ICRA Lanka optimistic over SL achieving current account surplus albeit headwinds

• Forecasts a current account surplus of about 0.5% of GDP
• Maintains relatively positive outlook on dollar/rupee exchange rate 

ICRA Lanka Limited yesterday expressed optimism over the potential of the country to return to a current account surplus in 2021, albeit the pandemic’s toll on exports and tourism flows could linger throughout the year.

The surplus in the current account of the balance of payment (BoP) is typically a sign of external sector strength of an economy.  In a comprehensive report on the economic outlook for 2021, the rating agency said the imports would remain compressed before some relaxation towards the year-end, buttressing the current account.  

The rating agency forested a current account surplus of about 0.5 percent of gross domestic product (GDP). 

“Unlike exports, imports are clipped by the import restrictions. Therefore, imports are expected to be more or less flat throughout 2021. But we believe it is likely that the government may ultimately be compelled to relax the restrictions, at least partially in 4Q,” ICRA Lanka said.

The rating agency also expects the remittance income to remain flat in 2021, after a record inflow in 2020. Worker remittance income for January 2021 recorded a 16.3 percent, compared to the same months of 2020.

The assertion of a potential surplus in the current account by ICRA Lanka comes in the wake of claims by the Central Bank of the possibility of a such a scenario, as the authorities intend to keep the lid on non-essential imports through the end of 2021.      

Central Bank Chief Economic Researcher Dr. Chandrananth Amarasekara recently made the same assertion for 2021, based on similar assumptions such as continuing import suppression and with only a little adjustment to export and import numbers of last year, as his team ran several scenarios to see how the external current account would behave. 

“When I discuss with my colleagues, so I ask them to make some scenario analyses to see what happens to see if we continue with the current import compression in 2021 and beyond. They say that there will be a current surplus even if you adjust the export, import numbers by a little bit. (I ask) what will happen if the export performance is better than what we expect now? They say there will be a current account surplus. What will happen if tourism rebounds early? They say there will be a current account surplus. And What will happen if the worker remittances are slightly higher than what we are getting at the moment? They say there will be a current account surplus,” Dr. Amarasekara told a recent seminar on the economy.

Meanwhile, ICRA Lanka gave a relatively positive outlook for the dollar/rupee exchange rate for 2021, as their models forecast the rupee to hover around Rs.195.00 for a dollar in general, albeit it could fall to no more than Rs.200.00 to a dollar only in the months of May, November and December, on account of relatively weaker current account balances. 

“Net outflows from G-secs and equities would also remain low. In this context, fluctuations in the trade deficit are likely to be the main determinant of the exchange rate, assuming all export proceeds are converted to rupees,” the rating agency added. However, due to a longer than expected time projected for Sri Lanka’s key trading partners such as the United States, Europe, the United Kingdom, India and China to return to pre-crisis levels, ICRA Lanka does not expect the export and tourism sectors to normalise in 2021. 

“In other words, we expect the exports to grow at a slower rate than its potential in the 2H. As for non-tradable sector, especially the tourism sector, will likely to go through another tough year in 2021. Therefore, the tourism earnings will see further collapse in 2021.”