Sri Lanka trade deficit narrows in May 2019

July 18, 2019

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The Central bank of Sri Lanka yesterday revealed that country’s trade deficit had narrowed significantly in May 2019 in comparison to the corresponding month of the previous year due to the combined effect of an increase in exports and a reduction in imports. The deficit in the trade account narrowed to US dollars 823 million from US dollars 933 million in May 2018. On a cumulative basis, the deficit in the trade account contracted further by US dollars 1,633 million to US dollars 3,281 million during the first five months of 2019 in comparison to the corresponding period of 2018. The considerable reduction in the trade deficit in May 2019 was due to the decline in import expenditure by 3.9% (year-on-year) and an increase of export earnings by 4.0 %( year-on-year). Meanwhile, the terms of trade, which represents the relative price of imports in terms of exports, deteriorated by 4.1 % (year-on-year) to 87.2 index points in May 2019 due to the higher rate of decline in export prices in comparison to the decline in import prices. On a cumulative basis, the terms of trade deteriorated by 2.5 per cent (year-on-year) during the first five months of 2019 in comparison to the corresponding period of 2018. Exports Earnings from merchandise exports increased by 4.0% (year-on-year) to US dollars 961 million in May 2019 due to an increase in industrial and agricultural exports. Earnings from industrial exports increased in May 2019 mainly due to the improved performance in textiles and garments and rubber product exports. Earnings from textiles and garment exports increased in May 2019 benefiting from higher demand for garment exports from both the traditional markets ie. the USA and the EU and nontraditional markets. Accordingly, earnings from garment exports to the EU market increased by 9.55 in May 2019 driven by high demand from the Netherlands,Ireland, Germany and the UK. Further, reflecting the higher performance in all sub categories, export earnings from rubber products increased in May 2019. In addition, export earnings from animal fodder, base metals and articles, machinery and mechanical appliances, and gems, diamonds and jewellery contributed towards the increase in industrial exports in May 2019. However, earnings from petroleum product exports declined due to the combined impact of lower export volumes and average prices of bunker and aviation fuel. Further, export earnings from leather, travel goods and footwear, food, beverages and tobacco, and transport equipment declined in May 2019 in comparison to May 2018. Earnings from agricultural exports increased, on a year-on-year basis, in May 2019 driven by improved performance in earnings from tea and coconut exports. Export earnings from tea increased for the first time since April 2018 due to higher export volumes despite lower average export prices when compared with May 2018. Further, export earnings from coconut rose notably during the month mainly due to high export volumes of all sub categories of coconut products. However, export earnings from spices decreased mainly driven by lower export volumes of cinnamon and pepper. Export earnings from seafood and minor agricultural products also declined due to the combined impact of lower export volumes and average prices in May 2019. Export earnings from mineral exports declined in May 2019 due to the lower performance in all sub categories. The export volume index in May 2019 increased by 15.5 per cent while the export unit value index decreased by 9.9 per cent, indicating that the growth in exports was entirely driven by the increased volume when compared with May 2018. Import Expenditure on merchandise imports declined by 3.9 per cent to US dollars 1,784 million, on a year-on-year basis, in May 2019, recording a decline for the seventh consecutive month. This decline was due to lower imports of consumer goods, particularly, personal vehicles, despite an increase recorded in investment and intermediate goods imports. Expenditure on consumer goods imports declined significantly in May 2019, mainly due to lower imports of non-food consumer goods. Under non-food consumer goods imports, import expenditure on personal motor vehicles continued to decrease significantly since December 2018, on a year-on-year basis, owing to the reduction reported in importation of hybrid and electric motor vehicles and motor cars with less than 1000cc engine capacity, reflecting the lag effect of policy measures introduced on importation of vehicles during the second half of 2018 and the increase in excise duties on selected motor vehicles in the 2019 Budget. However, expenditure on food and beverages imports increased driven by imports of seafood such as canned fish and dairy products such as milk powder in May 2019 in comparison to May 2018. Imports of intermediate goods increased marginally in May 2019 for the first time since November 2018, mainly driven by higher fuel imports. Import expenditure on fuel increased substantially due to higher import volumes of refined petroleum and coal despite lower average import prices. In contrast, expenditure on crude oil imports declined due to lower average prices as well as a marginal decline in the import volume. Further, expenditure on textiles and textile articles led by fibers and yarn also increased during the period concerned. However, import expenditure on wheat and maize declined mainly due to the reduced wheat import volume in May 2019. In addition, expenditure on base metals, plastic and articles thereof and chemical product imports also declined in May 2019 when compared with the corresponding month of the previous year. Expenditure incurred on investment goods imports increased in May 2019, mainly due to higher imports of building materials and machinery and equipment. Imports of building materials increased mainly driven by higher imports of articles of iron and steel as well as machinery and equipment led by transmission apparatus and office machines. However, reflecting lower imports of tankers and bowsers, the import of 7 vehicles used for commercial purposes categorized under transport equipment declined in May 2019 when compared with May 2018. The import volume index increased by 2.2 per cent and the unit value index decreased by 6.0 per cent in May 2019. This indicates that the decline in imports during the month was driven entirely by the reduction in prices of imported goods.