Export performance: only glimmer of hope in external finances | Print edition
The favorable performance of exports this year is the only ray of hope amid the dark and threatening clouds of exhaustion of external finances. Export earnings have exceeded US $ 1 billion per month since June, while external reserves have fallen to around US $ 1 billion. Trade and balance of payments deficits have also widened.
Exports increased 21% in the first ten months of 2021 compared to the same period last year to reach $ 10.05 billion. As of June of this year, monthly export values have exceeded one billion US dollars. In October 2021, exports hit a record high of US $ 1.16 billion, 35% more than a year ago. The trade deficit widened in the first nine months and the balance of payments also deteriorated. The improvement in export earnings is the only positive sign of the country’s external finances.
Despite these favorable results for exports, foreign exchange reserves fell to US $ 1 billion at the end of November, insufficient to meet the country’s essential import needs and to service its debt. The country is facing a serious currency crisis that threatens the lives of the population.
The government is eagerly awaiting a lifeline from India which alone can enable the country to overcome the severe shortage of foreign exchange. There is no confirmation that the requested US $ 500 million currency exchange and trade credit for the purchase of food, pharmaceuticals and fuel have been approved. This assistance is crucial because it is too late to apply for an IMF facility as it would take a few months to approve it.
Alternatively, we must receive substantial foreign aid from another friendly country. Expectations of such assistance announced from time to time by the governor of the central bank have not yet materialized.
It is in this dire foreign exchange situation that exports have increased significantly. Had export earnings been close to last year’s amount, the trade deficit would have widened further and strained the balance of payments. Yet rising import spending widened the trade deficit to US $ 6 billion in the first nine months of this year.
Exports have increased by up to 21 percent in the first ten months of this year, compared to the same period last year. The main increase in exports was in exports of manufactured goods which increased significantly in the first ten months.
It should be noted that this export growth has been achieved through a wide range of exports such as boat building, electrical appliances and seafood, in addition to established exports like clothing, rubber articles and tea.
Threats to exports
Increasing exports of manufactured goods and ICT services is the way forward for the country. However, this prospect is seriously threatened.
Trade reforms and realistic management of exchange rates are essential to ensure export growth. Current foreign exchange shortages and restrictive foreign exchange regulations could threaten industrial exports due to shortages of essential raw materials. The artificially low exchange rate is also a drag on exports as it has been for remittances.
Another serious threat is the withdrawal of the SPG plus concession by the European Union (EU) in 2022, followed by similar action by Western countries which are the main markets for our exports. There does not appear to be any effort to improve human rights in the country. Therefore, the threat is a serious economic problem.
The favorable development of export earnings should not lead policy makers to believe that an increase in exports could resolve the current external finance crisis. The increase in exports is insufficient to resolve the current severe shortage of foreign exchange reserves. Yet this is the way to go in the long term.
No home solutions
It is important to recognize that there are no “local” solutions to the severe depletion of foreign exchange reserves, and the only relief is foreign aid. Getting the country out of this serious external financial vulnerability is urgent and imperative. Only foreign aid can save us from bankruptcy.
The continued increase in exports is indeed a singular bright light in the surrounding gloom. Yet growing exports are insufficient to overcome the severe depletion of foreign reserves, the country’s import needs and debt repayment obligations.
In fact, despite the notable increase in exports and strict import controls, the trade deficit is widening this year.
In short, although export performance has been favorable this year, especially since June, the trade deficit has widened despite tight import controls. This highlights the fact that export earnings have
increase much more to finance even essential imports. Nevertheless, export growth has been the
the only silver lining in the country’s external finances.
The external finances are in such a precarious situation that the country needs immediate relief. The only immediate prospect is the assistance plan requested from India. In the medium and long term, the country should seek help from the International Monetary Fund (IMF) to resolve the country’s fundamental and structural economic weaknesses. Fundamental structural reforms are imperative.
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