Another BoP crisis in the making?

Conveying a worrying message to the authorities, the most recent external sector data available up to April showed that a swift action was required to arrest the ballooning trade deficit as the recent uptick in exports has been offset by the racing imports during the first four months.  
To make matters worse, inflows from worker remittances and tourism, which have been cushioning the country’s current account, appeared to have slowed down in the last couple of months, stoking fresh fears of a deteriorating balance of payments (BoP) situation.    
The provisional data showed that the tourism earnings have seen a dent in May year-on-year (YoY) although the earnings in the first four months edged up 6.1 percent YoY to US $ 1.3 billion.
“The balance of payments is likely to deteriorate, if the trade deficit increases and worker remittances and tourist earnings do not increase”, said senior economist and former Central Banker Dr. Nimal Sanderatne in his weekly column with our sister newspaper. 
The BoP during the first four months of 2017 has been a deficit of US $ 344 million but lower than the deficit of US $ 958 million recorded during the corresponding period last year, the Central Bank data showed.  Mirror Business recently reported that Sri Lanka’s trade deficit had widened from US $ 2.6 billion to US $ 3.3 billion during the first four months of 2017, an increase of 27.2 percent YoY, due to the accelerated growth in imports.  
The imports rose 13.7 percent YoY to US $ 6.9 billion during this period, while the exports grew a paltry 3.5 percent YoY to US $ 3.6 billion. 
The soaring oil bill among other consumption and intermediate commodities has been the main element for this significant jump in imports, as the country has spent as much as US $ 1.2 billion on fuel imports, out of which US $ 829.9 million was for 
refined petroleum.  

The oil bill in the first four months is a 76 percent jump from what the country spent for oil during the same period last year. Sri Lanka had to resort to expensive thermal power to ensure the continuity of uninterrupted power supply as hydro power generation fell to record lows due to the prolonged drought.  
At a recent media briefing, Central Bank Governor Dr. Indrajit Coomaraswamy, quoting the former Treasury Secretary, Dr. P.B. Jayasundera, said that Sri Lanka’s economy’s fate, in most part, hinged on the global oil prices and the annual rainfall. 
This notion has been proven correct over the years as most of the times Sri Lanka recorded a comfortable BoP position, the country had received adequate rain and oil prices remained low.
The external sector data for April demonstrated another worrying sign where the worker remittances had declined by as much as 15.6 percent YoY to US $ US $ 488 million in April while for the first four months the decline was 6.3 percent YoY to US $ 2.2 billion. 
This is the first time in recent years that the remittances have not increased, Dr. Sanderatne pointed out. 
The sluggishness in growth in remittances and tourist earnings, if continued, would mean that the country would not be able to absorb its record high trade deficit as in the past, thus resulting in deterioration of the BoP. 
Under these circumstances, containing trade deficit becomes imperative. But restraining the fast racing import bill is an uphill task in the current context as Sri Lanka remains predominantly an import-dependent economy.