went up 9.4 percent to 20.9 billion dollars, expanding the trade deficit to 9.6 billion US dollars from 8.8 billion dollars.
Remittances were down 1.1 percent to 7.14 billion rupees and tourism receipts were estimated at 3.6 billion US dollars. Remittances (which are not save in in forex accounts) and tourism receipts, when spent by their recipients generate a trade deficit.
Software exports will also drive the trade deficit when spent by their recipients.
Gross inflows to the government from foreign loans amounted to 5.7 billion US dollars, up from 4.9 billion US dollars including inflows to rupee Treasury bill markets from abroad.
The net inflows to government, when spent, generates a current account deficit. Sri Lanka Development Bonds, sold to forex account holders will also expand the current account when spent by the government, generating imports.
However any loan repayments abroad, and central bank foreign reserve collections will stop expanding the trade or current account deficit.
Any increases in exports when spent will drive total imports up, though they will not expand either the merchandise trade deficit or current account.
The central bank has said it bought about 1.6 billion US dollars from the forex markets, mopping up liquidity from dollar purchase in 2017.
The central bank had also received 419 million dollars from the IMF on a gross basis. Foreign reserves are also boosted by interest earnings on reserves.
A 'BOP surplus' is not really surplus as such but the funds are invested by the central bank in US Treasuries or similar securities and are no longer in the country. But based on standard economic accounting such 'below the line' flows are not considered 'capital outflows'.
In the same manner a 'BPO deficit' also implies capital inflows as a central bank sells its foreign securities to generate dollars to intervene in forex markets when money printed by its domestic operations department turns in to imports. Under a fiat money standard, the BOP is always in balance and there is no surplus or deficit.
The 'BOP surplus' is an archaic terms dating back to the gold standard.
Under a gold-linked standard, a central bank (or a collection of free banks or ordinary savers who do not have bank accounts) holds rising gold reserves (savings) as a domestic asset, when credit and consumption slows, not a foreign asset. As s result a 'BOP surplus' represents an inflow of gold.
Trade balances, current account balances and a BOP surplus or deficit are therefore a function of savings behaviour. (Colombo/Feb2/2018 - Update)