Sri Lanka is likely to see a current account deficit of $ 1.5-2 billion by the end of the year if crude oil continues to trade above $ 100/bbl, in addition to several other macroeconomic factors, Capital Alliance (CAL) Head of Research Trisha Pieris said on Monday (16), speaking during a live presentation on the company’s socials.
“If crude stays above $ 100 per barrel, we’re looking at moving into a current account deficit, and this scenario that we have factored in here, is only with regards to a change in the crude oil price,” Pieris said, presenting the impact of elevated costs of crude oil on the current account, as it could lead to elevated inflation and FX pressure.
“So what you could be looking at in a worst case scenario is potentially a current account deficit in excess of $ 1.5-2 billion.”
The Brent crude oil per $/bbl rate once again hovered around $ 103.65 to $ 104 yesterday (17), over continued doubts of the US carrying though on its promise to protect shipping via the Strait of Hormuz, through which at least 20% of global crude oil consumption and refined products are shipped through, yearly.
US President Donald Trump indicated that such a coalition, between the US and other nations was yet to be realised, going back on previous sentiment; urging countries to join the US in ensuring safe passage for shipments through the Strait.
MST Marque Head of Energy Research Saul Kavonic according to a CNBC report said: “Mixed messages are coming from the Trump administration on the war’s duration, as the market focuses more on the actions on the ground that remain escalatory.”
In January, Sri Lanka’s current account recorded a surplus of $ 369.7 million, more than triple the surplus seen the year before, in the same time period, at $ 99.8 million, Central Bank of Sri Lanka’s (CBSL) External Sector Performance data shows.
Pieris explained that the reason why the exchange rate has seen stability in the recent past is due to the running of current account surpluses thus far, which had been the research unit’s key expectations for the year.
She added that if the Strait of Hormuz is to continue to be closed indefinitely, even as Sri Lanka may rely on alternate routes for shipping, incurring elevated costs, it is to also add to the risk of running a deficit on the current account.
“What happens if this conflict gets prolonged, where the Strait is closed for longer, where we may find alternate routes for sourcing; but of course where it takes a lot more time and at a much more elevated cost. This means that we would be moving into a current account deficit, elevated inflation levels and a lot more pressure on the FX,” Pieris said.