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Improvement in Trade Balance sign of Recession

It is one of the complexities of Economics that, what is0 apparently a favourable development, turns out to be an unfavourable one. Perhaps it is for this reason that, Economics has earned its reputation of being called the dismal science. In Economics, every silver lining has a dark cloud behind it. The improvement in the External Trade account is a reflection of deterioration in the Economy!

The statistics of External Trade confirm the emerging expectation that, this year’s Trade Balance would be vastly different from what it was last year or, even the year before. In contrast to the massive Trade Deficit of US$ 5.9 billion in 2008, the Trade Deficit this year, is likely to be about a third of last year’s deficit, at around US$ 1.8 to 2 billion. In the first two months of this year, the Trade Deficit was only US$ 262 million-- a sharp fall from the deficit of US$ 937 million in the first two months of last year. This 72% decrease in the Trade Deficit was owing to the drop in import expenditure by 40.2% to US$ 1,277 million in the first two months of the year, compared with US$ 2,135 million in the first two months of last year.

The projected Trade Deficit for the year, on the basis of these figures, would be less than US$ 2,000 million, a third of what it was last year. Unlike last year, this year’s Trade Deficit is easily resolved by Capital Inflows, provided the prices of our imports remain fairly stable. The inflow of Private Remittances should more than offset the Trade Deficit. In fact, even lower Private Remittances than expected, should erase the deficit to record a Balance of Payments surplus. In the first two months of this year, Private Remittances were 5% less than in the first two months of last year, but more than the Trade Deficit. Therefore, the Trade Deficit was more than offset by Remittances. While the Trade Deficit was US$ 262 million, Remittances were almost double that at US$ 492 million.

The Expenditure on all categories of Imports declined this year, due to the reduced demand for all types of Imports—Consumer, Intermediate and Capital Goods. There were also decreases in prices of many items of important Imports, especially Petroleum.  Consumer goods Imports declined by 28%, intermediate goods Imports decreased by 46% and capital goods Imports fell by 38%. Expenditure on Sugar Imports declined, despite the increases in the average Import price by about 20% in February 2009.  Expenditure on Motor Vehicle Imports declined sharply. The restrictions placed on these Imports through higher margins, that have now been removed, may account for this. Expenditure on Petroleum Imports, which accounted for nearly one third of Imports, fell by 62% as Crude Oil prices remained low and below US$ 50 per barrel. Total Expenditure on Imports at US$ 1,277 million by end February 2009, was a decrease by 40.2% in the first two months of the year, compared with that of last year.

Then, why is this good news in the Trade account viewed as being adverse? First, the decline in Import Costs has been accompanied by a decline in Exports. Export Earnings declined by 18.4% to US$ 524 million in February 2009, reflecting contractions in all three major categories of Exports. The earnings from Agricultural, Industrial and Mineral Exports have declined. The largest contribution (53%) to this decline was from Industrial Exports, followed by Agricultural Exports (41%).  Industrial Exports declined by 13.4% to US$ 408 million in February 2009.  Textiles and Garments, major subcategories within the Industrial Exports grew by 7%, helping to contain the impact of negative growth in other subcategories. This was indeed good news, as Garments is the mainstay of the country’s Manufactured Exports. Textile and Garment exports to the European Union and the United States have increased by 15.4% and 1.5%, respectively, in February 2009.  With respect to Agricultural Exports, both, Tea and Rubber, recorded year-on-year declines, due to depressed demand and lower prices. Exports of Coconuts, however, increased in February 2009, despite the lower prices in international markets. Overall earnings from Agricultural Exports declined by 31% in February 2009, to US$ 109 million. The cumulative earnings from Exports have declined during the first two months by 15.2% to US$ 1,015 million.

What these statistics tell us is that, Economic activity is slowing down. There would be a decrease in Employment, owing to the decrease in Imports, as well as Exports. Corporate and Individual Incomes in Trade Services would be adversely affected. Much more important is the serious setback to the Industrial sector in particular. The decline in Intermediate Imports is a clear sign in the deceleration of Industrial activity. The decreased demand for the country’s Exports, illustrated by the decrease in Export earnings of manufactures by nearly 10%, is reflected in the decline of Intermediate goods. The decrease in Capital Goods is a further indication of less Investment in Industry.

Although Private Remittances more than offset the Trade Deficit, there are concerns that these too would decline during the course of the year. Private Remittances that have been the mainstay of the Balance of Payments for several years, decreased by 5.3% from US$ 523 million during January and February 2008 to US$ 495 million in the corresponding period of 2009.  However, Remittances during January and February were 89% (US$ 233 million) in excess of the Trade Deficit, thereby, easing the pressure on the Current Account Balance.

The Trade gap has decreased significantly in the first two months of the year. There is little doubt that, this trend would continue during the course of the year. While the lower prices of the country’s main Imports have been the main reason for this in the first two months of the year, the more recent Depreciation of the Rupee, that makes Imports dearer, would also assert a further influence reducing Import Costs. The flipside of the coin is that prices of our Agricultural Exports too, are depressed, and so is the demand for all the country’s Exports. The silver lining, however, is that, the nation’s main Manufactured Export, Garments, has shown an ability to be competitive under difficult local conditions for manufacture, and have increased Export Earnings.

The recent Depreciation of the Rupee should add to the Export Industry competitiveness. Yet, the impact of these developments on Employment, Incomes, Profits and Poverty are likely to be adverse this year. The decline in Remittances would probably continue, but is most likely to be high enough to offset the Trade Deficit. The bottom line should be a Balance of Payments surplus.