Trade deficit declines

The tight policies adopted by the Government in February this year continued to deliver the expected results according to the latest external sector statistics issued by the Central Bank (CB). There was a marked deceleration in expenditure on imports by July 2012, and the trade deficit declined by 33.8 percent, year-on-year, to $ 535 m in July 2012, the lowest recorded in 17 months. Devaluation of the rupee, interest rate increase and limitation of credit have reduced import demand significantly since April 2012.

By July there was a 24.9 percent year-on-year decline in import expenditure. Expenditure on consumer goods declined by 20.9 percent, intermediary goods by 27.4 percent and investment goods by 20.6 percent. Decrease in the import of motor vehicles contributed to a decline in import expenditure and there was a 62.4 percent, year-on-year decline in expenditure on motor vehicle imports by July.

With regard to intermediate goods, significant declines were noted in respect of import expenditure in relation to fertiliser, gold, wheat and rubber based products.

As in June, expenditure on investment goods imports recorded a decline in July 2012 too, although for the first seven months of 2012, investment goods recorded an increase on a year-on-year basis. Expenditure on import of investment goods in July declined by 20.6 per cent, year-on-year.

However, the sharp decline in exports weakened the positive impact of import control. Export earnings declined by 17.4 percent to US$ 794 m year-on-year.

Exports of agricultural products declined by 11.8 percent and industrial products by 19.3. Tea exports declined by 12.6 percent and textile and apparel exports declined by 14.4 percent. There was a 4.6 percent decline in export earnings in the first seven months of the year and tea exports declined by 5.5 percent, textile and garments by 3.6.

Earnings from food and beverage exports declined by 19.8 percent during this period. The reason for the decline in export earnings is weaker global demand and decline in commodity prices in the international markets.

The other reason pointed out by the CB is the base effect, the historically high level of $ 962 m export earnings in July, 2011 had also led to the relatively large drop in export earnings in July 2012.