Decline in trade deficit in first eight months:

Economic potential for higher growth

By Shirajiv Sirimane

Sri Lanka is now slowly but surely moving towards the further narrowing of the trade deficit with higher earnings from exports. The cumulative trade deficit during the first eight months of this year declined by 5.6 percent to US$ 5,998 million, from US$ 6,356 million in the corresponding period of 2012.

Garment exports to the USA increased by 9.4 percent

Spices made a significant contribution to the growth in export earnings

Vehicle imports increased

Earnings from exports in August 2013 reached US$ 918 million, the highest monthly value since January 2012, led by a significant increase in earnings from agricultural exports.

Being a country where most people are engaged in the agricultural sector, earnings from this sector grew on a year-on-year basis, by 41 percent to US$ 247 million in August 2013.

This was mainly due to an increase in the export of tea and spices which account for more than three fourths of agricultural exports.

The impressive growth of tea exports by 49.3 percent in August 2013 was a combined outcome of a 43.3 percent increase in export volumes along with an increase in the average price by 4.2 percent.

An increase in tea exports to Turkey and Iraq mainly contributed to this increase.

Earnings from the export of spices also increased significantly by 25.8 percent, led by an increase in the volume of pepper exported with improved production, despite the decline in prices.

Other major agricultural product exports also improved considerably.

This helped Sri Lanka's earnings from exports increase for the third consecutive month in August 2013, reflecting a gradual recovery in the global economy, while expenditure on imports declined.

Accordingly, the cumulative trade deficit contracted further during the first eight months of 2013, improving the current account of the Balance of Payments (BOP).

Earnings from exports recorded a healthy growth of 10.7 percent on a year-on-year basis in August 2013, while expenditure on imports declined by 7.7 percent, reversing the recent upward trend.

Consequently, the trade deficit of the BOP contracted by 24.2 percent to US$ 698 million during the month.

On a cumulative basis, earnings from exports during the first eight months of 2013 declined marginally by one percent, while expenditure on imports declined by 3.3 percent compared to the corresponding period in 2012.

Industrial exports rise

Meanwhile, industrial exports rose by 2.6 percent to US$ 668 million in August 2013, mainly due to an increase in earnings from petroleum products followed by food, beverages and tobacco and textiles and garments. Earnings from petroleum products increased by 24.8 percent in August 2013, led by a significant increase in the export of bunker fuel. Earnings from food, beverages and tobacco and textiles and garments have increased by 54.7 percent and 2.1 percent respectively.

This segment would further increase with the completion of private sector projects that are under way at the Hambantota harbour. During the month, earnings from the export of garments to the USA increased by 9.4 percent, while exports to the EU declined marginally by 0.7 percent.

The current account was further strengthened by increased receipts from tourism, reflecting Sri Lanka as an attractive tourist destination, together with higher inflows on account of workers' remittances. Meanwhile, inflows to the financial account have also increased during the year, consolidating the BOP position.

Earnings from tourism grow

Tourist arrivals grew at a healthy rate of 26.2 percent year-on-year to 89,761 in September 2013. Accordingly, the total number of tourist arrivals during the first nine months of the year increased by 15.5 percent to 801,210 over the corresponding period in 2012. Earnings from tourism increased by 43.4 percent year-on-year, to US$ 98.7 million in September 2013.

Cumulative earnings from tourism during the first nine months of 2013 recorded a growth of 24.2 percent to US$ 883.1 million from US$ 711.1 million during the corresponding period in 2012.

The expenditure on imports declined by 7.7 percent to US$ 1,616 million in August 2013, due to the significant decline in both intermediate and investment goods imports. Expenditure on intermediate goods imports declined by 5.7 percent year-on-year, to US$ 1,018 million in August 2013, mainly due to a decline in the importation of fertiliser and crude oil.

Although the import of crude oil declined by 34.6 percent, the expenditure on fuel increased due to a sharp increase in the importation of refined petroleum products.

However, the decline in expenditure on base metals, agriculture inputs, wheat and maize and diamonds and precious stones led to an overall decline in imports.

Imports of investment goods declined by 25.7 percent to US$ 331 million in August 2013, mainly due to a sharp decline in the import of machinery and equipment and transport equipment, despite a 10.4 percent increase in building materials imports.

Meanwhile, the expenditure on consumer goods imports increased by 18.6 percent year-on-year in August 2013 with increases recorded in both food and non-food consumer goods categories.

Vehicle imports increase

Vehicle imports, which were on the decline since April 2012, began to increase from June 2013 and recorded a year-on-year increase of 109.1 percent in August 2013, becoming the main contributor to the increase in consumer goods imports.

Dairy products, seafood, oil and fats were among the other consumer goods which contributed to the increase in import expenditure.

Prudent demand management policies and supply side improvements have resulted in inflation remaining at single digit levels for the past 56 months, signalling the success of policies already implemented.

Headline inflation decreased marginally to 6.2 percent year-on-year, while core inflation declined to its lowest at three percent year-on-year in September 2013.

Going forward, the inflation outlook continues to remain favourable with restrained international commodity prices, reduced domestic supply side pressures, and well-contained demand-driven inflationary pressures.

The Central Bank was of the view that in keeping with the benign inflation and favourable inflation outlook environment, there is still space to ease monetary policy to harness Sri Lanka's full economic potential, and stimulate the economy to reach a higher growth trajectory in 2014.