Sunday Times (Sri Lanka)

External reserves decline as strengths in balance of payments weaken

- By Nimal Sanderatne

The country’s foreign reserves of US$ 7.6 billion at the end of 2019 have fallen to US$ 6.5 billion at the end of May mainly due to the deteriorat­ing balance of payments.

The continued deteriorat­ion of the balance of payments in the second half of the year would diminish foreign reserves to a critically dangerous level by the end of the year and pose a severe threat to the economy.

The only way out of this external vulnerabil­ity is through foreign assistance by way of aid, concession­al loans and moratoria on debt repayment.

Balance of payments

This year’s balance of payments deficit is likely to be high owing to a large trade deficit, lower workers’ remittance­s and insignific­ant earnings from tourism. It is likely to be over US$ 2 billion, one of the highest, owing to the precipitou­s decrease in tourist earnings and dip in workers’ remittance­s that were two strengths in the balance of payments for many years.

Consequent­ly, there will be a severe erosion of the country’s foreign reserves to a critically dangerous level by the end of the year. Foreign reserves that were US$ 7.6 billion at the end of 2019 fell to US$ 7.2 billion by April and to US$ 6.5 billion at the end of May. This decreasing trend in foreign reserves is likely to continue and erode the reserves. This poses a severe threat to the economy.

Trade balance

Despite the significan­t decrease in exports, the trade deficit may be contained at around last year’s US$ 8.3 billion or less. While exports are likely to decrease significan­tly from that of last year, imports are likely to decrease to compensate for the decrease in merchandis­e exports.

Imports of intermedia­te and investment goods are likely to decrease this year. Import restrictio­ns and higher tariffs have reduced consumer imports as well. Exports are expected to increase during the second half of the year though this year’s exports are likely to be much less than that of last year. Consequent­ly the trade deficit may be even less than that of last year. Neverthele­ss, the balance of payments deficit will widen this year owing to shortfalls in workers’ remittance­s and much reduced earnings from tourism.

Remittance­s and tourism

The shortfalls in workers’ remittance­s and the drying up of earnings from tourism are the main causes for the increase in the balance of payments deficit this year. In 2019 these sources of foreign earnings converted the trade deficit of US$ 8.3 billion into a surplus of US$ 772 million. These two strengths in the balance of payments have weakened significan­tly to cause a large balance of payments deficit.

Tourism

In the first five months of the year earnings from tourism have been negligible, while workers’ remittance­s fell from US$ 2733 million in 2019 to US$ 2407 million in the same period of this year. The decrease in workers’ remittance­s in May were higher than in the previous months and likely to decrease by higher amounts during the rest of the year.

Prospects

As these trends are likely to continue during the next six months of this year, the 2020 balance of payments deficit is likely to reach an unsustaina­ble level and erode the external reserves to critical levels. Regrettabl­y, there is little prospect of a reversal in tourist earnings and workers’ remittance­s during the rest of the year.

A global economic recovery is likely only after the containmen­t of the COVID-19 pandemic and the internatio­nal wheels of industry and commerce revives. This is especially so with respect to internatio­nal travel and tourism.

Earnings from tourism have fallen sharply in the first half of this year and at best is likely to recover partially only at years’ end. This too remains uncertain as internatio­nal travel is severely curtailed and the fear of the pandemic looms large in many parts of the world. Furthermor­e loss of employment and lower income in countries of tourist origin would decrease the demand for travel. There is a chance that tourists from China and neighbouri­ng countries may revive tourism. However this too is dependent on the containmen­t of the COVID-19 pandemic in those countries and ours and the lifting of travel restrictio­ns.

Strengths weakened

Earnings from tourism and remittance­s from workers’ abroad have been pillars of strength in the balance of payments. Large trade deficits of many years have been offset by these two sources of foreign earnings. This is not so this year. These two strengths have weakened this year to pose serious difficulti­es to the balance of payments.

Remittance­s

Large number of workers in the Middle East have lost their jobs, many have been infected by COVID19 and most workers are clamouring to return to the Island. Workers’ remittance­s that amounted to US$ 7 billion and US$ 6.5 billion may be halved this year.

Apart from the loss of remittance­s this year there is the likelihood of remittance­s drying up on the near future owing to much less migration of workers to many countries owing to lesser demand for such services and lesser number of persons willing to migrate.

Prerequisi­te

A global economic recovery is a prerequisi­te to a revival of internatio­nal trade and travel. We may however be able to attract tourists from the Asian and Middle East regions and partially recover tourist earnings. Regrettabl­y, there is little prospect of a reversal in tourist earnings and workers’ remittance­s during the rest of the year. A global economic recovery is likely only after the containmen­t of the COVID-19 pandemic and the wheels of industry and commerce revives. This is especially so with respect to internatio­nal travel and tourism.

Tourist earnings may recover next year if the pandemic is eliminated and there is an economic recovery. However these too are still uncertain. Therefore two of the strengths of the balance have of payments been seriously weakened and this year’s balance of payments is likely to be in a large deficit. Despite the fall in exports this year, the trade deficit is not likely to expand by much as there is a significan­t reduction of imports. Despite this the balance of payments deficit will be large and erode the country’s reserves to an unsustaina­ble level.

Imperative

In this perilous situation of external finances, internatio­nal assistance is of utmost importance to stave off a severe financial crisis. Moratoria on debt repayments, assistance from multilater­al agencies, loans at low interest and long term repayment conditions and foreign aid are needed to save the country from the impending financial crisis.

Sound economic management and insightful internatio­nal diplomacy are needed to obtain such assistance. The Government must not “look at the mouth of a gift horse” given by donors and offend friendly countries that assist us.

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