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Last year’s balance of payments performance illustrates the strengths and weaknesses of the country’s external finances.

Remittances from abroad and earnings from tourism were the two strengths of the economy. These help offset the large trade deficit. Our economy’s weakness is the inadequate merchandise exports to meet our import expenditure. The trade deficit was as much as US$ 6.2 billion.

Persistent trade deficits have been a serious weakness in the country’s external finances. Increasing the country’s merchandise exports is vital for an improvement in the country’s external finances.

BOP

In spite of the large trade deficit, a US$ 3.7 billion balance of payments surplus was achieved, and the external reserves increased to US$ 6.1 billion at the end of 2024 owing to higher remittances and tourist earnings.

In contrast, the trade deficit widened as merchandise imports exceeded merchandise exports by as much as US$ 6.1 billion, compared to a trade deficit of US$ 4.7 billion in 2023.

Strengths

US$ 6.6 billion in remittances and US$ 3.2 billion in tourism earnings boosted the balance of payments. These two sectors—the economy’s strengths—that brought in US$ 9.8 billion offset the trade deficit of US$ 6.9 billion.

Trade deficit

The trade deficit increased in the last quarter of 2024 and in January this year. Nevertheless, the increase in remittances and earnings from tourism resulted in an improved performance in the external finances.

Trade balance

The trade balance deteriorated significantly last year. Merchandise imports of US$ 10 billion exceeding the country’s merchandise exports of only US$ 4 billion are seen as a weakness in the economy. Despite the recognition of the need to increase exports, there have been continuous and persistent trade deficits. Only on four occasions has Sri Lanka recorded small trade surpluses in its 77-year post-Independence existence. The first was in 1950 and the last was in 1977.

BOP

Although last year’s trade deficit expanded to a record high of US$ 6.1 billion owing to an increase in imports, increased inward remittances of US$ 8 billion and tourism earnings of US$ 3.6 billion resulted in a balance of payments surplus of US$ 4.4 billion, enhancing gross external reserves to US$ 6.1 billion.

Remittances

The increase in reserves was due to increased inward remittances and earnings from tourism. There was also an increase in earnings from ICT services. It brought in US$ 1.5 billion. In spite of this, the trade balance widened due to increased merchandise imports of US$ 8 billion compared to exports of US$ 7 billion.

Imports

This widening of the trade deficit was due to the increase in imports being more than exports. This resulted in a trade deficit of US$ 6.2 billion. Last year’s favourable balance of payments outcome was entirely due to remittances and earnings from tourism.

Weakness

The persistent weakness in the external finances of the country has been inadequate exports. Despite the need for increased exports, the growth in merchandise exports has been slow. On the other hand, imports have tended to rise despite import restrictions. The import of motor vehicles this year would strain the trade balance this year.

Agricultural exports

Agricultural exports that were the main strengths of our external finances for about three decades after independence have failed to expand. The main reason for this is that the exportable surpluses have dwindled due to decreased productivity.

The causes for this decline have been many, and their reversals are difficult but essential. Strategies to enhance agricultural production are vital not only for export growth, but also for economic growth and reduction of poverty.

Reforms

The government is aware of this and is taking steps to enable higher foreign investments in export industries. The goal of enhancing exports is undoubtedly a tough task requiring a range of reforms.

External finances

At the end of 2024, external reserves had risen to US$ 6.1 billion. The main factors for this improvement were the increase in foreign remittances, increased earnings from tourism, higher earnings from ICT services, and an improvement in the trade balance due to higher merchandise exports. Nearly all these sources of foreign earnings have downward risks.

Trade wars

There is also much uncertainty in international trade, too. The likelihood of trade wars and price escalations could reduce these earnings as well as affect our trade balance. However, there is some optimism that our exports may not be affected adversely or even benefit as a small economy. Nevertheless, the uncertain international economic order is a concern for the economy.

The country’s inadequate exports continue to be a serious concern. While there are a plethora of institutions that are expected to spur exports, there is an inadequate thrust in policy reforms to propel exports. The anti-export bias in trade and exchange rate policies has to be addressed. One of these constraints is the para tariffs that increase the costs of production of exports.

Summary

The performance of the country’s external finances in 2024 illustrates the strengths and weaknesses of the economy. As in previous years, there was a large trade deficit. In fact, the trade deficit widened from that of 2023 owing to merchandise imports exceeding merchandise exports by as much as US$ 6.1 billion.

Despite this large trade deficit, there was a balance of payments surplus of US$ 4.1 that enhanced the foreign reserves to US$ 6.1 billion owing to increased inward remittances and earnings from tourism. They contributed nearly US$ 10 billion (9.6).

These two strengths of the external finances should not blind us to the weaknesses in our export performance, especially as there are downside risks in remittances and tourist earnings that are unpredictable, especially in the current international context of international hostilities and wars.

Conclusion

Policy reforms are vital for increasing exports to reduce the trade deficit and strengthening the external finances. The anti-export bias in our economic policies must be replaced by an export bias. For instance, the electricity tariff for export industries must be reduced. Import duties as well as para tariffs for imported raw materials should be reduced.

Complacency to address the root causes of inadequate export growth owing to increased earnings from remittances and earnings from tourism is wrought with risks and uncertainties.