Improvement in external finances enhanced by IMF facilityView(s):
The improvement in external finances this year has led to a positive expectation in the balance of payments and the external reserves by the end of the year. However, there is uncertainty in achieving this, owing to political protests and social upheavals.
A significant improvement in the external finances is likely in the coming months if the flow of remittances and the uptrend in tourist earnings gains momentum. These improvements in external finances would be further boosted by the first tranche of the IMF Extended Finance Facility (EFF) of US$ 290 million which is expected next month.
The EFF of US$ 2.9 billion over the next four years would not boost the external finances much, but the international confidence it generates and the more flexible exchange rate policies that may be adopted could increase capital inflows and inward remittances.
Multilateral financial institutions such as the World Bank and the Asian Development Bank (ADB) are likely to begin development projects. Some of the halted bilateral projects too are likely to be resumed. These too would improve the external finances. Nevertheless, there are risks, threats and uncertainties that must be avoided.
Remittances and tourist earnings
While remittances are likely to increase, earnings from tourism are susceptible to the security conditions in the country.
In the first two months of this year, remittances are estimated to be about US$ 800 million and tourist earnings are estimated at around US$ 300 million. On this basis, as well as an increasing trend, these two sources could be expected to earn around US$ 7 to 8 billion.
If the current wave of tourism is boosted, tourist earnings could increase. On the other hand, unrest in the country could be a setback to this expectation.
The arrival of Chinese and Indian tourists is expected to increase immediately, while European and North American tourist arrivals are expected to increase from September. If the country is considered safe for tourists and there are no disruptions to travel, earnings could reach US$ 2.5 billion or more this year. These earnings would boost the external finances significantly.
Will the current political upheavals weaken external finances? The prospects of an improvement in the external finances this year could be threatened by the ongoing strikes, political protests, social unrest and disruption of production. These pose serious concerns, instability and uncertainty in external finances.
The deficit in the merchandise trade account narrowed to US$ 410 million in January 2023, from US$ 857 million in January 2022. This was due to the decline in imports being more than the decline in exports.
The trade deficit is expected to widen this year owing to a declining trend in merchandise exports, mainly due to depressed global demand for our industrial exports. While the trade deficit is expected to widen owing to reduced exports, an increase in remittances and earnings from tourism are expected to bring about a balance of payments surplus and boost the foreign reserves. This is quite apart from obtaining the first tranche of the IMF credit facility.
The balance of payments surplus is expected mainly from increased remittances and much higher earnings from tourism. These are expected to offset the trade deficit to achieve a balance of payments surplus. The Achilles heel is the uncertainty about tourist arrivals owing to the political unrest in the country that could result in the country being considered unsafe for tourists.
Disruptions to economic activities and the increasing costs of production could hamper exports further. Already, in January this year, the trade deficit expanded from that of December 2022, as well as January last year. The increased costs of production and the disruptions to production could reduce export earnings further.
The most serious threat to the external finances is the setback of political unrest that could pose to tourism. In January, tourist arrivals of around 100,000 brought in US$ 400 million. If this increasing trend in tourist arrivals continues we could expect about US$ 5 billion this year. This would more or less wipe out the trade deficit while remittances of about US$ 5 billion could enhance the external reserves.
Whether the current conditions and the deterioration of security in the country would deter tourists is the all-important question.
Summary and conclusion
The external reserves could improve, if the flow of remittances and tourist earnings reaches around US$ 7 billion. While remittances are likely to increase, earnings from tourism are susceptible to the security conditions in the country. If the country is considered safe for tourists and there are no disruptions to travel, earnings from tourism alone could reach US$ 3 to 4 billion to boost the external finances.
The all-important issue is whether political upheavals will affect the upsurge in tourism and weaken external finances. The prospects of an improvement in the external finances this year could be threatened by the ongoing strikes, political protests, social unrest and disruption of production. On the other hand, the release of the first tranche of the IMF’s EFF would enable more market-friendly policies that could boost the country’s external finances.
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