Trade deficit narrows with rise in export income

Favourable developments in the external sector continued in March 2014, with a noticeable contraction in the trade deficit. On a cumulative basis, earnings from exports recorded a notable increase, while import expenditure witnessed moderate growth reducing the trade deficit substantially during the first quarter of 2014.

As a result of an increase in inflows from workers' remittances, along with the significant growth in earnings from tourism, the current account deficit in the first quarter of 2014 is expected to have narrowed substantially.

These developments with continued inflows to the financial account are estimated to have resulted in a higher surplus in the Balance of Payments (BOP) during the first quarter of 2014, compared to the corresponding period of 2013.

The Trade Account of the BOP, Sri Lanka's external trade improved further in March 2014 continuing the positive development from the second half of 2013. Earnings from exports increased significantly by 28.6 percent, year-on-year, to US $ 1,070 million in March 2014. This was the highest monthly export value ever recorded. Expenditure on imports increased by 8.2 percent to US $ 1,672 million in March 2014.

Accordingly, the cumulative trade deficit during the first three months of 2014 contracted by 13.5 percent, year-on-year, to US $ 1,862 million. Significant expansion in all major export categories contributed to the high growth in exports in March 2014.

The largest contribution to overall growth came from industrial exports, which grew by 25.7 percent, year-on-year, to US 779 million. Almost all sub categories of industrial exports grew in March 2014 except gems, diamonds and jewellery and petroleum products.

As the leading driver of growth in industrial exports, earnings from export of textiles and garments grew by 32.6 percent, year-on-year, to US $ 457 million in March 2014 reflecting significant increases in exports to traditional and non-traditional markets.

Export earnings from transport equipment increased by more than six-fold due to the export of ships, boats and floating structures. Rubber product exports also increased by 10.9 percent, mainly due to an increase in the export of rubber tyres.

Earnings from gems, diamonds and jewellery declined by 21.9 percent, year-on-year, due to the substantial decline in diamond exports as a result of low global demand.

Export earnings from petroleum products which mainly comprise bunkering and aviation fuel declined by 14.4 percent, due to a decline in export volumes despite the increase in prices.

Earnings from agricultural exports grew 22.4 percent, year-on-year, in March 2014 to US $ 257 million, mainly due to the healthy performance in the export of tea and coconut products. Export earnings from tea increased by 20.3 percent to US $ 155 million, recording a historically high monthly value.

This was a combined outcome of a 14.3 percent increase in export volume and an increase in the average export price of one kilogram of tea by 5.2 percent to US $ 5.02 million. Earnings from coconut product exports increased by 106.9 percent due to improved performance in kernel and non-kernel coconut products in terms of price and volume.

Export earnings from minor agricultural products and seafood also increased by 87.7 percent and 5.6 percent, in March 2014.

However, earnings from export of spices declined by 20.1 percent, mainly due to the decline in export of pepper and cloves, despite the increase in cinnamon exports. Earnings from rubber exports declined by 32.1 percent, year-on-year in March 2014, due to significant declines in export volume and price.

Expenditure on imports increased by 8.2 percent, year-on-year, to US $ 1,672 million in March 2014, reflecting increases in intermediate and consumer goods imports. Expenditure on intermediate goods imports increased by 12.7 percent, year-on-year, to US $ 1,045 million with notable increases in fuel, textile and textile articles and fertiliser imports.

Import expenditure on fuel increased substantially by 19.1 percent due to increases in prices of crude oil and refined petroleum products imports by 65.9 percent and 11 percent, owing to the higher use of thermal power generation and an increase in petroleum prices in the international market compared to the corresponding period in the previous year.

Import expenditure on textile and textile articles also increased by 40 percent, year-on-year to US $ 182 million in line with the continuous growth of textile and garment exports from Sri Lanka.

Despite the reduction in prices, expenditure on the import of fertiliser increased in March 2014, due to the high use of fertiliser for paddy and other crops during the Yala season and the low base.

Import expenditure on diamonds and precious stones and precious metals including gold declined by 68.5 percent. Import of wheat and maize, base metals and mineral products also declined during the month.

Import expenditure on consumer goods increased by 18.5 percent, year-on-year, to US $ 303 million in March 2014.

Import of food and beverages increased by 8.9 percent, due to a substantial increase in import expenditure on milk powder and sugar, on account of the increase in the price of milk powder and sugar in the international market. However, import of many sub-categories declined.

In March 2014, non-food consumer goods imports increased by 27.3 percent, mainly due to the significant increase in vehicle and clothing and accessories imports.

Expenditure on import of investment goods declined by 10.5 percent to US $ 323 million in March 2014, mainly due to the decline in import of building materials and transport equipment.

- Central Bank