| The Sunday Times Economic Analysis By the Economist | ||||||
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A balance of payments surplus despite large trade deficit By the
Economist The prospect of an overall balance of payments surplus is expected owing to the Central Bank of Sri Lanka announcement that the country had a surplus of US$ 122 million in the first three-quarters of last year. Since the trade balance for the last quarter is expected to be better and capital inflows are expected to be larger, there is every prospect that 2002 would end with a balance of payments surplus for the year. This balance
of payments surplus is however not being achieved owing to a trade
surplus. In fact the first ten months registered a trade deficit
of US$ 1118 million. Imports exceeded exports by this amount. It
is most unlikely that export earnings would have picked up by such
a huge amount in the last two months that it would be able to offset
this deficit of the first ten months. Besides imports
are likely to have increased in the last two months owing to both
seasonal factors and the increase in imports of intermediate imports,
owing to the increasing tempo of industrial production. At most
the deficit could be reduced owing to a surge in exports. In fact
it is more likely that at the end of the year the trade deficit
would increase to about US$ 1200 million. Therefore the
balance of payments surplus would be achieved in spite of a large
trade deficit. The overall balance of payments surplus is a result
of capital inflows from other sources. In recent years a big support
to the balance of payments has been the remittances of money from
Sri Lankans abroad. In the first ten months of this year the remittances
amounted to US$ 873 million, about 2 per cent higher than in the
previous year. Although outflows
were higher, the net gain was US$ 717 million, marginally higher
than that of 2001. Tourist earnings are another important component
of the balance of payments. Although there were expectations that
tourism would bounce back owing to both an improvement in the global
situation and the peaceful conditions in the country, tourist arrivals
did not increase in the first half of last year. In fact tourist earnings dipped in the first half of last year. Since then tourism picked up and in the first ten months of last year tourist arrivals increased by about 6 per cent. Tourism contributed
nearly US$ 200 million to the balance of payments in the first ten
months and its contribution in the last two months is likely to
be proportionately higher. Tourist earnings are likely to be around
US$ 230 to 240 million last year. Although remittances and tourist
earnings would contribute to offset the deficit in the trade balance,
there would yet be a deficit in the balance of payments after these
contributions are accounted for. The real difference
to the balance of payments appears to have come from the much higher
official inflows last year. In the first ten months of last year
official inflows raised the official component of the reserves by
19 per cent. This is an
indication of the main source for the balance of payments surplus.
However good an overall balance of payments surplus is, there is
a need to analyse how it came about. A qualitative assessment of
the factors behind the surplus is as important as the overall result
of the surplus. As we have
pointed out there is no likelihood that the trade balance would
be a reason for the balance of payments surplus. In fact the likely
large trade deficit is a severe strain on the balance of payments
last year. In fact it has been so for the past 25 years. There is an
essential distinction between a balance of payments surplus that
is achieved by a trade surplus, earnings from services such as tourism
and remittances, and one that is a result of capital inflows either
private or official. That essential difference is that capital inflows
are contingent liabilities. The monies that come in have to be repaid
or would be taken out in future years. Some part of
it would be a component of the foreign debt, others would be investments
that would be taken out, possibly with profits. What we are driving
at is the fact that a balance of payments surplus achieved owing
to capital inflows rather than from either merchandise exports or
service earnings is not necessarily a healthy balance of payments
position. Despite the likely balance of payments surplus last year, the plain fact is that our balance of payments is not a healthy one. We must mind the large trade gap.
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