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Sri Lanka’s trade deficit shrank by $ 2.4 billion in the first 10 months of 2019 assisted by a decline in merchandise exports earnings and local policies driving down imports, latest data by the Central Bank shows.
The deficit in the trade account contracted in October to $ 838 million, from $ 903 million in October 2018. On a cumulative basis, the trade deficit contracted by $ 2,405 million to $ 6,451 million during the first 10 months of 2019, in comparison to $ 8,857 million in the corresponding period of 2018.
Meanwhile, the terms of trade, which represent the relative price of imports in terms of exports, deteriorated by 5.7% (year-on-year) in October, as export prices declined at a faster pace than the decline in import prices.
In cumulative terms, the terms of trade deteriorated by 0.8% during the first 10 months of 2019 in comparison to the corresponding period of 2018.
Earnings from merchandise exports declined marginally by 0.2% (year-on-year) to $ 977 million in October, as a result of lower agricultural exports.
Decline in earnings from agricultural exports in October was driven by lower earnings from all sub-categories except minor agricultural products. Accordingly, earnings from tea exports declined due to lower average export prices in line with the fall in international market prices despite an increase in export volumes.
In addition, earnings from spices declined, mainly due to lower export prices of cinnamon and lower export volumes of cloves and pepper with the decline in supply. Earnings from seafood exports also declined significantly with lower demand from the US market.
Earnings from textiles and garments increased in October following the slight decline recorded in September, on a year-on-year basis, supported by higher demand for garment exports from all major markets. However, earnings from petroleum product exports continued the declining trend observed in the recent past, mainly due to lower bunkering prices in line with lower crude oil prices in the international market.
Earnings from mineral exports, which only account for 0.4% of total exports, increased in October, year-on-year, led by ores, slag and ash exports. The export volume index in October improved by 13.8% (year-on-year), while the export unit value index declined by 12.3%, indicating that the decline in exports was driven entirely by lower prices when compared to October 2018.
Contraction of merchandise imports continued for the 12th consecutive month with a 3.5% decline (year-on-year) in October to $ 1,816 million, driven by lower consumer and investment goods imports.
Although food and beverages imports increased in October, expenditure on consumer goods imports declined as a result of the decline in non-food consumer goods imports, driven by lower personal vehicle imports. However, motor vehicle imports remained at a relatively high level, on average, since July compared to values recorded during the first half of 2019, mainly reflecting the impact of the resumption of personal motor vehicle imports under concessionary permits. Meanwhile, expenditure on food and beverages imports increased, mainly driven by higher imports of onions to supplement lower domestic supply.
Expenditure on imports of intermediate goods increased in October, mainly due to expenditure on fuel, owing to higher volumes of imports of crude oil and coal, despite lower international prices. In addition, expenditure on base metals imports increased in October, driven by iron and steel imports. However, import expenditure on wheat and maize declined mainly due to volume effect while textiles and textile articles declined marginally, led by lower yarn and fabric imports.
Meanwhile, expenditure on investment goods imports declined in October with lower outlays in all subcategories amidst subpar growth in industry activities, including the spillover effects of the Easter Sunday attacks. Accordingly, expenditure on machinery and equipment declined, mainly related to textile industry and machinery parts, while expenditure on transport equipment declined with lower imports of commercial vehicles such as tractors, ambulances and auto trishaws. Expenditure on building materials declined due to lower imports of iron bars and rods although articles of iron and steel related to bridges and bridge sections continued to increase in October.
The import volume index increased by 3.8% while the unit value index narrowed by 7% in October, indicating that the decline in imports was driven entirely by lower prices when compared to October 2018.
Foreign investment in rupee denominated government securities recorded a net inflow of $ 12 million in October. On a cumulative basis, net outflows from the government securities market amounted to $ 280 million during the first 10 months of the year.
Foreign investment in the CSE, including primary and secondary market transactions, recorded a net outflow of $ 10 million during the month of October. Nevertheless, financial flows to the CSE recorded a marginal net inflow of $ 5 million during the first 10 months of 2019. Further, long term loans to the government recorded a net inflow of $ 102 million during October.
Foreign investment in rupee denominated government securities recorded a net inflow of $ 12 million in October. On a cumulative basis, net outflows from the government securities market amounted to $ 280 million during the first 10 months of the year.
Foreign investment in the CSE, including primary and secondary market transactions, recorded a net outflow of $ 10 million during the month of October. Nevertheless, financial flows to the CSE recorded a marginal net inflow of $ 5 million during the first 10 months of 2019.
Further, long-term loans to the government recorded a net inflow of $ 102 million during October.
Gross official reserves stood at $ 7.8 billion at end October, equivalent to 4.7 months of imports. Meanwhile, total foreign assets consisting of gross official reserves and foreign assets of the banking sector amounted to $ 10.4 billion at end October, equivalent to 6.3 months of imports.
