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Reducing the trade deficit and increasing the balance of payments surplus this year would enhance the country’s external reserves, decrease foreign indebtedness and reduce the country’s external financial vulnerability.

A substantial balance of payments surplus could be achieved primarily by reducing the trade deficit this year to US$ 8 billion or less. This year’s growth in exports must be enhanced and imports must be reduced to achieve this. The improvement in the trade balance in the first half of this year must be consolidated by enhancing the export growth of the first half of the year and by curtailing nonessential imports. Vigilance in the performance of the trade balance to reduce the trade deficit is vital to achieve a substantial balance of payments surplus of US$ 3 to 4 billion or more.

Export performance

The increase in exports by 4.7 percent in the first half of the year was achieved by increased manufactured exports, such as garments and rubber goods, by 6.7 percent. This increasing trend in exports should gain further momentum to reduce the trade deficit this year.

The disappointing feature of this year’s export performance has been the drop in agricultural exports. In the first half of this year, agricultural exports declined by 2.1 percent with the country’s main agricultural export, tea, declining by as much as 6 percent compared to the same period last year. Other agricultural exports, too, have not fared well.

To generate higher export surpluses, a revitalisation of agriculture is crucial as agricultural exports have a low import content. The long-term export strategy must place an emphasis on agricultural exports such as cinnamon, cardamom, cashew and fruits.

Export growth

It is vital that exports in the second half exceeds those of the first half as the export growth of nearly 5 percent in the first six months of this year is a continuation of the increasing trend in exports. Exports increased from US$ 10.3 billion in 2016 to US$ 11.9 billion in 2018. Therefore it is realistic to expect exports to exceed US$ 12 billion this year. This coupled with a significant decrease in imports would reduce the trade deficit.

Import decline

In recent years, imports have been increasing at a much higher amount than the export growth. Imports increased by 10.2 percent in 2017 from that of 2016 and increased by a further 4.7 percent in 2018.   Therefore, the decrease in imports in the first half of 2019 by 16.1 percent is a striking reversal of this increasing trend in imports. Hopefully, this year’s total imports could be contained at around US$ 19 billion or less.

Policies

For this to be achieved, there should not be a relaxation of tariffs on non-essential imports, especially motor vehicles, gold and other luxury imports. Fiscal and monetary policies must be mindful of the balance of payments implications.

Balance of payments

The lower trade deficit could result in a balance of payments surplus of over US$ 3 billion, especially if there is an improvement in tourist earnings and there isn’t a drop in workers’ remittances, both of which have declined in the first half of this year. The trade performance in the first half of the year leads to an expectation of a much reduced trade deficit of around US $8 billion or less this year. This would in turn enable a balance of payments surplus of around US$ 3 billion provided tourist earnings, workers’ remittances and capital inflows do not dip much from those of last year.

The balance of payments surplus could be increased if there is an improvement in the weakening items of the balance of payments, especially tourist earnings and workers’ remittances. While the inflow of workers’ remittances is beyond the control of the country, improvements in security conditions and policy measures could enhance the inflow of tourists.

Since June, there has been an increase in tourists that would improve earnings from tourism in the second half of the year. The revival of tourism in the past few months should gain momentum from October to enhance earnings from tourism substantially. An increase in tourist earnings is needed to improve the balance of payments significantly.

Furthermore the balance of payments would be improved if there are capital inflows rather than outflows. Higher foreign direct investment (FDI) inflows could make a significant contribution to the balance of payments. However, the current political uncertainty is not conducive to expecting much FDI.

Summary

The trade deficit that has widened in recent years owing to the growth in imports being higher than the growth in exports has been reversed in the first half of this year owing to the continued growth in exports and a decrease in imports. This has reduced the trade deficit significantly. Imports declined by as much as 16.1 percent in the first half of this year compared to that of the same period last year.

The prospect of a larger balance of payments surplus this year depends very much on the reduction of the trade deficit to US$ 8 billion or less. The decrease in the trade deficit by US$ 2.1 billion in the first half of this year compared to the same period last year must be reinforced by a higher growth in exports, especially by an improvement in agricultural export earnings.

The reduction in the trade deficit this year is likely to result in a higher surplus in the balance of payments. This would strengthen the external finances. The external reserves that were US$ 8.2 at the end of June could be enhanced to nearly US$ 10 billion. This may enable meeting next year’s debt repayment obligations without resort to further borrowing and thereby reduce the foreign debt.

Concluding reflection

As a higher balance of payments surplus this year could strengthen the external reserves and ease the country’s debt burden, it is of utmost importance that the momentum of export growth is accelerated, especially by increased exports of agricultural products that have declined in the first half of this year. This must be complemented by the containment of imports to keep the trade deficit to less than US$ 8 billion.

Monetary and fiscal policies should ensure that there isn’t a surge in imports as happened last year. Furthermore, increased foreign direct investment, higher earnings from services, increased tourist earnings and workers’ remittances would increase the balance of payments surplus. A higher balance of payments surplus this year would strengthen the external finances and reduce the country’s external vulnerability.