Worker remittances record marginal growth in H1
- Trade deficit widens for fifth consecutive month
- Import expenditure increases by 30% in H1
By Shenal Fernando
Worker remittances have increased marginally by 2.6% YoY during the first half of 2021 despite recording a 35.4% YoY decrease during the month of July, according to the Central Bank of Sri Lanka (CBSL).
Worker remittance is the largest single source of foreign exchange inflow into Sri Lanka. The contribution of worker remittance to the GDP averaged around 5.7% during the 1981-2000 period, before increasing to around 8.0% of GDP during the period from 2001-2020, reflecting its increased importance to Sri Lanka.
Despite the weak employment conditions in migrant-hosting countries as a result of the Covid-19 pandemic, and fears of an upturn in return migration, worker remittances increased significantly during the second half of 2020 and recorded the highest monthly remittances in history in December 2020. Resulting in a 5.8% YoY increase to $ 7.1 billion during 2020.
According to the CBSL, the trade deficit widened on a YoY basis for the fifth consecutive month in July 2021 to $ 607 million compared to $ 209 million recorded in July 2020. And the cumulative trade deficit has widened during the first half of 2021 to $ 4.9 billion from $ 3.5 billion in the corresponding period of 2020. The widening trade deficit is due to the greater increase in import expenditure as against the increase in export earnings.
Expenditure on merchandise imports to Sri Lanka increased 30.7% YoY during the first half of 2021 to $ 11.7 billion from $ 9.0 billion in the corresponding period of 2020. The increase in import expenditure was observed across all main categories of imports, namely, consumer goods (8.8% YoY), intermediate goods (41.4% YoY) and investment goods (27.5%), despite some import controls still being in place. The largest contributor to import expenditure was fuel imports which expanded by 41.4% YoY to $ 2.0 billion in 1H2021 from $1.4 billion in 1H2020. The import expenditure per barrel of crude oil amounted to $ 68.92 in July 2021 compared to $ 46.23 in July 2020.
Earnings from merchandise exports expanded by 23.7% YoY to $ 6.8 billion during the first half of 2021 from $ 5.5 billion in the corresponding period of 2020 with higher earnings recorded from all major categories of exports. The largest contributor to export earnings was the export of textiles and garments which increased 21.9% YoY to $ 2.9 billion in 1H2021 from $ 2.4 billion in 1H2020.
The official gross foreign reserves in Sri Lanka had fallen to around $ 2.8 billion in July 2021, its lowest position since July 2009 due to the settlement of the matured ISB of $ 1.0 billion by the CBSL on behalf of the Government. However, the foreign reserves were strengthened in August 2021, due to the influx of $ 787 million from the International Monetary Fund’s (IMF) special drawing rights (SDR) allocation, $ 150 million from the Bangladesh Central Bank under the swap arrangement and ¥ 2,000 million ($ 300 million) from the China Development Bank.
The foreign reserve position of the country is expected to be further strengthened by the three-year bilateral currency swap facility amounting to ¥ 10 billion (approximately $ 1.5 billion) between the People’s Bank of China (PBoC) and the CBSL.