Import controls shrink trade deficit to 5-year low

By Madhusha Thavapalakumar

Sri Lanka recorded the lowest trade deficit in over five years with the February trade deficit significantly contracting to $ 451 million, following several import control measures adopted in 2018.

The Central Bank of Sri Lanka (CBSL) announced on Monday (8) that this was the lowest trade deficit since October 2013. During the first two months of 2019, trade deficit contracted to $ 1 billion from $ 2.1 billion year-on-year (YoY).

Despite a slight decline in exports in February compared to the previous month, the narrowing of the trade gap has been stimulated by a 27.6% decline in import expenditure in February from $ 3 billion in January to $ 1.4 billion.

One main reason for this was that personal vehicle imports came down by 57.7% as the expenditure was recorded at $ 48.1 million from $ 113.7 million a year earlier. Vehicle import expenditures peaked to $ 161 million in September last year.

Realising the potential threat from this to the macroeconomic stability of the country, at the end of September last year, the Monetary Board of the CBSL imposed a 100% margin deposit requirement against Letters of Credit opened with commercial banks for the import of motor vehicles, which are generally used for non-commercial purposes.

Accordingly, Letters of Credit for the importation of these vehicle categories could be done only with a minimum cash margin of 100% and vehicles imports have been coming down gradually since this requirement was imposed.

Further, gold and fertiliser imports have also witnessed drastic YoY declines of 99.3% and 73.8% respectively, with their expenditures coming down to $ 0.7 million from $ 119.9 million and to $ 5.3 million from $ 20.3 million a year earlier.

Gold imports which were recorded above $ 50 million per month decreased drastically following the introduction of import tax on gold in April 2018. Sri Lanka introduced a 15% tax on gold to curb surging imports which contributed to a rapid depreciation of the rupee, widening the trade deficit. Since then, monthly gold import values have remained well below $ 1 million.

A 10.6% YoY reduction was witnessed in fuel imports as the expenditure was recorded at $ 281.8 million compared to the $ 315.2 million in February last year.

In the first quarter of 2018, gold imports were recorded at around 8,000 kg. Sri Lanka’s gold imports rose to 15,750 kg in 2017 from 9,148 kg in 2016.

However, during this period, increased import expenditures were witnessed in base metal imports with expenditure going up by 24.1% YoY.

Export earnings in February 2019 grew by 7.2% YoY to $ 981 million from $ 915.7 million. The increase was mainly driven by increased exports of seafood, spices, textiles, food, beverages, tobacco, gems, diamonds, and jewellery.

Seafood exports were increased by 30% to $ 29.9 million from $ 25.3 million while textiles and garments were increased by 14.4% to $ 465 million from $ 407 million. Food, beverages, and tobacco increased by 20% to $ 35.5 million from $ 29.6 million and gems, diamonds, and jewellery by 17.5% to $ 27.1 million from $ 23.1 million.

In the meantime, significant reductions were recorded in tea, petroleum products, leather, travel goods, and footwear exports at declines of 6.4%, 15.2%, and 25.5% YoY respectively.