Sri Lanka Trade Deficit contracts

15th July 2009, DailyMirror Financial Times

Sri Lanka’s trade deficit contracted by 64 per cent to US Dollars 175 million for a fifth consecutive month in May 2009. In the meantime the island’s cumulative trade deficit decreased by 61.9 per cent to US Dollars 982 million during the first five months of 2009 from the US Dollars 2,577 million recorded during the corresponding period in 2008. However, private remittances increased by 2.9 per cent to US Dollars 1,308.6 million during the first five months of 2009, from US Dollars 1,272 million in the corresponding period of 2008 thereby resulting in remittances being in excess of the trade deficit during the period under review.

Export earnings dropped by 27.8 per cent in May 2009, to US Dollars 538 million, reflecting year-on-year reductions in mineral and industrial exports. However, agricultural exports, which accounted for 26 per cent of total exports, grew by 2.5 per cent during May 2009, mainly due to an increase in exports of traditional crops. Exports of tea, rubber and coconut increased by 3.9 per cent, 24.8 per cent and 47.9 per cent respectively while tea prices continued to fetch premium prices on the international market. At an average export price of US Dollars 3.93 per kilo, tea was almost on par with the levels maintained during this part of the year in 2008. Rubber and coconut prices, however, declined by 44.4 per cent and 39.0 per cent, respectively. Among the industrial exports, earnings from the textiles and garments industries declined by 22.7 per cent for the second consecutive month in May 2009, due to the lag effect of the global recession. Textiles and garments exports to the European Union and the United States decreased by 17.9 per cent and 29.4 per cent respectively, due to lower demand emanating from these countries. The cumulative earnings from exports declined by 18.9 per cent to US Dollars 2,623 million.

The expenditure on imports also showed a decline with a drop of 42.1 per cent to US Dollars 713 million in May 2009, reflecting reductions in all three major categories of imports. Imports of consumer goods declined by 41.2 per cent to US Dollars 140 million, largely on account of lower commodity prices. While expenditure on sugar increased on account of higher prices

amidst the global supply constraint, expenditure on other commodities, such as rice, wheat and dairy products declined in May 2009. Expenditure on non-food consumer goods declined by 36.8 per cent, led by motor vehicles. Imports of intermediate goods declined by 42.6 per cent in May 2009, mainly due to the lower expenditure incurred on petroleum imports. Imports of investment goods also declined by 43.8 per cent, mainly due to the lower expenditure incurred on imports of building materials and machinery and equipment. The cumulative expenditure on imports declined by 38.0 per cent to US Dollars 3,605 million.

The gross official reserves, with and without Asian Clearing Union (ACU) funds, recorded US Dollars 1,487 million and US Dollars 1,436 million respectively, by end May 2009. These include deposits of US Dollars 145 million placed with two domestic banks. Based on the previous 12 month average imports (US Dollars 983 million per month), these reserve values are equivalent to 1.51 and 1.46 months of imports, respectively. However, in view of the current and expected low imports, resulting from the sharp reduction in the oil and petroleum product import bills, the actual equivalent number of months of imports would be much higher. The foreign exchange inflows have also responded favorably to the positive outlook brought about by the end to the three decades of conflict. In the meantime, the Central Bank of Sri Lanka is in the process of building up its official reserves to a more comfortable level by absorbing foreign exchange from the market. Since end April 2009, it has absorbed US Dollars 511 million from the market (upto 10 July 2009). In addition to this, the Sri Lanka Development Bonds (SLDBs) offered on 15 June 2009 was substantially oversubscribed by 152 per cent, enabling the mobilization of an additional US Dollars 76 million for gross reserves.