The prospects of an improvement in the external finances
The easing of the severe shortages of essential imports, such as petrol and diesel, one expects is owing to an improvement in the external finances. This is only partially so. However there is a prospect of an improvement in external finances later this year owing to increased tourist earnings and remittances from abroad.
Balance of payments
There has been a slight improvement in the trade balance this year owing to an increase of industrial exports and a decrease in imports. This together with higher inward remittance and increased earnings from tourism have contributed to a slight improvement in the balance of payments.
Low reserves
Although there has been a slight increase in external reserves due to these improvements, the critical state of the country’s external reserves persists. The Central Bank of Sri Lanka has pointed out that although gross official reserves at the end of August 2022 were US$ 1.7 billion, it included the swap facility of US$ 1.4 billion from China that is subject to conditions on its use. Consequently, the Central Bank of Sri Lanka considers the level of liquid reserves to be at a “significantly low level” at the end of August 2022.
Improvement
There has been an improvement in the balance of payments in the first eight months of this year compared to the same period last year due to increased manufactured exports, reduced imports owing to stringent controls, increased inward remittances, higher earnings from tourism and increased exports of ICT services. Nevertheless, the improvement in the external finances is slight. The external reserves were perilously low at the end of August 2022.
Trade balance
The trade balance in the first eight months of this year improved compared to the same period last year. The trade deficit decreased by 12 percent to US$ 3.9 billion in the first eight months of this year compared to a deficit of US$ 5.5 billion in the same period last year.
Increased exports
This improvement in the trade balance was brought about by increased manufactured exports and reduced imports owing to stringent import controls.
Merchandise exports
In the first eight months of this year, the trade deficit declined mainly owing to an increase in manufactured exports. Export earnings increased by 12.6 percent to US$ nine billion in the first eight months of this year, compared to US$ seven billion for the same period last year.
Industrial exports
Manufactured exports increased to US$ ten billion from US$ nine billion in the first eight months of this year. Most manufactured exports, other than a few like rubber gloves, increased. Apparel exports fared well.
In September
This trend of increased industrial exports continued in September. Industrial exports were US$ 1.1 billion in September. In the first nine months of this year industrial exports increased to US$ 13 billion and total exports reached US$ 14 billion.
Agricultural exports
In contrast agricultural exports dipped by ten percent in the first nine months of this year. Export earnings from agricultural exports decreased to US$ 1.5 billion in the first nine months of this year.
Tea
There was a 20 percent decrease in export earnings of tea, the country’s main agricultural export, owing to a decline in production. Exports of spices too decr eased.
Imports
Imports in the first eight months of this year decreased by 4.6 percent owing to stringent import controls. There was also a slight decline in import prices.
Balance of payments
The balance of payments deficit decreased to US$ 1.5 billion in January-August this year, compared to US$ 2.2 billion in the first eight months of last year. Increased inward remittances, tourist earnings and increased export of ICT services contributed to the balance of payments.
The balance of payments that was in deficit of US$ four billion in the first eight months of last year decreased in the first eight months of this year to US$ 3.2 billion owing to an increase in inward remittances, tourist earnings and export of ICT services in the first eight months of this year.
It is vital that these earnings continue to increase. The proposed changes to taxes should not jeopardise the earnings from exports and earnings from the export of services, especially ICT services that have a potential for expansion.
Remittances
The increase in remittances to the banking system is attributed to the smaller premium of the unofficial exchange dealers; incentives offered by banks and remittances from individual and organisations to alleviate poverty and hunger. In spite of these favourable developments, the external reserves are perilously low.
External reserves
At the end of August, the external reserves were US$ 450 million somewhat higher than in recent times, but adequate to finance only one month of imports. This is a perilous state of external reserves.
Here was a slight decrease in imports that together with the increase in exports, reduced the trade deficit to US$ two billion compared to US$ 3.2 billion in the first eight months of this year.
There was a 20 percent decrease in tea, the country’s main agricultural export owing to a decline in tea production. However export earnings from tea increased in September owing an increase in tea prices.
Balance of payments prospects
The prospect of any significant improvement in the balance of payments in the next four months rests with an increase in remittances and earnings from tourism. While it is difficult to predict remittances in the coming months, there is a prospect of a larger number of European tourists owing to the cold winter and inadequate heating in Europe. Already, there has been increased flights from Europe and high occupation in beach resorts.
If earnings from tourism could exceed US$ two billion, it would make a difference to the balance of payments outcome this year. On the other hand, there is no prospect of the trade deficit decreasing significantly due to the structure of the country’s imports.
Summary and conclusion
There has been an improvement in the trade balance and balance of payments in the first eight months of this year compared to the same period last year. This improvement in the trade and balance of payments was brought about by increased manufactured exports, reduced imports owing to import controls, increased inward remittances and tourist earnings.
Hopefully, inward remittances and tourist earnings would increase in the next four months to improve the external reserves significantly.