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News Features  


 

Silver linings in external trade performance
Despite the country heading for a massive trade deficit last year, the latest statistics of the country’s external trade performance has some encouraging signs.
There appears to be a revival of the country’s industrial trade exports; increase in some new industrial export items; a good performance in tea and rubber exports owing to buoyant international commodity markets; and a significant increase in worker remittances.
The latter has helped immensely in reducing the merchandise trade deficit to less than US$1,000 million.
Import expenditure has however risen sharply owing to increased imports as well as high prices of food, petroleum and fertilizer.

The recent lowering of tariffs on several items has also as expected resulted in increased imports of vehicles, electronic items and other consumer durables.
Intermediate imports have risen sharply, especially owing to the increase in oil prices.
This pattern is likely to be repeated in 2011, though the unfavourable factors are likely to be accentuated and the trade balance perhaps even higher than in 2010.

Merchandise trade deficit
The merchandise trade deficit for last year is likely to exceed US$5,000 million and be close to US$5, 5000 million at the end of the year.
In the first 11 months of the year, the trade deficit expanded to US$ 4,744 million compared to US$2,753 million in the same eleven month period of 2009.
This 72 percent increase has resulted in a huge trade deficit that would have caused a serious balance of payments strain.
However, the significant increase in worker remittances during the same period has offset to a large degree the massive trade deficit.
During the first eleven months of 2010, workers’ remittances increased by 24 per cent over that of the corresponding period of 2009 to US$3,761.9 million.
Consequently the merchandise trade deficit when offset by worker remittances amounted to less than US$ 1,000 million.

The larger tourist earnings last year and capital inflows are likely to bring about a surplus in the balance of payments.
The gross official reserves were at a very comfortable level of US$6.6 billion by the end of 2010.
Owing to the high worker remittances, enhanced tourist earnings and other capital inflows, the large trade deficit will not have an adverse effect on these reserves as the final outturn in the balance of payments is likely to be a surplus.
The current amount of reserves is estimated to be adequate as they are according to the Central Bank equivalent to 6.6 months of imports.

Exports in 2010
Export earnings,during the first 11 months of 2010, increased by 15.4 per cent to US$7,339 million.
However, this increase was inadequate as imports increased by a larger amount to cause the large trade deficit.
What is however very significant is the high growth in exports in November that was one of the highest growth rates in exports in the recent past.
In November, export earnings increased significantly by 36 per cent or US$834 million.
This was the highest monthly increase since October 2004.
The salient issue is whether this is setting a trend for 2011 and whether it would result in a more diversified export profile.

This is to be seen in the export performance in the first half of this year.
It was very significant that there were substantial increases in some newer categories of exports, such as boats, bicycles, electrical equipment, rubber products, petroleum products, food, beverages and tobacco.
There have been signs of an increase in such exports for some time.
Such diversification in the industrial export profile is propitious for the country’s export structure and the trade balance that is continuously in deficit as it has been dependent mostly on garments exports.
Such diversification of the export structure could give greater stability to export incomes and reduce the external trade vulnerability of the country.

The largest contribution to growth in export earnings in November came from industrial exports, followed by the agricultural exports.
This was a reversal of the trend in the previous 10 months when industrial exports fared badly, while agricultural exports fared well.

Industrial exports, which accounted 76 per cent of total export earnings, were led by textile and clothing exports.
Contrary to earlier expectations earnings from garment exports to Sri Lanka’s major markets, the EU and the US, increased by 39.2 per cent and 28.7 per cent, respectively, in November 2010.
Earnings from machinery and equipment exports increased significantly to US$67 million in November 2010.
This comprised mainly of transport equipment, such as boats and bicycles, and electrical equipment, such as transformers, static converters, inductors, circuits and insulated cables.
Earnings from rubber products, petroleum products and food, beverages and tobacco categories also contributed towards the growth in industrial export earnings in November 2010.
Earnings from agricultural exports grew owing to increases in both export volumes and improved prices. Particularly significant were the increase in prices of tea and rubber.
The average export prices of tea reached US$4.55 per kg while rubber prices reached US$4.14 per kg in November 2010. These prices continued to increase in December and January this year.

Import expenditure
The main reason for the trade deficit increasing to the mammoth US$ 4,744 million during the first 11 months of 2010 compared to US$2,753 million in the same period of 2009 was the higher imports of intermediate goods.
The expenditure on intermediate imports increased by 33 percent to US$6,696 million in the first 11 months.
The largest increase in import expenditure was for petroleum imports that increased by as much as 46 percent to reach a massive US$2,695 million in the first 11 months of last year.
The rise in petroleum prices this year is likely to result in a further increase in oil import expenditure. ]]

Prospects
The huge merchandise trade deficit of last year will be brought down to a modest level owing to the increase in worker remittances.
The increased tourist earnings and other capital inflows will enable the country to record a balance of payments surplus for the year thereby not straining the reserve position that is in any case strong.
A significant development last year was the enhanced exports of newer industrial products.
This development augurs well for the country’s future trade stability.
The merchandise trade deficit is likely to be even more this year, but once again worker remittances, tourist earnings and capital inflows are likely to offset the trade deficit.