Balance of Payments Surplus

Foreign Aid & Sri Lanka's Military Expenditure

A balance of payments surplus despite large trade deficit
Sri Lanka Sunday Times, Colombo, January 19, 2003

"...The real difference to the balance of payments appears to have come from the much higher official inflows last year. In the first ten months of last year official inflows raised the official component of the reserves by 19 per cent....capital inflows are contingent liabilities. The monies that come in have to be repaid or would be taken out in future years..."

The prospect of a balance of payments surplus in 2002 is indeed good news. In simple terms, a balance of payments surplus means that the foreign exchange coming into the country is higher than the foreign exchange sent out of the country.

Sri Lanka has not had a balance of payments surplus since 1998, when the country registered a small overall balance of payments surplus of US $ 37 million. In fact in the past 25 years from 1978 the country has experienced only 14 years when there were balance of payments surpluses.

The prospect of an overall balance of payments surplus is expected owing to the Central Bank of Sri Lanka announcement that the country had a surplus of US$ 122 million in the first three-quarters of last year. Since the trade balance for the last quarter is expected to be better and capital inflows are expected to be larger, there is every prospect that 2002 would end with a balance of payments surplus for the year.

This balance of payments surplus is however not being achieved owing to a trade surplus. In fact the first ten months registered a trade deficit of US$ 1118 million. Imports exceeded exports by this amount. It is most unlikely that export earnings would have picked up by such a huge amount in the last two months that it would be able to offset this deficit of the first ten months.

Besides imports are likely to have increased in the last two months owing to both seasonal factors and the increase in imports of intermediate imports, owing to the increasing tempo of industrial production. At most the deficit could be reduced owing to a surge in exports. In fact it is more likely that at the end of the year the trade deficit would increase to about US$ 1200 million.

Therefore the balance of payments surplus would be achieved in spite of a large trade deficit. The overall balance of payments surplus is a result of capital inflows from other sources. In recent years a big support to the balance of payments has been the remittances of money from Sri Lankans abroad. In the first ten months of this year the remittances amounted to US$ 873 million, about 2 per cent higher than in the previous year.

Although outflows were higher, the net gain was US$ 717 million, marginally higher than that of 2001. Tourist earnings are another important component of the balance of payments. Although there were expectations that tourism would bounce back owing to both an improvement in the global situation and the peaceful conditions in the country, tourist arrivals did not increase in the first half of last year.

In fact tourist earnings dipped in the first half of last year. Since then tourism picked up and in the first ten months of last year tourist arrivals increased by about 6 per cent.

Tourism contributed nearly US$ 200 million to the balance of payments in the first ten months and its contribution in the last two months is likely to be proportionately higher. Tourist earnings are likely to be around US$ 230 to 240 million last year. Although remittances and tourist earnings would contribute to offset the deficit in the trade balance, there would yet be a deficit in the balance of payments after these contributions are accounted for.

The real difference to the balance of payments appears to have come from the much higher official inflows last year. In the first ten months of last year official inflows raised the official component of the reserves by 19 per cent.

This is an indication of the main source for the balance of payments surplus. However good an overall balance of payments surplus is, there is a need to analyse how it came about. A qualitative assessment of the factors behind the surplus is as important as the overall result of the surplus.

As we have pointed out there is no likelihood that the trade balance would be a reason for the balance of payments surplus. In fact the likely large trade deficit is a severe strain on the balance of payments last year. In fact it has been so for the past 25 years.

There is an essential distinction between a balance of payments surplus that is achieved by a trade surplus, earnings from services such as tourism and remittances, and one that is a result of capital inflows either private or official. That essential difference is that capital inflows are contingent liabilities. The monies that come in have to be repaid or would be taken out in future years.

Some part of it would be a component of the foreign debt, others would be investments that would be taken out, possibly with profits. What we are driving at is the fact that a balance of payments surplus achieved owing to capital inflows rather than from either merchandise exports or service earnings is not necessarily a healthy balance of payments position.

Despite the likely balance of payments surplus last year, the plain fact is that our balance of payments is not a healthy one. We must mind the large trade gap.