Despite the country heading for a massive trade deficit, the government’s own forecast is that the country would achieve a small surplus in the balance of payments. These projections are based on expectations that are probably somewhat optimistic. However despite the very large merchandise trade deficit, it is likely that the end result in the balance of payments would probably be a modest deficit. Increased tourist earnings, an increased inflow of worker remittances and capital inflows are likely to offset much of the merchandise deficit in the balance of trade. These are likely to reduce the balance of payments deficit significantly.
Whereas the government expects a balance of payments surplus of US$ 200 million, a deficit of around US$ 1000-1500 million is more likely. The government estimates the merchandise trade deficit to be US$ 4500 million. It is more likely to be in the order of US$ 6000 million. This is the main reason for the difference in the estimated projections. Given the large foreign exchange reserves that have been built up, the balance of payments deficit will not lead to any crisis. However it would mean depletion in the foreign exchange reserves, if the deficit reaches the higher estimate.
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There are other serious economic implications besides the balance of payments that must be considered seriously. These include the implications of the fall in industrial export earnings on employment and incomes and the long run implications for industrial development of the country. Already there have been increases in unemployment owing to the closure of factories. The government’s objective of a drastic reduction in poverty may be seriously in trouble due to the failure of many industries.
The large merchandise trade deficit is mainly owing to the increased import expenditure due to rising oil and food prices. Other consumer goods are also likely to increase. On the side of exports, there is a growth in agricultural exports mainly due to improvements in prices of tea and rubber. In contrast, industrial exports have grown very little resulting in the growth in total export earnings being a fraction of the increased expenditure on imports.
These developments are seen in the first four months’ trade figures. Whereas export earnings increased by only 10.7 per cent, expenditure on imports increased by as much as 42.9 per cent. While export earnings in the first four months were only US$ 2,307 million, import expenditure had risen to US $ 4,192 million. Consequently in the first four months of the year the merchandise trade deficit reached US$ 1884 million. This was a significant increase of 122 per cent from what it was during the same period last year and similar to the experience in 2008.
The sluggish growth of industrial exports by only 3.9 per cent is an important reason for this adverse outcome. Even more disconcerting is the fact that textiles and garments exports during the first four months declined by as much as 11.6 per cent and earned only US$ 936 million. Garment export earnings are expected to decline by about US$ 500 million with the withdrawal of the GSP plus status. If this happens and import expenditure increases owing to the recent reduction in tariffs and higher oil and food import prices, the merchandise trade deficit may rise above US$ 7000 million this year.
In this context of a poor performance in industrial exports a countervailing factor has been an improvement in agricultural export earnings by 33 per cent. This has been particularly so with respect to the country’s tea exports. Tea export earnings grew by as much as 33 per cent mainly due to improved international prices. This was the case with respect to rubber exports as well where there has been a boost to international rubber prices owing to the increasing trend in oil prices and reduced supplies of natural rubber in the international market. Rubber prices reached a record level during last week. However rubber supply cannot be increased to get the full benefit of the price increase.
During the first four months of 2010, workers’ remittances increased by 14.5 per cent over that of the corresponding period of 2009 to US dollars 1,199 million. Last year remittances exceeded the trade deficit to convert it into a trade surplus. Although remittances have continued to flow in a progressively higher rate, the extent of the trade deficit this year is likely to be of a magnitude that even the increase in remittances by 14 per cent would not be able to offset the deficit. This is seen in the external trade statistics for the first four months when remittances at US$ 1199 million fell short of the merchandise trade deficit of US$ 1894 million. Nonetheless the inflows of remittances are such that the overall deficit is likely to be reduced to around US $ 2000 million by then. Therefore like in earlier years worker remittances would be a significant contributor to the trade balance as remittances are considered as export earnings and would reduce the balance of payments deficit.
There are serious implications of the developing merchandise trade scenario for the real sectors of the economy. The drastic decline in industrial exports are resulting in shut downs of manufacturing plants and resulting in increasing unemployment. This is especially so with respect to the garment industry where job losses have been high. If this decline in garment exports continues, it would have an adverse impact on the job market. Whether other industrial exports could compensate for this decrease remains to be seen. As some of the adverse conditions that affected garment exports are likely to affect other industries as well, the short term possibilities of such compensations are unlikely.
Despite the large trade deficit this year, it would not create a serious problem for the external finances of the country. Workers’ remittances, tourist earnings, foreign investments and other capital inflows would at best result in a small balance of payments surplus, and at worst a balance of payments deficit that will make a dent on the reserve position. What is far more important than the balance of payments outcome is that there is serious weakness in our export structure that causes concern over the country’s competitiveness in world markets. If the country’s competitiveness in industrial exports is eroded, there would be serious repercussions on incomes and employment in the country.
What these trends in exports indicate is that corrective actions are needed to boost industrial products for export. Garment export earnings are likely to decline further with the withdrawal of GSP plus status in the European Union countries that are the country’s main export market, and the prospects of an improvement in demand consequent to the abatement of the global recession too are not evident. There are few signs of improvement in the US economy. The high rate of unemployment of 9.5 per cent and loss of jobs imply a sluggish demand for the type of goods we export. The deficit in the merchandise trade account is of serious concern for the long run economic development of the country. |
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