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The repayment of the country’s debt obligations next year is a national anxiety. The low external reserves, a balance of payments deficit this year and the impact on the economy of the spreading COVID are serious concerns. On the other hand, there are some bright spots in the economy that lend hope to a better than expected outcome in the trade balance. Exports have picked up to as much as before COVID, imports have been reduced and the trade deficit is less than that of 2019. Nevertheless the balance of payments deficit is large and foreign reserves are low.

Silver linings

The bright spots in the economy are the revival of exports to pre-COVID levels, decrease in imports and a likely lower trade deficit than last year. While tourist earnings have fallen precipitously, there has been an unexpected surge in workers’ remittances. However these silver linings cannot drive away the dark clouds that overhang the external finances.

Exports

The most encouraging feature in the country’s external finances is the export revival. The dip in exports in the second quarter of this year has been arrested and exports have bounced back to pre-COVID levels of about US$ one billion a month. The resilience and adaptability of key export industries have enabled export earnings to be at near normal levels in the third quarter of this year.

Imports

In the first nine months of this year imports shrunk by 19.3 percent to US$ 11.8 billion due to restriction of “non-essential” imports and lower prices and volume of fuel imports. This reduction in imports contributed much to a reduction in the trade deficit as exports too decreased.

Exports

During the first nine months of this year, exports decreased by 17.1 percent to US$ 7.4 billion, compared to US$ 9 billion in the same period of 2019.

Trade balance

Owing to these developments, at the end of September, the trade deficit was narrowed by nearly 20 percent to US$ 4.3 billion, compared to US$ 5.6 billion in the first nine months of last year. This has been achieved primarily by the curtailment of “non-essential” imports and the reduction in price and volume of fuel imports.

Balance of payments

The adaptability of key export industries have enabled export earnings in the third quarter of the year to be at near normal levels. This together with restrictions of imports has enabled a lower trade deficit. Workers’ remittances that dipped earlier have picked up to higher amounts.

In contrast, there has been a massive loss in tourist earnings whose recovery remains uncertain in the next year and even after. This has been a serious setback to the country’s external finances. Tourist earnings fell from US$ four billion in 2017 to US$ 958 million in the first nine months of this year.The earnings from tourism in the last quarter is likely to be negligible.

Tourism will continue to be affected till the global travel restrictions prevail. Its impact is not only on foreign exchange earnings. The increase in unemployment and loss of livelihoods owing to the setback to tourism is severe. It is one of the darkest clouds over the country.

BOP outcome

In contrast to last year’s overall balance of payments surplus of US$ 789 million, this year’s BOP will be in deficit. At the end of September this year, the overall deficit was US$ 1.1 billion. On the basis of this trend, the BOP deficit this year is likely to be around US$ 1.5 to two billion. Consequently, the foreign reserves will continue to deplete and strain debt repayment obligations. This deterioration in the BOP is in spite of an improvement in the trade balance.

Remittances

Fortunately, workers’ remittances have picked up since August this year and has been higher than previously. The surge in workers’ remittances after a drop in the middle of the year, is one of the brightest silver linings in the balance of payments. It is also a significant contribution to the economy and livelihoods of a large number of people.

However, this increase in remittances owing to the repatriation of savings of permanent returnees, diversion from informal remittance channels and increased assistance to families from relations abroad are not likely to continue. With lessor workers abroad remittances are likely to decrease during the course of next year.

Foreign reserves

The net results of these developments are the dip in foreign reserves to US$ 5.9 billion at end of September. They are likely to fall further in the next three months unless there are foreign loans and other arrangements like SWAPs.

As the external reserves are dangerously low to meet next year’s foreign debt repayments, there is an urgent need to replenish these reserves through bilateral and multilateral assistance as debt repayment obligations are as much as US$ four to 4.5 billion.

Conclusion

Despite several silver linings in the economy, the external finances are in a vulnerable situation. In spite of a revival of exports, reduction in imports, an improvement in the trade balance and a surge in workers’ remittances, this year’s balance of payments deficit is likely to be around US$ 1.5 to two billion. The foreign reserves of US$ 5.9 billion at the end of September are therefore likely to decline further. The critical issue is how the debt repayments of around US$ four to 4.5 billion could be met next year.

Finally and critically, at what cost will we borrow?