The truth is that the rise in foreign reserves has rested substantially on large commercial borrowings by the government, and the release of the first two installments of a US$ 2.6 billion International Monetary Fund standby loan, which is spread out over two years. The IMF approved the loan last July when the country faced a major foreign exchange crisis and, potentially, a default.
The Sunday newspaper economic columnist warned last weekend: “Most of the (foreign currency) reserves are loans that have to be repaid rather than funds that have been earned through exports. These contingent liabilities have also increased the country’s public debt that is a serious burden on the economy…”
The columnist also noted that another reason for the favourable foreign exchange figures was a rise in remittances sent by workers employed overseas, particularly in the Middle East. He pointed out that while remittances increased 14.2 percent in US dollar terms over the first 11 months of 2009, exports were sharply down in all areas by an overall 14.7 percent. These included a fall of 12.3 percent in agricultural exports, including 10.2 percent for tea, and 15.1 percent for industrial exports.
Textile and garment exports fell by only 5.3 percent, but the sector will be hard hit by the EU’s decision to end its GSP+ trade preferences over war crimes and human rights abuses. Like the US, the EU is using the human rights issue to pressure the Sri Lankan government, and undermine the influence of rivals such as China. But the decision to end GSP+, which will take effect in six months, will have a damaging effect on garment exports and jobs. More than half of the sector’s exports go to Europe.