Three factors are redeeming the country’s external finances that may have otherwise reached crisis proportions.
The increasing large import bill, mainly due to higher prices of imports and poor export performance in industrial exports, has caused a very large merchandise trade deficit. This would, in turn, result in a serious dent in the balance of payments.
However, three factors are likely to mitigate the adverse impact of the high merchandise trade deficit. These are the high prices of tea and rubber combined with an improved production performance in the two crops. The increasing inflow of worker remittances will offset to a fair extent the merchandise trade deficit and reduce the trade deficit. The increasing numbers of tourists visiting the country are expected to contribute to a significant increase in foreign exchange earnings from tourism. With these three favourable developments the country could avert a serious balance of payments problem. Foreign borrowing would ease the strain on the foreign reserves but these would at the same time increase the country’s foreign debt and debt service costs.
Trade deficit
In the first five months of this year (January to May 2010) the merchandise trade deficit ballooned to US dollars 2,351 million. This was more than double (117%) what it was during the same period of last year. As this trend is likely to continue, at years end the merchandise trade deficit is likely to reach a massive amount exceeding US$ 5,000. This is similar to the serious trade deficit in 2008 that led to a balance of payments problem in 2009. This serious situation is likely to be averted this year due to the increasing remittances from workers abroad, the boom in tea and rubber exports and the increased earnings from tourism.
Worker remittances
During the first five months of 2010, workers’ remittances increased by 13.3% over that of the analogous period of 2009 to US dollars 1,498 million. This resulted in the trade deficit being brought down from US$ 2,450 to about US$ 1,500 as remittances are a component of the trade balance. If this trend in remittances continues, it means that the overall trade deficit would be brought down from an annual merchandise trade deficit of about US$ 5,000 million to around US$ 3,500 million.
Although the trade deficit is brought down to more manageable proportions, it must be recognised that it is a large one and that the merchandise trade deficit is most unsatisfactory. The beneficial impact of the remittances should not lead to complacency. The adoption of policies to arrest the industrial export decline is vital. This is especially so as the GSP plus withdrawal is likely to further dent the merchandise trade account.
Furthermore, it is observed that the remittances in May were at a lesser rate of increase than in the previous months. In the first four months, remittances grew by 14%. This has dropped somewhat to 13% owing to remittances in May being an increase of only 8.6% over that of May 2009.
Tea and rubber boom
Tea and rubber prices are on an increasing trend. The high prices coupled with increased production, especially of tea, are increasing agricultural export earnings at a time when industrial exports are not faring well. Tea export earnings have increased owing to both a significant increase in prices and an increase in tea production and exports. Indications are that tea production would increase in the second half of the year to reach a record level and international prices would rise still further owing to supply constraints and healthy demand factors.
Tea export earnings grew by as much as 26% in the first five months of this year mainly due to improved international prices. Tea prices increased 13.0% to US dollars 4.44 per kilogramme owing to higher demand from the Middle East. Tea production is expected to reach a record level of over 320 million kilogrammes beating the previous high of 318.7 million kilogrammes in 2008. In the first half of this year (January to June 2010), tea output increased by 27.8% to 166.9 million kilogrammes compared to the first six months of last year when production was low.
Favourable weather, better fertiliser use and an absence of labour unrest were important factors that yielded this increase. If favourable conditions continue into the rest of the year as expected, total tea production for this year is likely to exceed 320 million kilos. With the expectations of good international prices, export earnings from tea are likely to be high owing to poor production conditions in other tea producing countries. However, tea exports increased by less than 6% in May this year compared to the same month last year. The Central Bank attributes this to the strong promotional campaigns by other tea producing countries. However, this setback is not likely to continue.
Rubber prices reached a record US dollars 3.40 per kilogramme, reflecting a year-on-year increase of 125.4 % mainly due to the higher demand for natural rubber from China, India and Malaysia. However, volumes of rubber exports declined by 47.1% in May 2010. According to the Central Bank, this was due to the adverse weather conditions in the major rubber producing areas of the country.
Tourist earnings
The earnings from tourism that began to rise in the latter part of the year after the end of the war have continued. Tourists arrivals increased by 48.4% during the first half (January-June) of 2010, with a total of 278,652 arrivals to the country in comparison to 187,729 arrivals during the same period last year (2009). The increase in tourist arrivals in the first half of 2010 have been mainly from India and other South Asian countries, Western Europe, East Asia, North America, Australasia, Middle East, North America and Eastern Europe.
Tourist earnings last year amounted to US $ 326.3 million. Given the current increasing trend in tourist traffic, it is most likely that this year’s earnings would reach around US$ 700 million making it one of the important contributors to the country’s balance of payments.
Bailed out
The merchandise trade deficit could be even higher than the projected US$ 5000 million owing to several foreseeable unfavourable international developments. The food import bill is likely to rise with an expected increase in prices of especially wheat, owing to the destruction of crops in Russia. Oil prices are likely to remain high and imports of consumer and intermediate goods are likely to increase significantly. The tardy growth in the US economy and only a modest growth of 1% in Europe and the loss of GSP plus concession imply a poor performance for industrial exports. It is possible that the country would be bailed out of the serious merchandise deficit by remittances, agricultural export earnings and tourism.
source & photo credit - www.nation.lk
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