Trade deficit widens despite June posting lowest deficit of 2018
Sri Lanka recorded the lowest trade deficit so far during the year in absolute terms in the month of June, but the trade deficit widened significantly in comparison to June 2017 as the growth in import expenditure outpaced the increase in export earnings, the Central Bank of Sri Lanka (CBSL) said in a statement.
The trade deficit, which stood at US$ 554 million in June 2017, expanded to US$ 795 million in June 2018 and, on a cumulative basis, from US$ 4,751 million during the first half of 2017 to US$ 5,709 million in the first half of 2018.
Earnings from tourism increased notably in June 2018 continuing the growth momentum observed since the beginning of the year. Tourist arrivals increased by 19% in June 2018 to 146,828 as a result of a healthy growth in the number of tourists arriving from India, Australia, Saudi Arabia and China in comparison to June 2017. Total tourist arrivals during the first half of 2018 at 1,164,647 was a 15.3% increase over the first half of 2017. Earnings from tourism in June 2018 are estimated at US$ 272 million, with cumulative earnings amounting to US$ 2,160 million during the first half of 2018.
Continuing the decline observed in the previous month, workers’ remittances declined by 11.4%, year on year, to US$ 524 million in June 2018. Consequently, workers’ remittances recorded a cumulative growth of 0.9% to reach US$ 3,624 million during the first half of 2018 in comparison to the corresponding period of 2017.
Balance of Payments
The financial account of the Balance of Payments (BOP) was supported by the fifth tranche of the Extended Fund Facility of the International Monetary Fund (IMF-EFF) and the third tranche of the divestiture of the Hambantota Port, however, outflows of foreign investment from the government securities market and the secondary market of the Colombo Stock Exchange (CSE) exerted some pressure on the BOP.
Reflecting developments in the domestic and global foreign exchange markets, the Sri Lankan rupee depreciated by 3.4% against the US dollar by end June 2018 and by 5.0% during the year up to 27 August 2018. Furthermore, reflecting cross currency movements, the Sri Lankan rupee depreciated against the euro, the pound sterling, the Japanese yen and the Canadian dollar while appreciating against the Australian dollar and the Indian rupee during this period.
With the receipt of the fifth tranche under the IMF-EFF of US$ 252 million and proceeds of the third tranche from the divestiture of Hambantota Port amounting to US$ 585 million, the level of gross official reserves of the country increased to US $ 9.3 billion at end June 2018 from US $ 8.8 billion recorded at end May 2018. This level of reserves was equivalent to 5 months of imports. Total foreign assets, which consist of gross official reserves and foreign assets of the banking sector, were estimated at US$ 11.3 billion as at end June 2018 which was equivalent to 6.1 months of imports.
Foreign investments in the CSE, including both primary and secondary market foreign exchange flows, recorded a marginal net inflow of US $ 0.3 million during the month of June 2018, the CBSL statement added. Consequently, cumulative net inflows to the CSE in the first half of 2018 amounted to US$ 53 million.
Meanwhile, the government securities market recorded a net foreign investment outflow of US$ 74 million in June 2018, thus raising the net cumulative outflow to US $ 176 million by end June 2018. Further, long term loans to the government recorded a net outflow of US$ 115 million during June 2018.
The statement added that earnings from merchandise exports surpassed US$ 1 billion for the second time during the year to US$ 1,024 million in June 2018, mainly driven by industrial exports. Leading markets for merchandise exports of Sri Lanka in June 2018 were the USA, the UK, India, Italy and Germany, which accounted for about 48% of total exports.
In merchandise exports, earnings from textiles and garment exports increased significantly due to the higher demand from the EU and the USA while exports to non-traditional markets also increased. Export earnings from petroleum products increased significantly in June 2018 due to the combined effect of higher export prices and volumes of bunker and aviation fuel, while earnings from rubber products increased mainly due to higher earnings from tyre exports.
Earnings from exports of machinery and mechanical appliances also increased notably during the month owing to the increase in earnings from electrical machinery and equipment and electronic equipment exports. Meanwhile, export of base metals and articles increased due to higher exports of iron and steel articles and aluminium articles. However, earnings from transport equipment exports declined significantly mainly due to the effect of higher earnings recorded in June 2017 following the export of two ships. In addition, food, beverages and tobacco and leather, travel goods and footwear exports also declined notably in June 2018 in comparison to June 2017.
Meanwhile, earnings from agricultural exports declined in June 2018 due to the poor performance in almost all categories except seafood, unmanufactured tobacco and rubber exports. Export earnings from tea declined as both prices and volumes exported reduced in June 2018. In addition, export earnings from spices declined marginally in June 2018 as the growth in cinnamon, and nutmeg and mace was outperformed by the decline in pepper, cloves and other spices.
However, benefiting from the positive impact of the removal of the ban on fisheries exports to the EU and the restoration of GSP+ facility, earnings from seafood exports increased significantly during the month due to higher prices and volumes of seafood exported.
Breaking down the trade performance, expenditure on merchandise imports increased to US$ 1,819 million in June 2018 mainly due to high expenditure incurred on fuel, vehicles and transport equipment. The main import origins were China, India, Japan, UAE and Singapore, which accounted for about 58% of total imports.
Expenditure on fuel imports, categorised under intermediate goods, increased considerably during the month owing to higher import prices and volumes of crude oil and refined petroleum products. In addition, expenditure on textiles and textile articles imports increased in June 2018 reflecting higher expenses on all sub categories, particularly fabric and yarn imports.
Import expenditure on base metals, wheat and maize, fertilizer and food preparations contributed towards the increase in intermediate goods imports during the month. However, expenditure on the importation of gold, which increased considerably since early 2016, declined notably for the second consecutive month in June 2018.
Meanwhile, import expenditure on personal vehicles, categorised under consumer goods, increased significantly in June 2018 owing to the substantial increase in imports of vehicles with less than 1,000 cylinder capacity (cc), hybrid and electric vehicles. As taxes applicable on small vehicle imports were revised upward with effect from 1st August, vehicle imports are expected to decelerate to some extent in the coming months.
However, the reduction in import of sea food, rice and sugar under consumer goods, contributed towards mitigating the pressure on import expenditure during the month. Meanwhile, higher expenditure on transport equipment driven by the importation of four ships and road vehicles such as commercial cabs and auto-trishaws, led to an increase in investment goods imports despite a decline in machinery and equipment and building material.