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The balance of payments and external reserves improved at the end of April this year. Gross external reserves (including a Yuan currency swap of US$ 1.5 billion) increased to US$ 5.1 billion.

The government expects the external reserves to increase to over US$ 6 billion by the end of this year.

Expectation

Its expectations depend on the continuous rise in remittances and tourism earnings. A satisfactory completion of foreign debt restructuring by the end of June is also expected to enhance external reserves by an inflow of project loans and foreign assistance. Several projects that were discontinued are expected to resume.

Balance of payments

In spite of this, the balance payments surplus increased mainly owing to higher remittances and earnings from tourism—the two strengths of the economy. There could be a higher balance of payments surplus this year if remittances and tourism earnings increase. Furthermore, there are expectations of foreign assistance once the foreign debt restructuring is completed.

Trade deficit

The trade deficit increased to US$ 3.7 billion in the first four months of this year, compared to a trade deficit of US$ 2 billion in the first four months of last year. This widening trade deficit was entirely due to an increase in imports. In fact, exports increased by 3.6 percent from US$ 1,960 to US$ 2,030 million. Both manufactured exports and agricultural exports increased.

Imports

On the other hand, imports increased by 8.6 percent in the first four months of this year. This was due to more liberalised imports and an increase in import prices.

This trend of increasing imports is likely to continue. The country’s import needs are likely to increase import expenditure in the coming months. An increase in exports is much less likely.

The trade deficit is likely to expand this year owing to higher import expenditure and exceed US$ 6 billion, compared to last year’s trade deficit of US$ 4.7 billion.

Impact on BoP

The widening trade deficit will weaken the balance of payments and could strain the external reserves. However, the increasing trend in remittances, earnings from tourism, foreign assistance, and project loans could boost the reserves from US$ 4 billion to around US$ 6 billion.

Remittances

The increasing trend in remittances and tourism earnings last year has continued in the first four months of this year. Remittances amounted to US$ 840 million in the first four months of this year. If this trend continues, then remittances should be over US$ 6 billion this year. If, however, the tension escalates in West Asia, it may result in workers returning home, and about one-half of our remittances from the region declining.

Risks and uncertainties

As this year’s improvement in the balance of payments is mainly due to an increasing trend in remittances and earnings from tourism, if these two sources of foreign exchange dip, then the balance of payments could deteriorate.

There are risks and uncertainties in these sources owing to the expanding war between Israel and Palestine and the Russian-Ukrainian war. Furthermore, political and social unrest in the country could threaten the safety of tourists and ruin tourism.

Tourism

The tourist boom witnessed at the end of last year has continued in the first four months of this year. In the first four months, tourism earnings amounted to US$ 1.2 billion. If this trend continues, it should exceed US$ 4 billion.

Two sources

The inflow of about US$ 10 billion from these two sources should result in a balance of payments surplus of about 4 billion, despite a trade deficit of US$ 6 billion. In addition, there are earnings from IT services and shipping and expectations of capital inflows from foreign assistance and project loans. Foreign reserves are likely to exceed US$ 6 billion. However, the trade deficit is weakening the country’s balance of payments. The external reserves are required to be strengthened to meet the foreign debt obligations.

Foreign reserves

Strengthening foreign reserves is imperative to meet debt repayment obligations this year. The trade deficit widening this year weakens the enhancement of external reserves. Ways and means of reducing the trade deficit have to be found to achieve a lower trade deficit.

Last year

Last year’s trade deficit was as much as US$ 4.7 billion. This was due to reduced exports and increased imports. Indications are that this year’s trade deficit will be higher. Exports may increase somewhat, but not much, while import expenditure is likely to increase.

Concluding reflection

If the current trend in remittances and tourism earnings continues, there will be a balance of payments surplus despite a widening trade deficit. However, there are downside risks. We have no control over the external risks but must avert the internal risks by ensuring law and order. The run-up to the elections is, however, an uncertain time. A stalemate in the elections, especially the presidential poll, could destabilise the economy.

Furthermore, unstable conditions in the country could jeopardise the IMF arrangement. The foreign debt restructuring, which the government expects to finalise this month, could enhance foreign reserves as project loans and foreign assistance are expected.