External Sector Performance – July 2022
Earnings from exports increased in July 2022, while import expenditure declined for the fifth consecutive month, on a year-on-year basis. The notable decline in import expenditure in July 2022 reflected the impact of overall moderation of activity amidst forex liquidity strains in the banking system, while the policy measures to curtail non-urgent import expenditure also helped to contain import demand pressures.
As a result, the trade deficit recorded a notable contraction in July 2022 over the year, thereby easing stresses in the domestic foreign exchange market. Workers’ remittances increased marginally in July 2022, compared to June 2022, and remained in excess of the trade deficit, thereby supporting the forex liquidity conditions under severe balance of payments pressures. Earnings from tourism recorded an increase in July 2022 (year-on-year) on the low base. Foreign investment in the government securities market and the Colombo Stock Exchange (CSE) recorded a marginal net inflow during July 2022. The Central Bank continued to provide forex liquidity to finance essential imports, exhausting the usable level of gross official reserves. Meanwhile, the weighted average spot exchange rate in the interbank market remained around Rs. 361 per US dollar during the month.
Merchandise Trade Balance
and Terms of Trade
Trade Balance: The balance in the merchandise trade account recorded a deficit of US dollars 123 million in July 2022, compared to the deficit of US dollars 606 million recorded in July 2021. Meanwhile, the cumulative deficit in the trade account during January-July 2022 narrowed to US dollars 3,637 million from US dollars 4,922 million recorded over the same period in 2021.
(CBSL)
The major contributory factors for the decline in the cumulative trade deficit are shown in Figure 1.
Terms of Trade: Terms of trade, i.e., the ratio of the price of exports to the price of imports, deteriorated by 3.0 per cent in July 2022, compared to July 2021, as the increase in import prices surpassed the increase in export prices.
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