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The external finances of the country have improved and are likely to improve further this year. This is in spite of the trade deficit widening owing to decreased exports.

The improvement in foreign finances is owing to increased earnings from tourism, higher remittances from abroad and international assistance.

Nevertheless, the country’s foreign debt remains large.

External reserves

Sri Lanka’s external reserves are estimated at US$ 3 billion at the end of March. However, the country’s foreign debt is massive. It is estimated to be more than US$ 51 billion. The restructuring of this debt is a complex problem.

A balance of payments surplus is expected this year mainly due to remittances and earnings from tourism. However, the trade deficit has expanded to widen owing to a decline in exports. This is in contrast to last year’s increase in exports that narrowed the trade deficit.

Net foreign reserves

Although foreign reserves were US$ 3 billion at the end of March, this includes a Chinese line of credit of US$ 1.4 billion that can be used only for imports from China. Therefore, at the end of March, the country’s freely useable reserves were about US$ 1.6 billion.

Improvement

The improvement in the country’s external finances in the first three months of this year is expected to be enhanced during the course of the year, mainly due to increased remittances from abroad, higher earnings from tourism and international assistance.

Remittances

The main reasons for the improvement in the balance of payments in the first quarter of this year were the increase in remittances and earnings from tourism.

Remittances increased to about US$1.2 billion and tourism earnings to about US$ 400 million in the first three months of this year.

These earnings are on an upward trend. Remittances are expected to exceed US$ 5 billion and earnings from tourism are expected to be about US$ 2 billion.

Projects

In addition, project assistance from bilateral and multilateral sources is expected to boost the reserves during the year.

There was a balance of payments surplus in the first three months of this year. This was achieved despite a larger trade deficit. This was due to increased remittances from abroad and higher earnings from tourism. Remittances and earnings from tourism are expected to increase in the coming months.

Trade balance

The deficit in the merchandise trade account increased in January-March due to the decline in merchandise exports. Manufactured exports fell owing to decreased demand from Western countries that are experiencing a recession.

This decrease in demand for our manufactured goods is expected to continue for the rest of the year and may even continue into 2024.

Agricultural exports, mainly tea, declined owing to a fall in production.

Expectation

This improvement in external finances in the first quarter has led to an expectation of an improvement in the balance of payments and an increase in the external reserves by the end of the year.

While the trade deficit may widen this year due to reduced exports and increased imports, increases in remittances and earnings from tourism are expected to bring about a balance of payments surplus to boost the foreign reserves.

This is quite apart from the IMF’s first tranche of US$ 333 million that has already been credited in March.

External finances

The country’s external finances are expected to improve during the course of the year primarily due to increased remittances from abroad, earnings from tourism and project loans from bilateral and multilateral sources.

Project loans

External reserves are expected to be boosted by inflows of project loans from friendly governments and multilateral institutions, especially the World Bank and the Asian Development Bank (ADB). This inflow is a result of the agreement with the IMF.

Balance of payments

A balance of payments surplus of about US$ 1.5 to 2 billion, or even more, could be expected this year, if the uptrend in remittances and tourist earnings continue. Furthermore, if foreign developmental assistance flows increase, the balance of payments surplus could be even higher.

Tourism

While remittances are likely to increase, earnings from tourism depend on the conditions in the country being considered safe for tourists.

Risk

Tourist earnings could be threatened by strikes, political protests, social unrest and a breakdown of law and order. Travel advisories cautioning travellers coming to the Island could once again be a serious setback to tourism.

Political unrest

The prospects of an improvement in the external finances this year could be undermined by strikes, political protests, social unrest and disruption of production. Will political upheavals resume to weaken external finances?

Fortunately, at the time of writing, there appears to be a lessening of protests and strikes. Perhaps the end of scarcities and improvements in living conditions have weakened the will for political upheavals and strikes.

Optimistic

The hospitality trade is optimistic of a significant revival later this year and in 2024.

Foreign assistance

There is also the possibility of a higher BOP surplus if foreign assistance flows increase as a consequence of the IMF’s Extended Finance Facility (EFF) and economic reforms. The confidence generated by the IMF programme is expected to enhance development assistance from multilateral agencies and foreign governments.

Prospects

The BOP and the external reserves could improve if the flow of remittances continues and increases and tourist earnings reach around US$ 3 to 4 billion. While remittances are likely to increase to about US$ 5 billion, 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, tourist earnings could reach US$ 3 to 4 billion to boost the external finances.

Summary and conclusion

The country’s balance of payments has improved in the first quarter and is expected to improve further by the end of the year mainly owing to increased remittances from abroad and higher earnings from tourism. If the expected foreign assistance for projects materialises, the external reserves would be further strengthened.

The external reserves are expected to be boosted by inflows of project loans from friendly governments and multilateral institutions, especially the World Bank and the Asian Development Bank (ADB) and Japan. Many of these projects were halted owing to government decisions and the bankrupt status of the country. With the country’s regained confidence owing to the IMF agreement, much foreign assistance is expected through project assistance.

In spite of these improvements in the external finances, our foreign exchange crisis remains as foreign debt is estimated at over US$ 53 billion which is 83 percent of the country’s GDP. The extent to which the restructuring of the foreign debt would result in its reduction would be of much significance for the economy.