Sizeable moderation in trade deficit – CBSL

External Sector Performance – February 2023

• Import expenditure declined notably, compared to the reduction in export earnings in February 2023 (y-o-y), resulting into sizeable moderation in the trade deficit.

• Workers’ remittances and earnings from tourism continued to improve in February 2023.

• Gross official reserves strengthened further by end February 2023, compared to recent months.

• The exchange rate appreciated notably in March 2023 following the greater flexibility that was allowed in the determination of the exchange rate.

• The Colombo Stock Exchange (CSE) and foreign investment in the government securities market recorded net inflows during February 2023.

• The Extended Fund Facility (EFF) from the International Monetary Fund (IMF) of US dollars 3 billion was approved and the first tranche was disbursed in March 2023.

The deficit in the merchandise trade account narrowed significantly to US dollars 39 million in February 2023, from US dollars 780 million in February 2022, mainly reflecting the impact of significant moderation of import expenditure due to subdued aggregate demand conditions. The cumulative deficit in the trade account during January-February 2023 was US dollars 449 million, a sizeable decline from US dollars 1,636 million recorded over the same period in 2022. The major contributory factors for this are shown in Figure 1.

Overall Exports: Despite recording a marginal growth compared to January 2023, earnings from merchandise exports declined by 10.2 per cent in February 2023, year-on-year, to US dollars 982 million. Exports earnings recorded below US dollar 1 billion level for the second consecutive month. While the decline in earnings was observed across all main categories, industrial exports mainly contributed to the overall contraction. Cumulative export earnings during January-February 2023 declined by 10.7 per cent over the same period in the last year.

Industrial Exports: Earnings from the exports of industrial goods declined in February 2023, compared to February 2022, with a substantial share of the decline being contributed by garments. Reduced demand from major markets for garments due to unfavourable economic conditions globally mainly contributed for this outcome. Earnings from rubber products continued to decline due to the lower exports of household rubber gloves. Similarly, earnings from the exports of petroleum products

1 The CBSL classification of exports and the classification of exports based on the Standard International Trade Classification Revision 4, are presented in Annex II and Annex III, respectively. also declined due to the drop in volumes of bunker and aviation fuel exports despite the higher aviation fuel prices. In contrast, earnings from machinery and mechanical appliances (mainly, electronic equipment); and gems, diamonds, and jewellery increased in February 2023.

Agricultural Exports: Earnings from the export of agricultural goods marginally declined in February 2023, compared to a year ago, since the increase in earnings from spices and tea was offset by the decline in earnings from coconut related products (primarily, fibres and desiccated coconut). Export earnings from spices improved due to higher export volumes of cloves; cinnamon; and nutmeg and mace. Increased earnings from tea exports were mainly due to price increases as the volumes registered a decline.

Mineral Exports: Earnings from mineral exports declined in February 2023, compared to February 2022, mainly due to the decline in exports of titanium ores.

Overall Imports: Expenditure on merchandise imports was almost halved in February 2023 at US dollars 1,021 million, compared to February 2022, recording the lowest imports since May 2020. All major import sectors declined while the decline in expenditure on intermediate goods was significant. Meanwhile, cumulative import expenditure during January-February 2023 also declined by 37.1 per cent over the corresponding period in 2022.

Consumer Goods: Expenditure on the importation of consumer goods declined in February 2023, compared to February 2022, driven by lower expenditure on both food and non-food consumer goods. Decline in expenditure on non-food consumer goods was broad-based but the drop in imports

2 The CBSL classification of imports and the classification of imports based on the Standard International Trade Classification Revision 4, are presented in Annex IV and Annex V, respectively.

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