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Sri Lanka’s once trade-dependent economy is now very much dependent on foreign remittances and earnings from tourism. This dependence has risks and uncertainties, as global conditions could affect these sources of foreign exchange earnings adversely. The current global developments pose such risks.

Even in 2023, the country’s trade dependency (exports and imports as a percentage of GDP) was 11.1.

Such a high dependency is to be expected of a small country with limited resources, unlike large countries such as the United States, China or India.

Instability

However, such high dependence results in instability and economic fluctuations. This was the experience in the 1950s and up until the 1970s, when adverse terms of trade caused economic hardships.

Exports

In 2023, merchandise exports earned US$ 11.9 billion, while imports cost US$ 16.8 billion. The consequent trade deficit of US$ 4.9 billion was wiped off entirely by remittances of US$ 5.97 billion. In addition, earnings from tourism contributed US$ 2.1 billion. Consequently, there was a balance of payments surplus of US$ 4.4 billion.

New dependence

Remittances of about US$ 6 billion and about US$ 2.1 billion in tourism earnings were the strengths of last year’s external finances. These two were 3.1 percent of GDP. More significantly, they were able to offset the trade deficit to achieve a balance of payments surplus.

In 2023, remittances of US$ 6 billion and earnings from tourism of 2.1 billion offset the trade deficit of US$ 4.9 billion to achieve a balance of payments surplus of US$ 3.2 billion. This shows the country’s dependence on these two sources for its external finances. Unfortunately, both these sources have downside risks.

External finances

The improvement in the country’s external finances last year was entirely due to higher remittances from abroad and increased earnings from tourism. While this was a favourable development, it is fraught with risks and uncertainties.

Risks

The current war in West Asia and recessionary conditions in Europe and the United States pose severe downside risks for the Sri Lankan economy. There are uncertainties about the current and developing international conditions. The surplus in the balance of payments and the increase in foreign reserves last year were solely due to increased remittances and higher earnings from tourism. Both these sources of foreign earnings are uncertain in the current global conditions, especially due to the expanding war in West Asia.

The current global conditions pose a serious threat to the country’s external finances. This increasing dependence of the economy on remittances from abroad and earnings from tourism to meet the country’s foreign exchange needs is risky in the current global conditions due to the two wars that are likely to expand and escalate.

Recession

The recessionary conditions in many developed countries in the West have already affected our manufactured exports adversely. The decrease experienced last year is likely to expand.

Trade

In contrast, the country’s trade balance has deteriorated. Last year, merchandise exports decreased while imports increased, bringing the trade deficit to US$ 4.7 billion. Exports continue to decrease this year owing to the decreased demand for our exports from the recession-hit western countries that are our main markets. There are no signs of recovery yet.

Remittances

In 2023, remittances of US$ 6 billion and US$ 2.1 billion in tourism earnings wiped out the widened trade deficit of US$ 4.9 billion to enhance the country’s external reserves to US$ 4.4 billion. Although these are continuing to increase, there are many uncertainties and risks.

War

The expansion of the war in West Asia may cause a sharp decline in remittances. As these two sources brought in US$ 7 billion, their decrease by half would result in a balance of payments deficit of about US$ 2 billion. This is in the context of having to meet foreign debt obligations.

Remittances

Over 50 percent of the remittances are from workers in the Middle East. Some countries, like Lebanon and Israel, are already experiencing bombings and destruction, and there have been workers returning home. There is information to suggest that there is a drop in the number of people seeking employment in West Asia.

This phenomenon is likely to expand to other countries in the region, like Lebanon,Iran, Kuwait, and Yemen.

Exodus

The exodus of workers from these war-affected countries and the reduction of migrants to these countries could result in a severe reduction of worker remittances. A US$ 2–3 billion would make a se-rious dent in the balance of payments. At first, there may not be a drop as returnees may bring their savings, but it will be followed by a dip in remittances.

Tourism

Tourism which is currently booming and brought in US$ 2.1 billion last year, could experience another reversal if the wars make air travel risky. Already, there has been an increase in travel costs.

Diversify exports

In this context of instability in external finances, there is an urgent need to diversify the country’s merchandise exports and enhance production of commodities that substitute for imports, moreso, in respect of agricultural produce. The country produces several spices that are of the best quality, but their output is inadequate. These, as well as food production, should be increased to make a significant contribution to the balance of trade. The current high dependence on a few exports has proved inadequate, risky, and uncertain. The country’s main manufactured exports—garments—have declined owing to recessionary conditions in the West. The inability to increase agricultural export volumes has reduced agricultural export earnings.

Increase production

Increased production of manufactured exports and agriculture must meet domestic needs and export possibilities. A dollar saved through domestic production is a dollar earned.

Conclusion

The external finances of the country, which improved last year owing to increased remittances and higher earnings from tourism, are at risk this year owing to the unstable conditions in the West Asia region. Much depends on whether the war will expand or escalate. The indications are that it would. Remittances could be severely eroded. Tourist earnings, too, are at risk if the wars make travel risky. There is a need to reduce this vulnerability, especially by increasing agricultural production for exports and import substitution.