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News Features


Balance of payments surplus achieved

Foreign exchange reserves reached a record US$ 4 billion by September 10. These reserves are estimated to cover about 4.4 months of imports and are a very comfortable reserve position. The balance of payments has been improving in recent months. The increased inflow of private remittances has more than offset the trade deficit that has also been narrowing in comparison with that of last year. At the end of July remittances were about 25 percent in excess of the trade deficit and registered a surplus of US$ 372 million. The total balance of payments surplus is likely to be much more as there are other items that are likely to have and in fact have boosted the balance of payments. Due to these other inflows of capital and earnings foreign exchange reserves have now exceeded US$ 4 billion.

This situation is in sharp contrast to the dire straits that we reached in our external reserves around March this year. The inflow of the first tranche of the IMF facility of about US $ 322 million followed up by a further global infusion of funds by the IMF to developing countries to assist in the global economic recovery have been the foundation on which the reserves have been built. Sri Lanka received US$ 225 million as the allocation under this quite apart from the commitment under the Stand-by arrangement. Subsequent to this, the government was able to borrow funds internationally owing to a renewed confidence in the economy.

According to the Central Bank the gross official, reserves were US dollars 2,189.3 million by end July 2009. If the reserves at the Asian Clearing Union is counted the Bank says the reserves would be higher at US dollars 2,278.1 million. More important is the fact that since July the reserves have risen further to over US$ 4 billion in the subsequent months.

Positive outlook

The interpretation of the Central Bank on this favourable development in the external finances is that: “The foreign exchange inflows have also responded favourably to the positive outlook brought about by the end to the three decades of conflict and approval of a Stand-by Arrangement (SBA) facility by the International Monetary Fund (IMF).” The Central Bank also points out that net foreign inflows to the government T-bills and T-bonds from May 2009 to 11 September 2009 amounted to US dollars 1,214 million.

In the intervening period, the Central Bank has been building up its official reserves to a more comfortable level by absorbing excess foreign exchange from the market. From end March 2009 to September 9, Central Bank states that it absorbed nearly 2 billion from the market. In addition, with the approval of the new general and special allocations of Special Drawing Rights (SDR) by the IMF Sri Lanka has received approximately US dollars 508 million to contribute to this significant improvement in foreign reserves by September 10, 2009.

Although the country continues to have a trade deficit, this has been decreasing in recent months. In July this year the trade deficit contracted for the seventh consecutive month to US dollars 260 million, more than a third less than the corresponding amount last year. The trade deficit for the first seven months of this year of US $ 1,512 million was much lower than that of the first seven months of last year when it was US dollars 3,531 million. The trade deficit has decreased by as much as 57.2 percent during the first seven months of 2009 from that of the same period of 2008. The main factor accounting for the decline in the trade deficit has been the lower expenditure on imports.

Expenditure on imports decline

Compared to the imports in the first seven months of last year, expenditure on imports during the first seven months of this year declined by 35 percent to US dollars 5,353 million. Imports of consumer goods, intermediate goods and investment goods have declined this year by significant amounts. Most significant is the drop in the value of petroleum imports that is a significant determinant of the trade balance. Petroleum imports declined by nearly 50 percent (49 percent) and cost only US $ 1,067 million compared to US$ 2,090 in the first seven months of last year. The decrease in prices of petroleum accounted for this favourable development.

Although the country continues to have a trade deficit, this has been decreasing in recent months. In July this year the trade deficit contracted for the seventh consecutive month to US dollars 260 million, more than a third less than the corresponding amount last year. The trade deficit for the first seven months of this year of US $ 1,512 million was much lower than that of the first seven months of last year. This trade deficit was a decrease of as much as 57.2 percent during the first seven months of 2009 from US dollars 3,531 million in the same period of 2008. The main factor accounting for the decline in the trade deficit has been the lower expenditure on imports.

Earnings from exports decline

The weakness in our trade balance this year, as in the recent past, has been exports. Earnings from exports have declined by 19 percent by end July 2009. Exports during the first seven months of 2009, declined to US $ 3,841 million. All three categories of exports - Agricultural, Industrial and Mineral - declined this year. The largest decline was in agricultural exports by 19 percent. The most significant decline in exports was in industrial exports by 18 percent. All three main agricultural exports - tea rubber and coconut - declined, as was the case with industrial exports. The decline in garments exports was however only 6.8 percent.

The country has achieved a strong position in her external reserves. These reserves must be used to advantage to enhance the productive capacity of the country. Especially important is the strengthening of the export sector. As pointed out earlier, although the trade deficit has been reduced and a balance of payments surplus has been achieved owing to the higher remittances, exports have continued to decline. This is indeed an area of concern even though the country’s trade deficit is declining, there is a balance of payments surplus and reserves are high.