Bal­ance of Pay­ments sur­pluses vi­tal to face large debt re­pay­ments in 2019

Sunday Times (Sri Lanka) - - COMMENT -

Two years from now in 2019 a mas­sive debt ser­vic­ing cost of US$4 bil­lion is due. There­fore the im­pend­ing chal­lenges to the ex­ter­nal fi­nances in 2019 are quite for­mi­da­ble. How do we face this crunch in the coun­try’s ex­ter­nal fi­nances? Mean­while, the Prime Min­is­ter told par­lia­ment that the World Bank and the ADB will not be giv­ing loans to Sri Lanka af­ter 2019.

Prime Min­is­ter

Prime Min­is­ter Ranil Wick­remesinghe ad­dress­ing mem­bers of par­lia­ment last week told them that Sri Lanka will not re­ceive con­ces­sion­ary aid from the Asian Devel­op­ment Bank (ADB) and the World Bank (WB) af­ter 2019. His as­ser­tion that the na­tion has to plan ahead, and de­vise meth­ods of ob­tain­ing funds post 2019 is of much sig­nif­i­cance.

Im­pli­ca­tions

The se­ri­ous im­pli­ca­tion of the Prime Min­is­ter’s state­ment is that the coun­try would have to bor­row funds at in­ter­na­tional in­ter­est rates. And these rates are de­pen­dent on a coun­try’s risk rat­ing that has not been par­tic­u­larly good. The non-avail­abil­ity of con­ces­sional aid from mul­ti­lat­eral agen­cies is par­tic­u­lar dis­ad­van­ta­geous as large in­fra­struc­ture projects that re­quire mas­sive in­vest­ments and have a long pe­riod of ges­ta­tion would not be fi­nan­cially fea­si­ble.

For­eign debt re­pay­ment

More se­ri­ous than the stop­page of loans from the World Bank and ADB is the mas­sive in­crease in for­eign debt re­pay­ment obli­ga­tions in 2019. While this year’s for­eign debt obli­ga­tions are about US$2.4 bil­lion and in­creases slightly to US$2.6 bil­lion in 2018, for­eign debt ser­vic­ing obli­ga­tions in­crease sharply to US$4 bil­lion in 2019.

Fac­ing the cri­sis

In this im­mi­nent sit­u­a­tion in ex­ter­nal fi­nances, it is im­per­a­tive that the ex­ter­nal re­serves be strength­ened to re­pay as much of the debt re­pay­ments as pos­si­ble in 2019 with min­i­mal for­eign bor­row­ing to avoid a for­eign debt trap. This means that the bal­ance of pay­ments this year and in 2018 would have to gen­er­ate a sig­nif­i­cant sur­plus.

The strength­en­ing of the bal­ance of pay­ments im­plies the need to re­duce the trade deficit to man­age­able pro­por­tions. A trade deficit of around US$8 bil­lion in 2017 and 2018 would be needed to en­able a sig­nif­i­cant bal­ance of pay­ments sur­plus. There are both favourable and un­favourable fac­tors to achieve this.

Trade deficit

Re­vers­ing the grow­ing trade deficit ap­pears rather un­re­al­is­tic in the con­text of the coun­try’s grow­ing trade deficits since 2014. The trade deficit in­creased from a lit­tle over US$8 bil­lion in 2015 and 2016 to US$9.1 bil­lion in 2016. And in the first half of this year it has in­creased fur­ther to US$4.7 bil­lion. This in­creas­ing trend of trade deficit is hardly en­cour­ag­ing.

Yet, as pointed out in last week’s col­umn, there are some hope­ful signs that ex­ports are re­viv­ing and that the trade bal­ance could be re­duced pro­vided im­ports too are reined in.

Tea ex­ports

A much im­proved per­for­mance in agri­cul­tural and industrial ex­ports is vi­tal for an im­prove­ment in the trade bal­ance. Tea, the coun­try’s main agri­cul­tural ex­port has shown a resur­gence and in the first half the year tea ex­ports in­creased by 17.8 per­cent. The in­creas­ing trend in in­ter­na­tional prices must con­tinue to next year to en­sure a sig­nif­i­cant en­hance­ment of tea ex­port earn­ings. On the pro­duc­tion side too there has been an im­prove­ment both in low grown small hold­ings as well as on estates. The im­proved rain­fall in the high­lands and the eas­ing of floods in the low grown areas of the South are the main rea­sons for this in­creased tea pro­duc­tion and en­hanced tea ex­port sur­plus. If in­ter­na­tional prices for tea hold the con­tri­bu­tion of tea ex­port earn­ings could make a dent in the trade deficit.

Fish ex­ports

The other favourable devel­op­ment is the surge in sea food ex­ports. In the first half of this year sea food ex­ports, es­pe­cially to the EU, in­creased by 17.4 per­cent. This in­creas­ing trend of sea food ex­ports could also make a sig­nif­i­cant con­tri­bu­tion to ex­port earn­ings dur­ing the rest of the year and next year.

Industrial ex­ports

The main industrial ex­ports have not in­creased. In the first half of the year gar­ment ex­ports de­clined by 5.6 per­cent. As gar­ment ex­ports con­sti­tute about 40 per­cent of the coun­try’s ex­ports, it is im­per­a­tive that there is a resur­gence in gar­ment ex­ports to en­hance ex­port earn­ings. Gar­ment ex­porters are con­fi­dent of a swell in ex­ports to the US later this year and the next.

Prospects

There are signs of an im­proved ex­port per­for­mance with tea, fish and rub­ber ex­ports ex­pand­ing. Gar­ment ex­ports too must in­crease to en­sure a sig­nif­i­cant growth in ex­port earn­ings. The trade deficit can be con­tained only if im­ports are also re­strained by ap­pro­pri­ate mon­e­tary and fis­cal poli­cies that re­strain im­ports. The resur­gence in the growth of re­mit­tances and tourist earn­ings would make a sig­nif­i­cant im­prove­ment to the bal­ance of pay­ments.

Im­ports

In­creased ex­ports should be com­ple­mented with a re­straint on im­ports. One of the re­cent de­fi­cien­cies in our trade bal­ance has been the in­crease in im­ports that has off­set in­creased ex­ports. Mon­e­tary and fis­cal poli­cies must en­sure that non-es­sen­tial im­ports do not in­crease sig­nif­i­cantly. Fuel im­ports are likely to fall ow­ing to lesser need for ther­mal gen­er­a­tion of power with higher rain­fall en­abling higher hy­dro gen­er­a­tion of elec­tric­ity. Re­mit­tances and tourist earn­ings Two dis­cour­ag­ing fea­tures in the bal­ance of pay­ments has been the re­duced work­ers’ re­mit­tances this year and the slow­ing down of growth in tourist earn­ings. One can only hope that the geopo­lit­i­cal fac­tors re­spon­si­ble for the fall in re­mit­tances would be re­solved and that the growth in re­mit­tances would re­sume.

Sim­i­larly, the set­back to the tourist boom has to be ar­rested. An im­prove­ment in the coun­try’s en­vi­ron­ment, es­pe­cially with re­spect to the dengue epi­demic and garbage dis­posal, could as­sist in en­hanc­ing tourist ar­rivals and tourist earn­ings. These are two of the most sig­nif­i­cant con­trib­u­tors to the bal­ance of pay­ments in re­cent years. They have off­set the trade deficits in sev­eral years.

Im­per­a­tives

It is im­per­a­tive that the coun­try achieves a bal­ance of pay­ments sur­plus this year and in the next so as to re­duce the need for fresh com­mer­cial bor­row­ing to meet the large debt re­pay­ments in 2019. To achieve this it is vi­tal to con­tain the trade deficit to around US$8 bil­lion. This in turn re­quires an im­prove­ment in ex­port earn­ings of both agri­cul­tural and industrial ex­ports.

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