Support for economy from foreign remittances wanes

By Bandula Sirimanna

The foreign remittance component in bridging the country’s growing trade deficit dropped from 83 percent in 2010 to 53 percent in 2011, due to the doubling of the trade deficit last year, statistics to be released tomorrow by the Central Bank reveal.

The percentage drop of foreign remittances has affected the popular strategy used by the government to tackle the crisis. The government has often used the strategy of bridging a major portion of the trade deficit through foreign remittances.

The statistics show that the trade deficit widened sharply by as much as 100 percent to US$10 billion in 2011 from US$ 4.88 billion the previous year. In January alone, the deficit – the gap between export earnings and import costs -- was US$ 1 billion.

The 2011 figures of the economy will be released tomorrow when the Central Bank presents its annual report to President Mahinda Rajapaksa. Sources attributed the ever expanding deficit to the increasing expenditure on imports for government infrastructure projects financed mainly by foreign loans and to the continuing demand for investment and intermediate goods.

A senior government source said, “the issue that we face today is that whatever the foreign currency that is sent to Sri Lanka is changed into rupees by the recipients and only 5 percent of that money remains in the Non Resident Foreign Currency (NRFC) account.”

He noted that the need of the hour was to encourage people to keep the foreign currency in their NRFC accounts so that the whole country could benefit from it. He said the country had the ability and potential to increase its existing remittances. To do so, there should be effective schemes and official channels to attract foreign currency, he said.

The government has raised the interest rates twice in less than two months this year to control the spiralling trade deficit and to stop the decline in foreign reserves. But the source expressed his doubt as to whether this move will increase savings or not.

Sri Lanka is reaching its foreign borrowing limit and interest rates may need to be raised further to curb credit and strengthen the balance of payment situation.

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