Trade deficit expected to widen further end of this year

The growth in imports was much stronger than the exports, leading to a deterioration of the trade balance and the CAB

The recovery in trade performance has been immediate and widespread across all sectors of the economy after a significant drop in 2020. The overall import from January- June this year has increased by 52.0% as compared to the same period in the previous year whereas exports increased by 24.3% only.

If a similar trade pattern continues in the upcoming months, by the end of this year, overall import value will stand at Nu 111.3bn and export at Nu 60.4bn. As the magnitude of the increase in imports is much higher compared to the export, the trade deficit is expected to widen further.

With this, the balance of payment situation is expected to worsen as the current account balance deteriorates in the six months, of this year. The net financial inflows which are used to finance the current account deficits over the period have been decreasing due to a lower inflow of official grants, thereby impacting the gross international reserves.

The gross international reserve depleted from US$ 1,559.2mn in FY 2020-21 to US$ 1,120.5mn in FY 2021-22. As of June 2022, the reserve stood at US$ 839.6mn according to the monthly statistical bulletin, Royal Monetary Authority. This is much lower compared to June last year.

Further, as prospects of the tourism sector remain unpredictable due to global economic uncertainties, the prolonged impact of the Covid-19 pandemic particularly rising inflationary pressure, depreciation of exchange rate in emerging economies, and with the expected rise in imports, the external reserve position for the financial year 2022-23 is estimated to remain around US$ 845.2mn.

“In order to prevent from breaching of the constitutional requirement, an appropriate policy measures are warranted to build the external reserves and also avert any economic vulnerabilities and shocks,” the microeconomic situation report states.

In addition, the current account balance (CAB) is expected to deteriorate from negative 12.1% of GDP in FY 2020-21 to negative 28.0% in FY 2021-22, as a result of the widening trade deficit.

According to the ministry of economic affairs, Lyonpo Loknath Sharma, with a resumption of economic activities, trade flows will pick up surpassing the pre-pandemic threshold.

“The increase in imports were much higher compared to the exports leading to a huge trade deficit of 19.3% in the FY 2021-22 from 6.9% in the FY 2020-21. As a result, CAB is expected to remain elevated in the medium-term with imports increasing exponentially and exports remaining subdued,” Lyonpo said.

Some economists shared that widening the current account deficit puts further strain on the overall reserve of the country’s economy.

“With the economic activities including public infrastructure as well as hydropower projects resumed resulting in significant imports. The growth in imports was much stronger than the exports, leading to a deterioration of the trade balance and the CAB,” they shared.

In addition, they suggested that as the financial inflows are not adequate to meet the current account deficit, the negative balance of payments will lead to depletion of overall reserve assets posing risk to the constitutional mandate of meeting 12 months of essential imports.

“The macroeconomic imbalance emanating from the external sector is likely to spill over to other sectors of the economy eventually impacting growth prospects.”