Columns

The favourable export performance this year is the only silver lining amidst the dark threatening clouds of depleting external finances. Export earnings have exceeded US$ one billion a month since June, while external reserves have fallen to around US$ one billion. The trade and balance of payments deficits too have widened.

Export performance

Exports increased by as much as 21 percent in the first ten months of 2021 compared to the same period last year to reach US$ 10.05 billion. Since June this year monthly export values have exceeded US$ one billion. In October 2021 exports increased to a record high US$ 1.16 billion—35 percent higher than a year ago. The trade deficit widened in the first nine months and the balance of payments too deteriorated. The improvement in export earnings is the only silver lining in the country’s external finances.

External reserves

In spite of this favourable export performance, foreign currency reserves have fallen to a perilously low US$ one billion at the end of November, inadequate to meet the country’s essential import needs and service debt obligations. The country is facing a serious foreign currency crisis that is threatening the lives of the people.

Indian assistance

The government is eagerly awaiting a lifeline of credit from India that alone can enable the country to tide over the grave scarcity of foreign currency. There is no confirmation that the requested currency swap of US$ 500 million and the trade credit for purchase of food, pharmaceuticals and fuel have been approved. This assistance is crucial because it is too late to seek an IMF facility as it would take a few months for approval.

Alternately we must receive substantial foreign assistance from another friendly country. Expectations of such assistance announced by the Central Bank Governor from time to time is yet to be realised.

Silver lining

It is in this dire foreign currency situation that exports increased significantly. Had export earnings been around last year’s amount, the trade deficit would have widened further and strained the balance of payments severely. Yet, higher import expenditure has widened the trade deficit to US$ six billion in the first nine months of this year.

Export performance

Exports increased by as much as 21 percent in the first ten months of this year, compared to the same period last year. The main increase in exports was in manufactured exports that increased significantly in the first ten months.

It is noteworthy that this export growth was achieved owing to a wide range of exports such as boat building, electrical appliances and sea food, besides the established exports like garments, rubber goods and tea.

Threats to exports

Increasing manufactured exports and ICT services is the way forward for the country. However, there are severe threats to this prospect.

Trade reforms and realistic exchange rate management are vital for ensure export growth. The current foreign currency shortages and restrictive foreign currency regulations could threaten industrial exports due to shortages of essential raw materials. The artificially low exchange rate is also a disincentive for exports as it has been for remittances.

Another severe threat is the withdrawal of the GSP plus concession by the European Union (EU) in 2022, followed by similar action by western countries that are the main markets for our exports. There does not appear to be any efforts to improve the country’s human rights. Consequently, the threat is a serious economic concern.

Implications

Favourable developments in export earnings should not mislead policy makers into believing that increased exports could resolve the current crisis in external finances. The increase in exports is inadequate to resolve the current serious shortage of foreign reserves. It is however the way forward in the long run.

No homegrown solutions

It is important to recognise that there are no “home grown” solutions to the severe depletion of foreign reserves, and the only relief is through foreign assistance. Extricating the country from this severe external financial vulnerability is urgent and imperative. Only foreign assistance can save us from bankruptcy.

Summing up

The continuing increase in exports is indeed a singular bright light in the encircling gloom. Yet, the increasing exports are inadequate to overcome the serious depletion of foreign reserves, the import needs of the country and debt repayment obligations.

In fact, despite the noteworthy increase in exports and the stringent import controls, the trade deficit is widening this year.

In brief, although the export performance has been favourable this year, especially since June, the trade deficit has widened despite stringent import controls. This underscores the fact that export earnings have
to increase much more to finance even essential imports. Nevertheless, export growth has been the
single silver lining in the country’s external finances.

Concluding reflection

The external finances are in such dire straits that the country requires immediate relief. The only immediate prospect is the assistance package sought from India. In the medium and long run the country will have to seek International Monetary Fund (IMF) assistance to resolve the country’s fundamental and structural economic weaknesses. Fundamental structural reforms are imperative.