The external environment has always been a determinant of the country’s economic performance. The fundamental reason for this is the country’s dependence on exports and imports. A trade dependency of around 70 per cent means that export and import prices have a strong bearing on the country’s prosperity.
The country is likely to face serious challenges in its external finances this year, similar to the difficulties faced in 2008.
The signs of adverse conditions in the international marketplace are evident already. It is likely that 2010 would be a year when the terms of trade would be unfavourable to the country mainly due to the increase in import prices of essential goods. The statistics of the external performance of the country in January indicate this. The trade deficit in January this year was two and a half times that of January last year. If this trend continues, the trade deficit this year could exceed US$ 8000 million and be a huge strain on the balance of payments.
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In 2009 the trade deficit was only US$ 3122 million and was completely wiped out by remittances from abroad. Although remittances are continuing to increase at about 12 per cent this year, even such an increase would be inadequate to offset this deficit in the trade balance. Perhaps this trend of an adverse trade balance is likely to have continued into the entire first quarter of this year and is likely to remain so for the rest of the year. We would have to await the release of the delayed statistics by the Central Bank to be definite on this. The international prices for essential imports have risen and would therefore increase the import bill very much. Exports have not fared well even after January and the removal of the GSP + status in the European market could worsen this export performance.
There were adverse trends in both exports and imports in January this year. The increasing expenditure on imports was however the main reason for the large trade deficit in January. Import expenditure increased by 70 per cent in January this year compared to that of January 2009.
Import expenditure in the single month of January was US $1160.9 million. Petroleum and rice imports constituted 59 per cent of import expenditure; petroleum imports alone accounting for 52 percent of the total import expenditure. This is a sign of things to come as import prices of oil is expected to increase and in any event be much higher than the costs in the first half of last year.
Expenditure on petroleum imports increased due to both, increased import volumes and the substantially higher prices in the international market.
The average price of crude oil imports increased to US dollars 78.08 per barrel in January 2010, compared to US dollars 41.71 per barrel in January 2009. In fact in February and March oil prices in the international market increased and went up to US$ 87 per barrel in early April, but at the time of writing had decreased somewhat to US$ 82 per barrel.
In this context of increasing international prices it would be necessary to decrease consumption. The pricing policy for petroleum products need to reflect international prices. The increase in the consumer prices of petroleum is inevitable. This would undoubtedly fuel domestic inflation. Yet balance of payments as well as fiscal consideration requires a revision of petroleum prices to contain domestic consumption and imports and losses that have to be met by the budget. This would be a hard decision for a popularly elected government so soon after its election.
The government can only take measures that would reduce import volumes. These, as earlier experience shows, do not have an adequate effect on curtailing imports much. One of the ways of bringing down the import expenditure on oil is to reduce government expenditure on petrol consumption. Ways and means must be found to reduce wasteful expenditure on petrol consumption.
The increased expenditure on rice imports was quite unnecessary and an aberration. Therefore this will not have an effect on imports for the rest of the year. The increase in rice imports was due to the larger volumes of rice imports that were induced by the government reducing taxes on rice imports.
This measure was supposedly to prevent a potential shortage of rice in the domestic market. It was an election ploy to reduce market prices, especially to urban consumers. Consequently rice import volumes increased to 80,310 metric tons in January 2010 compared to 630 metric tons recorded in January 2009.
The oil price hike will raise natural rubber prices. This has already happened and benefited natural rubber producers. However the benefit of rubber price increases to the trade balance would be small as the capacity to increase rubber production is limited and much of the country’s rubber production is used locally in rubber based industrial exports.
The rise in oil prices would also increase incomes in oil producing tea consuming countries and as a result the demand for tea would increase and boost international tea prices. Though the country would benefit from higher international rubber and tea prices, they would not offset the higher import costs.
The performance of the country’s exports is worrisome. Industrial export earnings fell by 16.7 per cent with textiles and garments exports declining by as much as 37.9 per cent. The decline in textile and garments exports was due to the lower export volumes owing to the depressed international demand and lowering of our competitiveness in comparison with other exporting countries in Asia and Latin America.
The main industrial exports of the country have declined in recent years and constitute a serious threat to the trade balance, employment and incomes of the working class. The gains in export earnings of the minor industrial exports and increases in agricultural exports have not been sufficient to off-set this decline. The continuing decrease in industrial exports is not only having an adverse impact on the trade balance but creating a serious problem of unemployment.
In contrast, agricultural export earnings increased in January 2010, as a result of an improved performance of tea, rubber and minor agricultural exports. Export volumes of both, tea and rubber rose by 18.5 per cent and 32.6 per cent.
There were also significant increases in export prices, to US dollars 4.32 per kg and US dollars 2.79 per kg, respectively, from December 2009. Earnings from minor agricultural exports too increased. However, the decline in earnings from textile and garment exports, which accounts for 37 per cent of total exports, was too overwhelming to change the adverse effects in the trade balance.
It is crucially important to recognize the adverse trends in imports and exports in order to take countervailing measures to mitigate the consequences. Glossing over these problems and hoping for a reversal or interpreting the statistics in innovative ways to project an image of there being no problems may only compound the problem this year. |
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