EXTERNAL SECTOR OUTLOOK

Shiran Fernando is optimistic about growth potential in 2024 if the ‘world weather’ holds

Sri Lanka’s external sector is turning positive despite the picture for markets as regards key exports not being too rosy. And the country is on track to record current account and balance of payment surpluses after more than a decade.

The economy may continue to see this trend this year too, unless there is a slowdown in workers’ remittances and tourism. It’s necessary to explore the main contributory factors to this positive trend in the external sector and what could be expected from key export markets.

GLOBAL GROWTH According to the World Bank, global growth is expected to slow down further – to 2.4 percent in 2024, from 2.6 percent last year. If this forecast is accurate, the five year period from 2020 to 2024 will be the weakest half decade in terms of performance in 30 years.

Despite recovering from the COVID-19 pandemic, multiple global conflicts have disrupted supply chains and recoveries in most regions. The World Bank maintains that developing economies will grow only 3.9 percent while low income countries are expected to expand by 5.5 percent.

These are still weak growth trajectories for those regions relative to the last decade. The developed economies that include the EU and US are expected to slow to 1.2 percent, from 1.5 percent in 2023.

EXPORT SECTOR Sri Lanka’s apparel industry declined by about 20 percent last year, due to a drop in demand in markets such as the US, the UK and Europe. The industry expects this weak trend to continue at least in the first half of 2024 as buyers continue to reduce their inventories.

A real pickup in consumption demand for these economies will help turnaround this contraction. While apparel will continue to deliver much needed export dollars therefore, it is unlikely to grow further and assist in garnering a current account surplus.

With regard to tea, which is Sri Lanka’s second largest merchandise export, it’s unlikely that this commodity’s earnings will grow substantially this year.

While markets such as the Middle East, Turkey and Russia will play key roles, the industry also has to navigate domestic challenges and ensure that production is competitive in relation to  other exporters – which include Kenya and India – as well as manage the impact of climate change.

Beyond these two key merchandise exports, rubber, coconut, spices and seafood will have to fare better in 2024 relative to last year.

Given the lack of growth from merchandise exports, services will have to continue to help the country’s economy to move along. Driving this forward will be IT and business process management (BPM), and the maritime services sector. These areas are seeing growth with demand coming in for IT/BPM following rapid digitalisation in most markets.

South Asia continues to grow with Bangladesh and India developing at a healthy pace, and Sri Lanka’s ports – mainly the Port of Colombo – will benefit from corresponding transshipment traffic.

CURRENT ACCOUNT Impressive growth in tourism and remittance inflows negated the trade deficit, and helped improve the current account balance. Though both inflows weren’t at record high levels for a year, they have shown substantial growth in relation to the previous 12 months.

Remittance inflows grew by 58 percent while tourism earnings expanded by 82 percent last year. This momentum is likely to continue – in particular, for overseas workers’ remittances, which were strong in the second half of 2023 with the last quarter seeing over US$ 500 million flowing into Sri Lanka each month.

This raises the prospect of remittances being over 600 million dollars in certain months as was evidenced in 2016 when inflows hit an annual peak of US$ 7.2 billion.

LEARNING LESSONS Sensitivity to global shocks highlights the need to diversify export markets and products. But diversification has been a perennial problem for Sri Lanka.

While countries such as Vietnam have successfully diversified away from their reliance on apparel to electronic exports over the past two decades, Sri Lanka has yet to make such a transition. Vietnam has also been able to broad base its trade partners.

While the US is still that country’s number one export destination, Vietnam has been able to grow its exports to China, South Korea and most European nations since 2008. Since the 2000s, it has been quite active in liberalising trade policy and providing more market access through free trade agreements (FTAs).

This has enabled Vietnam to diversify its export destinations and plug into global value chains. By the end of last year, the country had signed 16 FTAs and is presently negotiating three more, according to the Vietnam Chamber of Commerce and Industry (VCCI). Until 2008, Vietnam had FTAs with the ASEAN bloc.

Sri Lanka must grow its export basket through FTAs and the agreement signed with Thailand in February could potentially be the first step to improving business in the ASEAN region.

In the meantime, policy makers must continue to improve Sri Lanka’s ease of doing business ratings while exporters navigate an uncertain trade environment in 2024.