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The external sector came under pressure in September with the trade deficit widening due to imports despite export earnings growing 4.4%, surpassing $ 1 billion for the fourth consecutive month, the Central Bank said in its latest report.
The widening deficit in the trade account and the strengthening of the dollar, which resulted in outflows of portfolio investments, adversely impacted the balance of payments during the month. Despite earnings from exports, which surpassed $ 1 billion for the fourth consecutive month, higher growth in import expenditure outpaced the increase in export earnings. In the financial account, foreign investments in the government securities market recorded outflows responding to the firming up of global financial markets, the Central Bank said.
Meanwhile, the Colombo Stock Exchange (CSE) also witnessed some outflows of foreign investments during September. Consequently, the rupee, which depreciated against the US dollar by 5.3% in the first eight months of the year, showed a further depreciation of 4.6% in September, reflecting the pressure on the domestic foreign exchange market. These developments necessitated intervention by the Central Bank to curtail excessive volatility in the exchange rate. The country’s gross official reserves stood at $ 7.2 billion at end September 2018, which was equivalent to 3.8 months of imports.
The deficit in the trade account expanded at a modest pace in September 2018 in comparison to September 2017 as import expenditure grew more than export earnings. On a cumulative basis, the trade deficit remained widened during the first nine months of 2018.
Earnings from merchandise exports surpassed $ 1 billion for the fourth consecutive month in September 2018. Earnings from industrial exports, which account for 77% of the total export earnings, grew by 9.4% during September 2018, while earnings from agricultural exports fell by 10.8%, reflecting the poor performance in almost all categories except seafood.
Under industrial exports, earning from textiles and garments increased in September 2018, reflecting considerable high demand for garments from the US and non-traditional markets such as Canada, India and Japan, although a slight reduction was recorded in exports to the EU market.
Earnings from petroleum products increased substantially in September 2018 due to higher export prices of bunker and aviation fuel, despite low export volumes. Under agricultural exports, earnings from tea declined in September 2018 reflecting lower average export prices despite a marginal increase in export volumes. Export earnings from spices reduced during the month due to the poor performance in almost all subcategories except cinnamon.
Further, earnings from coconut exports declined due to the reduction in coconut kernel products such as desiccated coconut and coconut oil while coconut non-kernel products showed a growth. However, earnings from seafood exports increased during the month due to higher exports to the EU market. Leading markets for merchandise exports of Sri Lanka in September 2018 were the US, the UK, India, Italy and Germany, which accounted for about 52% of total exports.
Expenditure on merchandise imports increased by 6.1% (year-on-year) to $ 1,768 million in September 2018 mainly due to the high expenditure incurred on fuel and personal vehicle imports. Expenditure on fuel imports, categorised under intermediate goods, increased significantly during the month, reflecting the combined effect of higher import prices and volumes of crude oil and refined petroleum products. In addition, import expenditure on textiles and textile articles, fertiliser and chemical products increased considerably.
However, continuing the trend observed since the imposition of customs duty on gold in April 2018, expenditure on gold imports declined significantly in September 2018. Under consumer goods, personal motor vehicle imports continued to increase in September 2018 on a year-on-year basis mainly due to higher imports of motor cars with less than 1,500 cylinder capacity (cc) partly reflecting the impact of increase in orders placed for importation of such vehicles prior to the implementation of the new tariff structure with effect from 1 August 2018.
Import expenditure on hybrid and electric motor vehicles also increased during the period. However, expenditure on personal vehicle imports is expected to decline in the coming months with policy measures taken by the Government and the Central Bank to curtail vehicle imports. Further, imports of consumer goods such as spices, medical and pharmaceuticals and sugar and confectionery increased during the month.
In contrast, expenditure on rice imports declined owing to increased domestic supply while expenditure on vegetables and dairy products also declined. However, import expenditure on investment goods declined in September 2018 mainly due to lower outlays on road vehicles such as tankers, bowsers and buses. In addition, expenditure on machinery and equipment imports declined mainly driven by electrical machinery and equipment and engineering equipment while expenditure on building materials increased led by iron and steel and cement. India, China, the UAE, Japan and Malaysia were the main import origins in September 2018 accounting for about 63% of total imports.
Tourist arrivals recorded a marginal growth of 2.8% in September 2018 as a result of a decline in the number of tourists arriving mainly from India, the Maldives and France in comparison to September 2017. Tourist arrivals during the first nine months of 2018 totalled 1,731,922, which was an 11.6% increase over the corresponding period of 2017. Earnings from tourism in September 2018 are estimated at $ 276 million, with cumulative earnings amounting to $ 3,212 million during the first nine months of 2018. Meanwhile, workers’ remittances declined by 7.1%, year-on-year, to $ 500 million in September 2018.
Consequently, workers’ remittances declined by 1.5% to $ 5,277 million during the first nine months of 2018 in comparison to the corresponding period of 2017.
Reflecting the ongoing portfolio rebalancing strategy of foreign investors, both the government securities market and the CSE witnessed foreign investment outflows in September 2018. The government securities market continued to experience a withdrawal of foreign investments recording a net outflow of $ 152 million in September, thus raising the net cumulative outflow to $ 468 million by the end of the first nine months of 2018.
Meanwhile, foreign investments in the CSE, including both secondary and primary market foreign exchange flows, recorded a net outflow of $ 7 million during September 2018. On a cumulative basis, the CSE recorded a net inflow of $ 37 million in the first nine months of 2018 which comprised an inflow of $ 73 million to the primary market and a net outflow of $ 36 million from the secondary market. Further, long-term loans to the Government recorded a net outflow of $ 63 million during September 2018 as loan repayments exceeded loan inflows.
International Reserves as at end September 2018, gross official reserves were estimated at $ 7.2 billion, equivalent to 3.8 months of imports. Total foreign assets, which consist of gross official reserves and foreign assets of the banking sector, amounted to $ 9.6 billion as at end September 2018, equivalent to 5.1 months of imports.
The Sri Lankan rupee depreciated by 15.1% against the US dollar during the year up to 29 November 2018. Furthermore, reflecting cross currency movements, the Sri Lankan rupee also depreciated against other major currencies during this period. The weakening of the Sri Lankan rupee against the US dollar mostly reflects a broad-based strengthening of the US dollar globally, outflows from the government securities market and demand for import expenditure in the foreign exchange market.
