Columns - The Sunday Times Economic Analysis

Remittances dependent import-export economy

By Nimal Sanderatne

The country is heading for a massive trade deficit of over 5 billion US dollars in 2010. Nevertheless there will be a balance of payments surplus. This has been the experience of recent years: large trade deficits yet balance of payments surpluses. The last time there was a small trade surplus was in 1977, when it was achieved under a tightly controlled import regime.

Despite continuous trade deficits in the last decade, there have been balance of payments surpluses in several of these years. Worker remittances have been the main factor enabling such a favourable outturn in external finances. In the light of Sri Lanka’s recent experience, it is accurate to describe the economy as a worker remittance dependent import economy as the country has been able to run huge trade deficits and yet record a balance of payments surplus mostly due to large inflows of funds from Sri Lankans living and working abroad.

The large inflows of worker remittances, as they are called, have been largely responsible for this. In a year such as last year, when the trade deficit is expected to be massive, the remittances are not able to wipe out the deficit completely, yet it goes a long way towards diminishing the strain on the balance of payments. Tourist earnings and other capital inflows will ensure a balance of payments surplus in 2010.

Massive trade deficit in 2010

Last year would have been a disastrous year for the balance of payments, if not for the increased flow of remittances. With the trade deficit exceeding US$ 5 billion, there would have been a serious balance of payments problem, if worker remittances were not large. Remittances increased by 24 per cent over that of the previous year and in the first eleven months of 2010 amounted to US$ 3.76 billion. At the end of the year it is likely that about 80 per cent of the merchandise trade deficit would be offset by remittances. Tourist earnings and other capital inflows are likely to more than offset the balance 20 per cent of the trade deficit.

Last year’s trade performance is particularly illustrative of this dependence on worker remittances. The merchandise trade deficit last year will exceed US $ 5 billion, as in the first eleven months the trade deficit reached US $ 4.7 billion. This increase in the trade deficit has been brought about by increased import expenditure owing to high prices of food, petroleum and fertilizer and increased imports of consumer durables. The recent lowering of tariffs on several items has also, as expected, resulted in increased imports of vehicles, electronic items and other consumer durables. Consequently, the trade deficit widened by 72 per cent compared to that of the first eleven months of 2009: from US $ 2.75 billion in 2009 to US$ 4.74 billion last year.

During the first eleven months of 2010, workers’ remittances increased by 24 per cent over that of the corresponding period of 2009 to US $ 3.76 billion. Consequently the merchandise trade deficit was reduced by worker remittances to less than 1 billion US$ dollars. The larger tourist earnings last year and capital inflows are likely to bring about a surplus in the balance of payments.

Remittances in previous five years

Last year was not an exceptional one. In the last five years large trade deficits have been reduced. In 2009 the trade deficit of US$3.12 billion was completely offset by remittances of US$ 3.33 billion. In 2008 the trade deficit was too high to be offset by remittances: it offset only 49 per cent of the deficit. A higher proportion of the trade deficit was covered in the three years 2005-2007, when worker remittances offset 70 per cent of the trade deficit. It would therefore be quite accurate to describe the country’s contemporary economy as a worker remittance dependent import economy.

Remittances from many countries

Remittances are from a wide range of countries. Remittances from migrant workers from the Middle East have been highlighted as these constitute 60 per cent of total remittances. However worker remittances also come from Italy, South Korea, Malaysia and Singapore. There has been an increasing inflow of remittances from Sri Lankans from European countries and North America. The remittances from North America, Europe, Australia and New Zealand of nearly 28 per cent imply that there are significant amounts of remittances from professionals as well. These remittances are for the upkeep of family members, purchase of land and apartments and other investments.

These migrant workers and expatriate remittances have an importance far beyond the support to the balance of payments. They improve living standards of the poor by improving their incomes, increasing expenditure on basic consumption, housing, education and enabling the start up of small business enterprises. Some families are able to rise above their poverty level only because these remittances allow them to break their vicious cycle of poverty that they would not have been able to, on wage incomes in the country.

Remittance dependent economy

The Sri Lankan economy has been described over the years as a trade-dependent economy. This is an accurate description of the country’s large trade dependence of around 70 per cent of GDP. Such trade dependency is inevitable for a small country with limited resources and a small domestic market. Other small countries too are similarly trade dependent. Paradoxically this trade dependence is responsible for both economic prosperity and at times economic depression. High trade dependence carries with it a high degree of vulnerability to external factors: external shocks and economic booms. Remittances that have been increasing in recent years have provided a most important source of foreign exchange and stabilised the external finances of the country.

Remittances of foreign exchange into the country are significant and have been increasing progressively. They provide an important source of capital inflows and have become even more significant in recent years owing to the widening deficit in the trade balance mainly due to escalating food and oil import prices. Remittances from abroad have become an important source of foreign exchange earnings, second only to the country’s total export earnings. In 2009 remittances financed one-third of the country’s imports and the entire merchandise trade deficit. It is likely that in 2010, remittances would finance about 80 per cent of the country’s trade deficit. Remittances are more important than export earnings from tea and rubber and are even higher than the value of total agricultural export earnings. They are also higher than the earnings from the main industrial export: garments. Therefore the extent and magnitude of their contribution to the balance of payments is huge.

The Sri Lankan economy is very much dependent on remittances from abroad. It would not have been possible to sustain imports at current levels had there not been a large inflow of remittances. These remittances that are more than any single export item and larger than either agricultural or industrial exports is the backbone of the country’s external finances. Sri Lanka is an economy whose imports are maintained by remittances from abroad. It is a remittance dependent import economy.

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