Surpassing $ 1 billion for the third consecutive month, earnings from merchandise exports increased by 3.7% year-on-year to $ 1,037 million in August 2018 helping the deficit narrow marginally to 5.8%, the Central Bank said yesterday.
The external sector performance remained subdued in August. During the month, the deficit in the trade account narrowed marginally compared to a year earlier as the rise in export income outpaced the growth in import expenditure. Meanwhile, other inflows to the current account continued to be modest in August with a marginal increase in earnings from tourism and a decline in workers’ remittances.
On a net basis, the financial account of the Balance of Payments (BOP) recorded outflows during the month, due to withdrawals of foreign investments from both the government securities market and the Colombo Stock Exchange (CSE) and continued debt service payments.
These developments, alongside the broad based strengthening of the dollar, continued to exert pressure on the exchange rate to depreciate, thus necessitating intervention by the Central Bank in the domestic foreign exchange market to curtail undue excessive volatility in the exchange rate. As at end August, gross official reserves amounted to $ 8.6 billion.
In August, export earnings increased at a faster pace than the growth in import expenditure, narrowing the deficit in the trade account marginally on a year-on-year basis. Nevertheless, on a cumulative basis, the trade deficit expanded during the first eight months of 2018 in comparison to the corresponding period of 2017.
Merchandise export growth was mainly driven by higher performance in industrial exports while agricultural and mineral exports declined. Under industrial exports, earnings from textiles and garments increased in August, reflecting increased demand from the USA and non-traditional markets, such as India, Japan, Australia and Canada, despite a decline in exports to the EU market. Further, export earnings from rubber products rose during the month due to the better performance in all sub categories, particularly rubber tyres.
Earnings from petroleum products increased substantially in August due to higher export prices of bunker and aviation fuel in line with rising fuel prices in the international market, although a reduction was recorded in export volumes. Export earnings from food, beverages and tobacco also increased during the month due to the good performance in manufactured tobacco and vegetable, fruit and nuts preparations, particularly in coconut-related products. In addition, earnings from machinery and mechanical appliances, base metals and articles and chemical products increased in August, contributing towards the increase in industrial exports.
However, export earnings from leather, travel goods and footwear, and gems, diamonds and jewellery declined during the month. Meanwhile, earnings from agricultural exports declined during the month owing to poor performance in almost all categories except unmanufactured tobacco and rubber. Reflecting the combined impact of lower average export prices and exported volumes of tea, export earnings from tea declined in August. Export earnings from spices reduced during the month due to the poor performance in almost all sub categories except cinnamon.
Further, earnings from coconut exports were lower due to the reduction in earnings from coconut kernel products, such as desiccated coconut and coconut oil. Leading markets for merchandise exports of Sri Lanka in August were the USA, the UK, India, Germany and Italy, which accounted for about 52% of total exports.
Expenditure on merchandise imports increased by 1.6% (year-on-year) to $ 1,887 million in August mainly due to the high expenditure incurred on fuel and vehicle imports.
Under intermediate goods, expenditure on fuel imports increased significantly during the month owing to higher import prices of crude oil and refined petroleum products despite a reduction in import volumes. In addition, import expenditure on textiles and textile articles, chemical products, plastic and articles thereof and mineral products increased considerably.
However, gold, base metals, and wheat and maize declined during this period. Under consumer goods, expenditure on personal motor vehicle imports continued to increase on a year-on-year basis for the ninth consecutive month in August mainly due to higher imports of cars with less than 1,000 cylinder capacity (cc), hybrid and electric motor cars.
However, considering the pressure on the BOP from increased imports, both the Central Bank and the Government took several measures aimed at curtailing high vehicle imports. Accordingly, taxes applicable on the importation of cars with less than 1,000 cylinder capacity (cc), hybrid and electric motor vehicles were revised upward with effect from 1 August , and a 100% margin deposit requirement imposed against letters of credit (LCs) on non-commercial vehicle imports with effect from 19 September.
Further, the margin deposit requirement against LCs on non-commercial vehicle imports was increased to 200% while the LTV ratio for credit facilities granted in respect of hybrid motor vehicles was reduced to 50% from 70% with effect from 1 October. Meanwhile, the Ministry of Finance and Mass Media announced the suspension of concessionary vehicle permits for a limited period. With these policy measures, expenditure on vehicle imports is expected to decline in the coming months. Further, consumer goods such as dairy products, medical and pharmaceuticals and telecommunication devices increased during the month while expenditure on rice imports reduced owing to increased domestic supply.
However, recently introduced measures such as the 100% minimum cash margin deposit requirement against LCs/documents against acceptance (DA) terms on selected nonessential consumer goods imports and the prohibition on releasing foreign exchange by authorised dealers for making payments for non-essential goods by converting Sri Lankan rupees are expected to reduce the pressure on the BOP, which was coming through the increased expenditure on non-essential consumer goods imports.
However, import expenditure on investment goods declined in August due to lower expenses in almost all sub categories. China, India, Japan, Singapore and UAE were the main import origins in August accounting for about 55% of total imports.