Widening trade deficit will weaken balance of payments and external reserves

This year’s trade deficit is likely to widen. It may exceed US$ 6 billion, compared to last year’s trade deficit of US$ 4.7 billion. The widening trade deficit will weaken the balance of payments and strain the external reserves.

Two months

In the first two months of this year, the trade deficit widened to US$ 860 million, compared to US$ 484 million in the same period last year. If the trade deficit continues to widen, as is likely, the trade deficit would be US$ 6 billion or more.

This is a severe strain on the balance of payments and will weaken the foreign reserves.

Trade deficit

The widening trade deficit in the first two months of the year was entirely due to an increase in imports. Exports—both manufactured and agricultural exports—increased by 3.6 percent from US$ 1,960 million to US$ 2,030 million.

Imports

On the other hand, imports increased by 8.6 percent in the first two months of this year. This was due to more liberalised imports and an increase in import prices. This trend of increasing imports is likely to continue.

Global conditions and the country’s import needs are likely to increase import expenditures in the coming months. An increase in exports is much less likely. Consequently, the trade deficit is likely to exceed US$ 6 billion.

Remittances

Fortunately, the increasing trend in remittances and earnings from tourism last year continued in January and February. Remittances amounted to US$ 840 million in the first two months of this year. If this trend continues, then remittances should be around US$ 6 billion this year.

Tourism

The tourist boom at the end of last year continued in the first two months of this year. Tourist earnings in the first two months amounted to US$ 600 million. If this trend continues, earnings from tourism should exceed US$ 4 billion.

Balance of payments

The inflow of about US$ 10 billion from these two sources should result in a balance of payments surplus of about 4 billion, despite a trade deficit of US$ 6 billion. In addition, there are earnings from IT services and shipping and expectations of capital inflows from foreign assistance and project loans.

Therefore, the balance of payments is reasonably satisfactory. However, the trade deficit is weakening the country’s balance of payments and external reserves, which are required to be strengthened to meet the foreign debt obligations.

Foreign reserves

Strengthening foreign reserves is imperative to meet debt repayment obligations this year. The likelihood of the trade deficit widening this year weakens the enhancement of external reserves.

Reducing trade deficit

Ways and means of reducing the trade deficit have to be found to achieve a lower trade deficit. Persistent trade deficits have been the Achilles heel of the country’s external finances. The trade surplus has been recorded only in four years since 1950.

The last time a trade surplus was recorded was in 1977. A small trade surplus was achieved that year with stringent import restrictions that resulted in severe hardships for people owing to a lack of essential foods and raw materials for industry.

Last year

Last year’s trade deficit was as much as US$ 4.7 billion. This was due to reduced exports and increased imports. Indications are that this year’s trade deficit will be higher. Exports may increase somewhat, but not by much, while import expenditure is likely to increase.

Trade balance

The trade balance that widened last year to US$ 4.7 billion was owing to a fall in exports and an increase in imports. It is likely to widen further this year owing to increased import expenditure and much lower exports. An increase in shipping costs could adversely affect exports as well.

Shipping

Our exports and imports could be adversely affected by steep increases in freight rates as ships and containers are delayed due to ships having to pass around Africa to avoid Houthi attacks in the Red Sea.

Widening

This year’s trade deficit is likely to widen owing to a further fall in manufactured exports, especially garments. The demand for our exports which was adversely affected by the recession in Western countries, is likely to continue, though it will be further weakened by disruptions in transport.

The trade deficit that widened to US$ 4.7 billion last year, mainly owing to a decrease in export earnings and an increase in import expenditure, is likely to widen further owing to the continuing global recession, difficulties, higher costs of shipping and disruption of supply chains.

Import expenditure

On the other hand, import expenditures is likely to increase owing to the higher costs of shipping and insurance. The liberalisation of some imports last year may have to be revoked to reduce import expenditure somewhat.

External reserves

Strengthening external reserves is vital to meeting debt repayment obligations this year.

The improvement in the balance of payments requires a two-pronged strategy of increasing exports and curtailing imports by higher production of commodities to reduce imports. Both of these can be only achieved by a long-term strategy of increased production of competitive exports, and the production of agricultural commodities for export and import substitution. This requires a long-term plan and cannot be achieved in a short time.

Conclusion

The trade deficit is likely to widen this year. However, increased earnings would offset the deficit. This should not blind us to the weaknesses in our trade that have to be addressed by a long-term strategy to increase the production of tradable goods.