Columns - The Sunday Times Economic Analysis

Balance-of-payments crisis looms despite export growth

By Nimal Sanderatne

The balance-of-payments anxieties are escalating rather than declining. The external trade statistics for September 2011 confirms that the massive trade deficit is continuing to strain the balance of payments.
In the first nine months of 2011, the trade deficit swelled to US $ 6,865 million and is likely to reach around US$ 9,000 million for the year. This large trade deficit has been incurred despite earnings from exports increasing by 27.7 per cent to US $7,820 million by the end of September.

This significant growth in export earnings has been negated by a massive increase in import expenditure of 51.8 per cent. The US $ 14,685 million import expenditure in the first nine months of this year was nearly double (87 percent) the export earnings. Consequently, the export growth this year has been quite inadequate to offset a significant amount of the trade deficit brought about by import expenditure increases. This is the crux of the balance of trade and balance of payments problem the country is facing this year. There is every reason to believe that this may turn out to be the pattern in 2012 as well.

Import expenditure
The burden of the large import expenditure is clear when one compares it with several items in the trade balance. Import expenditure was nearly double the export earnings: it was 87 percent more than export earnings. Petroleum imports constituted 25 per cent of total imports and as much as 42 per cent of export earnings were expended on petroleum imports alone. Consumer goods imports absorbed 40 per cent of total export earnings. Therefore, although there was a significant increase in export earnings, these were inadequate in comparison with the high expenditure on imports.

Export growth
These adverse developments in the trade account should not blind us to the fact that export growth this year was impressive, even though inadequate in the context of a massive increase in import expenditure. It is not only the increase in export earnings that are commendable, but also the emerging pattern of robust new industrial exports. Therein is the prospect for a vigorous thrust in increasing the volume, value and profile of exports.

As in the past, the main contributors to increased industrial exports were garments and textiles. Earnings from exports of textiles and garments increased by nearly 26 per cent to bring in US$ 3,113 million in the first 9 months of this year. Industrial exports that faced severe challenges in recent years have shown a commendable resilience. This is especially so with respect to garments exports that is the country's most important and largest industrial export.

There were gains in other export items as well. Export earnings from gem and jewellery, rubber products and food, beverages and tobacco were significant. Gem and jewellery exports increased by 88.7 per cent in September 2011. The export of rubber products increased by 37.3 per cent in September and by 65 per cent in the first nine months of this year. According to the Central Bank, export of food, beverages and tobacco increased by 48 per cent in September 2011 with significant contributions coming from tinned and bottled fruits, animal fodder and fruits and vegetable juices. Exports of such items as electrical accessories, boats and solid tyres are noteworthy achievements. It is important that the export profile is diversified further and these higher value-added exports gain further momentum.

The latest statistics disclose earnings from agricultural exports, too, have increased, but by a modest 14 per cent. In the first nine months, agricultural exports grew mainly due to increases in prices. According to the Central Bank, the average export price of tea increased by 3.9 per cent to US dollars 4.57 per kg and the average rubber prices rose by 40.3 per cent to US dollars 4.96 per kg in September 2011, compared to September 2010. In September this year, earnings from exports of coconut increased sharply by 75.6 per cent compared to September 2010 owing to the increase of both volumes and prices of desiccated coconut, copra and coconut oil. Earnings from minor agricultural exports also grew by 12 per cent in September 2011. There are limitations in increasing agricultural exports owing to supply inelasticity. Climatic conditions and labour unrest also affect production adversely. For instance tea production is somewhat lower this year than in 2010. Consequently the future export potential is in industrial exports and export of services.

Remittances and tourist earnings
The country has had persistent trade deficits for more than 30 years. However the silver lining in the balance of payments has been remittances. Worker remittances and earnings from tourism have made a substantial contribution towards reducing the current account deficit. These, together with earnings from services and capital inflows have in many years transformed the trade deficit into a balance of payments surplus. Remittances and tourist earnings have increased this year too. Yet, unlike in previous years, these increases are inadequate to offset a high proportion of the large trade deficit this year owing to the enormity of the trade deficit.

In the first nine months there has been an inflow of US$ 4775 million of workers' remittances, tourist earnings and foreign direct investments. These have been able to offset only 70 per cent of the deficit. In contrast, in 2010 remittances alone offset 80 percent of the trade deficit. The 25 percent increase in remittances, the 80 per cent increase in tourist earnings and the near doubling in foreign direct investment, were inadequate to offset the trade deficit by much owing to the huge increase in imports that resulted in the yawning gap in the trade account.

Although workers' remittances grew by over 25 per cent in the first nine months of 2011, its contribution towards bridging the trade deficit was only 55 per cent compared to remittances offsetting as much as 70 percent of the deficit of 2010. This underscores the fact that the difficulties in the balance of payments were due to the much larger trade deficit that grew by 96.5 per cent so far this year. Earnings from tourism grew by 48 per cent to US dollars 580 million compared to the corresponding period of 2010 owing to tourist arrivals increasing by 34.3 per cent to 598,006 and earnings per tourist per day increasing for the first nine months of 2011. Yet these favourable developments have had a lesser impact on the balance of payments.

Implications
The obvious implication of these statistics is that import expenditure is at an unsustainable level. There has to be a huge spurt in exports for the country to continue importing at current levels. This is an unrealistic expectation. Conversely, there has to be a curtailment of import expenditure. This should be achieved by conservation and other policy measures that would reduce import expenditure. Selective import substitution measures through higher tariffs could help, but an overall import substitution strategy is not a pragmatic option. In view of the country being an export import economy, any twist towards an inward looking economy would hamper economic growth and development.

Although this year's export growth has been good, recent growth in exports have been inadequate. The country's exports as a proportion of GDP have fallen sharply and the country's share of global exports is small. Much higher levels of exports are needed to ensure that the country does not face a severe balance of payments problem in the future. There should also be measures to reduce imports through pricing policies, tariffs, conservation of key imports and import substitution. This year's balance of payments difficulties could be the tip of the iceberg.

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