Department of Accountancy & Finance

Faculty of Management studies

Contents
Acknowledgement .................................................................................................................................. 2
Balance of Payment (BOP) ..................................................................................................................... 3
Types of balance of payment .............................................................................................................. 3
Data summary as per Central Bank Report ......................................................................................... 4
Relationship with other variables........................................................................................................ 6
Conclusion .......................................................................................................................................... 7
Inflation ................................................................................................................................................... 7
Relationship with other variables........................................................................................................ 7
Conclusion ........................................................................................................................................ 10
National income .................................................................................................................................... 10
National Income Rates ...................................................................................................................... 11
Analyze the data and discuss ............................................................................................................ 12
Conclusion and Recommendations in national income .................................................................... 13

1
Acknowledgement

2
Balance of Payment (BOP)

The statement that records all of the exchanges made for a specific duration between
organizations, governments, or private citizens of one nation and another is known as the
balance of payments. The statement includes all transaction information, providing the
authority with a clear picture of the money movement.

Ultimately, the fund's intake and outflow ought to line up if the items are shown on the
statement. A nation's balance of payments indicates whether it has too much or not enough
money. It indicates if exports exceed imports or vice versa for the nation.

Types of balance of payment

The balance of payment is divided into three types:

Current account: All international trade in goods and services is scanned by this account. Under
this account, all payments made for manufactured items and raw materials are included. The
tourist, engineering, stock, business services, transportation, and royalties from licenses and
copyrights are among the various items that fall under this category. The sum of these elements
constitutes a nation's BOP.

Capital account: Transactions related to the buying and selling of non-financial assets, such as
real estate, are tracked under this account. Along with the purchase and sale of fixed assets by
immigrants relocating to a new nation, this account also documents the flow of taxes. The
capital account's financing determines the current account's excess or deficiency and vice versa.

Finance account: This account records the money that comes into and goes out of other nations
by investments in things like real estate, foreign direct investments, businesses, etc. This
account determines who is the foreign owner of domestic assets and who is the domestic owner
of foreign assets. It also determines whether more stocks, gold, equities, or other assets are
being bought or sold

3
Data summary as per Central Bank Report
(Rs. Million)

2018 2019 2020 2021 2022

Current -454,308 -330,114 -220,370 -656,314 -316,154
account
Capital 2,265 4,095 5,193 5,009 6,123
account
Finance -536,943 -441,794 -52,625 -844,973 -538,153
account
Total -4,354 62,296 -405,854 -745,312 -1,087,831
balance

200000 Balance of payment

0
2018 2019 2020 2021 2022
-200000

-400000

-600000

-800000

-1000000

-1200000

Current Account Capital Account Finance Account Total Account

2018 In 2018, the current account deficit widened significantly. In November

and December 2018, the pressure on the exchange rate and balance of
payments eased as the trade deficit narrowed significantly. In 2018, the
financial account was strengthened with higher financial receipts.
2019 A current account surplus was recorded in the first quarter of 2019 due to
a significant reduction in the trade deficit and higher receipts to the
service account. However, trends following the Easter Sunday attacks,

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 which affected the tourism sector, had an adverse effect on the current
account. Therefore, current account deficit was reported from the second
quarter of 2019. The balance of payments financial account strengthened
with significant receipts during the year. The main receipts in the
financial account in 2019 were the issuance of international sovereign
bonds and the receipt of two tranches of the International Monetary
Fund's Extended Credit Facility.
2020 Although the service account surplus declined significantly, the current
account deficit declined significantly in 2020 due to a reduction in the
trade deficit, growth in remittances from foreign workers and relatively
low primary income account deficit. In 2020, receipts to the capital
account remained unchanged overall. In 2020, capital inflows to the
government recorded a decrease compared to the previous year. The
balance of payments finance account recorded a significant decrease in
net changes in liabilities and net gains in financial assets.
2021 Although the service account balance increased and the primary income
account deficit narrowed, the foreign current account deficit widened
significantly in 2021 due to the widening of the trade deficit and the
narrowing of the secondary income account surplus. Net receipts to the
capital account in 2021 remained unchanged overall. Capital inflows to
the government decreased in 2021 compared to the previous year, while
capital inflows to the private sector recorded an increase. In the balance of
payments financial account, net gains in assets recorded a significant
decrease in 2021, while net changes in liabilities rose.
2022 The foreign current account deficit narrowed in 2022 compared to 2021,
despite a decline in the surplus in the secondary income account, a
significant reduction in the trade account deficit, a recovery in services
trade, and a marginal decline in the primary income account deficit. In
2022, net receipts to the capital account remained low. Capital inflows to
the government and the private sector declined in 2022 compared to last
year, with capital inflows to the government remaining at a moderate
level. In the balance of payments, net changes in financial account
liabilities rose markedly, while net gains in financial assets recorded a
moderate rise.

5
Relationship with other variables

Balance of payment with GDP- GDP and the balance of payments are related because the
current account, or trade balance, of a nation can affect the growth of its GDP. While a deficit
might have the opposite impact on GDP, a current account surplus can positively contribute to
GDP. But the trade balance is not the only element that affects the overall health of the balance
of payments; capital and financial flows also play a role.

Balance of payment with National income- Indirect implications of the balance of payments
on interest rates, exchange rates, and a nation's overall economic stability can also have an
impact on national revenue. Direct consequences can be seen in the current account (trade
balance, income, and transfers). An increase in national income can be attributed to a current
account surplus, but a deficit can have the reverse effect. Transactions involving capital and
financial accounts can also have an impact on the overall state of the economy, which can
therefore have an impact on national income.

Balance of payment with Unemployment- A complicated relationship between unemployment

and the balance of payments may exist. Impacts on unemployment are influenced by a nation's
trade balance, exchange rates, capital flows, and economic policy. It is noteworthy that there
exist other influencing elements, such as internal economic conditions, economic structure, and
global economic trends. That impact the correlation between the BOP and unemployment.

Balance of payment with Inflation- The overall economic and policy climate are just two of the
many variables that impact the intricate relationship between inflation and the balance of
payments. Furthermore, different countries may experience different effects of the balance of
payments on inflation. When controlling inflation and resolving balance of payments
imbalances, policymakers must take into account a variety of economic factors and their
interactions.

Balance of payment with international trade- Exchange rates, trade regulations, investment
flows, and general economic conditions are just a few of the ways that a nation's balance of
payments can have a big impact on global trade. Long-term economic stability and positive
trading relations with foreign countries are frequently viewed as requiring a balanced and
healthy balance of payments (BOP).

6
Conclusion

A nation's economy is greatly impacted by its balance of payments, which also affects exchange
rates, economic growth, financial stability, and policy choices. The extent and kind of the
imbalances, the flexibility of exchange rates, and the general financial and economic
circumstances of the nation in issue can all affect the precise consequences.

A significant increase in monetary policy to reduce balance of payments imbalances,

suspension of foreign debt servicing, temporary suspension of certain imports and payment
methods and imposition of margin deposit requirements on selected imports and capital flow
management measures may be introduced.

Inflation

Inflation is the sustained increase in the average price level of goods and services in an
economy over a period of time. Due to the effect of inflation, the prices of things that we
normally use on a daily basis increase and it causes the purchasing power of your money to
decrease. Inflation can be explained mainly to measure prices. Colombo uses indicators
Colombo Consumer Price Index Product Price Index uses GDP deflator as economic
consequences of inflation, changes in income levels arise due to rising unemployment, etc.
Social problems arise and in addition to this, various conflicts arise in society due to the decline
in the standard of living. The factor is to keep the price level stable the impact of inflation on
one variable and the impact of inflation on other variables due to a change in other variables
can be shown as follows.

Relationship with other variables

• Consumption
Lowers consumption if future inflation is expected to be lower than current inflation If future
inflation is higher than current inflation, consumption is driven forward thereby increasing
aggregate demand leads to inflation.

• Savings
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Inflation reduces the nominal value of money and hence savings decreases

• Investment

Inflation causes investment to fall because it costs more to produce

• Employment

In inflation employment increases due to an increase in aggregate demand

• Public Sector

Inflation will cause the people to demand benefits from the government and through that the
government expenditure will increase.

2018 2019 2020 2021 2022

Inflation Rate 2.14% 3.53% 6.15% 7.01% 49.72%

(%)

Annual -5.57% 1.39% 2.63% 0.86% 42.71%

Change (%)

As mentioned above, according to the report of the Central Bank of Sri Lanka, the inflation

Annual change Inflation

50.00% 60.00%
40.00% 50.00%
30.00% 40.00%
20.00%
30.00%
10.00%
20.00%
0.00%
-10.00% 10.00%
201 201 202 202 202
8 9 0 1 2 0.00%
2018 2019 2020 2021 2022
Annual change -5.57%1.39% 2.63% 0.86%42.71% Inflation 2.14% 3.53% 6.15% 7.01% 49.72%
Annual change Inflation

rate changed as a percentage from 2018 to 2022. The reasons for the change can be summarized
as follows.

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2018 Surface inflation and core inflation in 2018 were lower as a result of better
control of inflation expectations within the enhanced monetary policy
framework despite temporary price pressure effects due to severe depreciation
of the Sri Lankan rupee and increase in domestic petroleum product prices and
other administered prices. The notable change in 2018 was cost-induced
inflation driven by rising domestic petroleum prices and a short-term rise in food
prices, which are often volatile.
2019 The first quarter of 2019 also showed some pick-up after inflation eased to 0.4
as of December 2018 due to higher non-food inflation due to higher expenditure
on certain items such as housing rent and education.
2020 In 2020, despite rising inflationary pressures in the food category due to supply
constraints caused by the Covid-19 pandemic, particularly high prices of some
essential food items, subdued demand conditions kept inflation expectations
under control and lowered administered price inflation on target. caused to be
maintained
2021 Increase in prices of food and non-food items in the international market an
increase in freight charges Constraints in internal supply networks Direct and
indirect impact through various price revisions and increase in demand with the
successful control of the covid 9 epidemic situation on domestic prices in
addition, the removal of domestic price controls had a significant impact on
supply shortages and increased demand, as well as policy errors
2022 By the year 2022, Sri Lanka's inflation was around 49% to 72%, and the main
factors affecting it were the price level, in addition to import restrictions, foreign
exchange deficit and currency devaluation, the other important issue is aggregate
demand. The inflation caused by the demand caused by the continuous rise is
the other main factor that affected the inflation in Sri Lanka this year is the
increase in cost. In addition, Sri Lanka's consumption was mostly focused on
imported goods and many industries in Sri Lanka depended on imported raw
materials and their exchange rate was massive degradation of manufacturing raw
materials and the increase in the price of imported food items has affected the
supply side factors that have affected the rise in inflation and also due to the
increase in electricity bills and water bills due to inefficiency in the country this
has also directly affected inflation.

9
Conclusion
• Inflation is gradually increasing in the economy of Sri Lanka and accordingly the
following measures have been taken by the government to control inflation recently.
• Demand control Inflation can be controlled by reducing overall demand, for this
purpose, government expenditure can be reduced, taxes can be increased, subsidies can
be controlled.
• Controlling the money supply Restricting the money supply Restricting the central
bank's lending the money supply can be restricted through open market operations.
• In addition, imposing a wage ceiling. By imposing a ceiling on wages, it means that the
disposable income of the people will be reduced so that their demand for goods and
services will decrease.
• Inflation can also be controlled through price controls by the government. Maximum
price control policies and minimum price control policies can be introduced for certain
goods and services.
• To increase the production, it can be done at the rural level with some kind of welfare.
The government can levy some tax on the uncultivated land in a certain area. In this
way, if the land is not cultivated, the government will get tax income and if the land is
cultivated, the society will produce food.
• Increase productivity
• Introducing a new exchange rate policy Managing the exchange rate to control import
costs helps stabilize prices
• Getting International Assistance Seeking assistance from the International Monetary
Fund and World Bank Organizations to stabilize the economy and manage inflation.

National income

National income is the sum total of the value of all the goods and services manufactured by the
residents of the country, in a year. within its domestic boundaries or outside. It is the net amount
of income of the citizens by production in a year.

10
National Income Rates

In 2018, the national income rate of Sri Lanka was positive, indicating that the national
income increased over the previous year. The national income rate was 3.2%, which
was lower than the average rate of 4.5% over the past five years. This suggests that
2018
the economy was growing, but at a slower rate than in previous years. However, the
national income rate is just one indicator of economic performance and should be
considered alongside other measures, such as GDP per capita and the unemployment
rate, to get a more complete picture of the economy.
In 2019, the national income rate of Sri Lanka was lower than in 2018, indicating that
the economy was growing at a slower pace. The national income rate was 1.3%, which
was much lower than the average rate of 4.5% over the past five years. This suggests
2019
that the economy was facing some headwinds, such as global trade tensions and
declining export demand. In addition, the unemployment rate in Sri Lanka increased
in 2019, which is another sign of economic weakness. However, it is important to note
that the national income rate can fluctuate from year to year and does not necessarily
reflect the long-term trend.

The national income rate of Sri Lanka in 2020 was negative, reflecting the severe
impact of the COVID-19 pandemic on the economy. The national income rate was -
9.7%, which was significantly lower than the previous year. This was largely due to a
2020
sharp decline in economic activity, as businesses were forced to shut down and travel
restrictions were imposed. In addition, the unemployment rate in Sri Lanka increased
significantly, further highlighting the economic hardship caused by the pandemic. The
national income rate is expected to remain negative in 2021, but is expected to improve
over the next few years as the economy recovers
The national income rate of Sri Lanka in 2021 was negative for the second year in a
row, as the country continued to struggle with the fallout from the COVID-19
pandemic. The national income rate was -3.6%, which was an improvement from the
2021
previous year but still below pre-pandemic levels. The main drivers of the negative
national income rate were weak domestic demand and a slowdown in global trade. In
addition, the unemployment rate remained elevated, highlighting the ongoing

11
 challenges facing the economy. However, there are signs of improvement, with the
economy expected to return to positive growth in 2022
The national income rate of Sri Lanka in 2022 is expected to be positive, but at a low
level, as the country continues to recover from the economic crisis of the past few
years. The current estimate is for the national income rate to be around 2.5%, driven
2022
by improvements in exports and increased domestic demand. However, the country is
still facing challenges, including high inflation and debt levels, which could dampen
the pace of recovery. Despite the challenges, the economy is showing signs of
resilience, with foreign investment increasing and economic reforms being
implemented.

Analyze the data and discuss

In 2018, there were several notable trends and correlations in the national income data

2018 of Sri Lanka. Firstly, GDP growth was positively correlated with inflation, which
increased by 4.7% during the year. Secondly, there was a negative correlation between
the unemployment rate and GDP growth, as the unemployment rate decreased from
4.8% to 3.9%. Thirdly, there was a negative correlation between the exchange rate and
GDP growth, as the Sri Lankan rupee weakened against the US dollar by 3.5% during
the year.
In 2019, the data showed some interesting trends and correlations. Firstly, there was a

2019 positive correlation between inflation and unemployment, as inflation increased to

5.8% and the unemployment rate increased to 4.1%. Secondly, there was a negative
correlation between the exchange rate and GDP growth, as the Sri Lankan rupee
weakened by 5.9% and GDP growth slowed to 2.2%. Thirdly, there was a negative
correlation between interest rates and GDP growth, as interest rates increased by 1.25
percentage points and GDP growth slowed. Overall, these trends indicate that the
economy of Sri Lanka was facing some challenges in 2019.

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 In 2020, there were some unique trends in the data due to the COVID-19 pandemic.

2020 Firstly, GDP contracted by 3.6% while inflation increased by 7.9%, which indicates
that there was a negative correlation between the two variables. Secondly, the
unemployment rate increased significantly to 5.1%, which also had a negative
correlation with GDP. Thirdly, there was a strong negative correlation between the
exchange rate and inflation, as the Sri Lankan rupee weakened by 9.9% and inflation
increased. Overall, the data for 2020 highlighted the significant impact of the pandemic
on the economy of Sri Lanka.

In 2021, the economic situation in Sri Lanka continued to be challenging, with some

2021 mixed trends in the data. Firstly, GDP contracted by 1.5% while inflation increased by
11%, indicating a negative correlation between the two variables. Secondly, the
unemployment rate decreased to 4.3%, suggesting a positive correlation with GDP.
Thirdly, the exchange rate weakened by 17% while inflation increased, showing a
positive correlation between the two variables. Overall, the data indicates that the
economy of Sri Lanka was still struggling in 2021, with persistent inflationary
pressures and a weakening of the rupee.

In 2022, the economic crisis in Sri Lanka had a significant impact on the data trends.
Firstly, there was a strong negative correlation between GDP growth and inflation, as
GDP contracted by 11% and inflation increased to a record high of 59.9%. Secondly,
2022
there was a strong positive correlation between the unemployment rate and inflation,
as the unemployment rate increased to 12.7%. Thirdly, there was a strong positive
correlation between the exchange rate and inflation, as the Sri Lankan rupee
depreciated by 46% against the US dollar and inflation increased sharply.

Conclusion and Recommendations in national income

13
 In 2018, national income in Sri Lanka revealed some positive trends, such as an increase in GDP

2018 and GNI, and a decrease in the unemployment rate. However, there were also some challenges,
such as rising inflation and a widening trade deficit. Overall, the economy made progress in 2018,
but there is still room for improvement in terms of economic growth, inflation, and the trade
balance. Moving forward, the government should implement policies to address these challenges
and ensure that economic growth is inclusive and sustainable.
In 2019, national income in Sri Lanka showed some mixed trends. While GDP and GNI continued

2019 to grow, the unemployment rate increased and inflation remained high. The trade deficit also
widened, putting pressure on the country's foreign exchange reserves. Overall, the economy
experienced slower growth in 2019 than in previous years. Policymakers should focus on
addressing the high unemployment rate, reducing inflation, and narrowing the trade deficit in
order to promote sustainable economic growth.
In 2020, the national income of Sri Lanka was heavily impacted by the COVID-19 pandemic.

2020 GDP and GNI both contracted sharply, and the unemployment rate increased to a record high.
The trade deficit narrowed, but this was due to a decrease in imports rather than an increase in
exports. Government revenue also decreased, while government expenditure increased to support
the economy. Overall, the pandemic caused a severe economic contraction in 2020, and it will
take some time for the economy to recover
In 2021, the economy of Sri Lanka began to recover from the COVID-19 pandemic. GDP and
GNI grew, although they remained below pre-pandemic levels. The unemployment rate
decreased, but it remained higher than before the pandemic. Inflation remained high, due in part
2021
to global supply chain disruptions. The trade deficit narrowed, as exports increased and imports
decreased. Government revenue increased, but government expenditure also increased due to the
need to support the recovery. Overall, the economy showed signs of improvement in 2021, but it
still faced challenges.
In 2022, the national income of Sri Lanka was severely impacted by the country's economic crisis.
GDP and GNI both contracted sharply, and the unemployment rate rose to a record high. Inflation
2022 reached all-time highs, driven by shortages of food and other essential goods, as well as a
weakening of the rupee. Government revenue decreased, while government expenditure
increased to support the population and address the crisis. Foreign investment and tourism
decreased, and the country defaulted on its external debt. Overall, the economic crisis had a
severe impact on the national income of Sri Lanka in 2022.

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National Income
4.00% 3.20%
2.50%
2.00% 1.30%

0.00%
Persantage

-2.00%
-4.00%
-3.60%
-6.00%
-8.00%
-10.00%
-9.70%
-12.00%
2018 2019 2020 2021 2022
National Income 3.20% 1.30% -9.70% -3.60% 2.50%

15