Remittances of Lankan workers abroad have been an important
support for balance of payments for nearly two decades
Remittances from abroad conceal
balance of payment problems
In his forthcoming book “Contemporary Economic Issues: Sri
Lanka in the Global Context,” Dr. Saman Kelegama identified
the twin problems of the external imbalance and the recurring high
fiscal deficits to be the core issues in economic management.
His essay on the "New Dimensions in Macroeconomic
Management," in this volume makes this important point. In
Kelegama's words, "Managing the macro-economy with twin deficits
in both the external and domestic current accounts is becoming increasingly
Are we facing these fundamental economic problems
or are we postponing their resolution with short-term palliatives
that could aggravate them?
Since 1978 the country sustained a continuous trade deficit. For
the last 27 years the country has had trade deficits that have grown
rather than diminished. Last year's trade deficit of US $ 2.5 billion
was the highest ever and increase in costs of petroleum imports
was the main reason for this.
The petroleum import bill increased by 37 percent
to US dollars 1,655 million in 2005 due to an increase in prices
of a similar dimension. Consequently the trade deficit increased
to US dollars 2,516 million. However the current account deficit
increased by only 650 million US dollars. Therefore the massive
trade deficit did not lead to a huge current account deficit in
the balance of payments. Why?
It is well known that remittances of Sri Lankan
workers abroad have been an important support for balance of payments
for nearly two decades. Last year saw an increased inflow according
to the Central Bank worker remittances, which grew by 22.7 percent
last year to 1,918 million US dollars. The significance of these
remittances becomes even clearer when one realises that they cover
as much as 75 percent of the trade deficit. Consequently, the current
account deficit declined from 3.2percent of GDP, in 2004 to 2.8
percent in 2005.
However it’s observed that these inflows
are not entirely from workers in the Middle Eastern countries, as
is often assumed. According to the 2005 Central Bank Annual Report
statistics, only 56.8 percent of the inflows were from Middle Eastern
countries. The rest were from nearly all regions of the world. European
Union countries accounted for 18.5 percent of them.
A significant proportion of these remittances come
from other countries as well, from professionals working in Europe,
US, Canada and African countries. Some of these remittances may
have been used to buy properties in prime locations as holiday homes
of the affluent Sri Lankan dual citizens.
The other relief was from Tsunami rehabilitation
funds. These too came to the rescue of the balance of payments.
Net inflows of funds to the government increased by as much as 91.5
per cent in 2005. These were almost entirely the large tsunami aid
from governments and aid agencies.
The balance of payments also benefited by lower debt repayments
owing to the debt moratoria from several governments. In addition
the strain on the balance of payments was temporarily eased by lines
of credit for oil purchases from Iran and India totalling US$ 250
These fortuitous developments resulted in an overall
balance of payments surplus of US dollars 501 million. This surplus
raised the official external reserves to 2,735 million US dollars
that were adequate to finance 3.7 months of imports, according to
Central Bank estimates. It also led to a modest appreciation of
the rupee against major currencies.
This in turn resulted in a revaluation of the
foreign debt component and the public debt GDP ratio falling from
over 100 percent to 96.5percent of GDP in 2005. Ironically, last
year's balance of payments averted a crisis by the financial fall
out from a natural disaster. This could lead to complacency resulting
in not taking remedial measures to resolve fundamental problems.
The seriousness of the continuing oil price increases remains unfelt
due to these other financial inflows from abroad. There are therefore
inadequate adjustments being made by consumers owing to the price
increases not being passed on fully.
The efforts to enhance energy supplies have also
been inadequate. The story that Sri Lanka would have its own supply
of oil in a few years lulls us into greater complacency.
Considering the fact that we have heard the story
of offshore oil many times in the past, it may be sensible to take
the news of the availability of oil with a pinch of salt. International
oil prices are on an upward trend and cannot be expected to decline
though a few fluctuations would occur both upward and downward owing
to political factors like the current Iranian nuclear issue.
The continuous rise in oil prices is cancerous;
it will eat into our costs of production and contribute to inflation.
Our exports could suffer while domestic production of many goods
and services including agricultural output could suffer too as higher
costs of petroleum-based fertiliser and chemicals would raise production
costs or reduce agricultural output.
Currently petroleum imports account for 18.7 per
cent of the total import bill, while imports of fertiliser and chemicals
constitute 5.3 per cent of the import costs. Curtailing these expenditures
is not easy. Last year petroleum imports were reduced by nearly
9 percent, but the expenditure on petroleum imports rose by 37 per
There are difficulties in curtailing the volume
of imports, while prices are continuously escalating. That is the
chronic problem we have to face in the years ahead.
Unless we recognise the seriousness of the balance
of payments problem and its impact on future growth, the responses
could be inadequate. Preoccupation with security and the complacency
generated by last year's fortuitous financial developments could
lead us to a crisis of serious proportions in the near future.