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Exports take a hit in the first half of 2020 due to COVID-19 but expected
to recover during the remainder of the year
Sri Lanka’s exports declined by 26.4% in the first half of 2020, reducing from $ 5.9 billion in the same period last year to $ 4.4 billion, largely due to COVID-19 impact, the Central Bank said yesterday, but there was also silver lining in the offing with the June trade deficit declining to the lowest level since August 2009.
Bucking the trend, June exports did better than the 39% decline recorded in May, with a 17.5% reduction of $ 894 million from $ 1,084 million during the same month in 2019.
Sri Lanka’s external sector stabilised further in June 2020, with the gradual normalisation of domestic economic activity. The trade deficit declined in June 2020 (year-on-year), with a more-than-expected rebound in merchandise exports and notable reduction in merchandise imports on account of restrictions on non-essential imports. The deficit in the trade account narrowed in June 2020 to $ 161 million, from $ 316 million in June 2019, recording the lowest monthly deficit since August 2009. Also, on a cumulative basis, the trade deficit narrowed by $ 335 million to $ 3,262 million during the first six months of 2020 from $ 3,597 million in the corresponding period of 2019.
Meanwhile, terms of trade, i.e., the ratio of the price of exports to the price of imports, declined by 7.3% (year-on-year) in June 2020 with prices of exports declining at a faster pace than those of imports.
Earnings from merchandise exports rebounded sharply, recording $ 894 million in June 2020 compared to $ 587 million recorded in May 2020. The gradual resumption of economic activities of the country as well as the recovery of both domestic and global supply and demand chains to some extent contributed to this improvement. The earnings from textiles and garments exports led the increase from May 2020 to June 2020, followed by rubber products, food beverages and tobacco, seafood and spices.
However, compared to June 2019, earnings from merchandise exports declined significantly by 17.5% in June 2020. The year-on-year decline in earnings from exports was led by industrial exports. Earnings from textiles and garments contributed the most to the decline in June 2020, on a year-on-year basis, despite the increase in earnings from Personal Protective Equipment (PPE) such as face masks and protective suits, categorised under other made up articles.
Earnings from most subcategories of industrial exports including transport equipment, petroleum products, gems, diamonds and jewellery and animal fodder declined, year-on-year, during the month.
Despite the increase of surgical and other gloves exports, earnings from rubber products declined, mainly driven by lower exports of tyres. However, earnings from food, beverages and tobacco (led by liquid coconut milk, coconut cream and manufactured tobacco), plastics and articles thereof (led by plastic clothing articles) and chemical products (led by activated carbon) exports increased in June 2020 compared to June 2019.
Earnings from agricultural exports grew considerably by 12% on a year-on-year basis in June 2020, for the first time since May 2019. This increase was led by all subcategories of agriculture exports except for unmanufactured tobacco. Earnings from tea recorded a growth after 10 months in June 2020 driven by higher average export prices of tea although the volume exported recorded a minor decline.
Higher earnings were recorded in minor agricultural products led by higher exports of areca nuts, fruits and betel leaves. Earnings from spices increased with higher export volumes of cinnamon and pepper, while earnings from coconut increased as a result of higher average export prices of kernel products and higher export volumes of non-kernel products.
Earnings from mineral exports recorded a decline in June 2020, year-on-year, led by lower earnings from ores, slag and ash exports.
The export volume index improved by 2.5%, on a year-on-year basis while the unit value index deteriorated by 19.5%, on a year-on-year in June 2020, indicating that the decline in exports was on average driven by lower export prices compared to June 2019. However, on a month-on-month basis, the improvement of the export volume index was substantially high at 61.7% while the deterioration of the unit value index was relatively low at 5.7%, in June 2020 compared to May 2020.
The declining trend observed in expenditure on merchandise imports from December 2019 to May 2020, reversed in June 2020, although a decline of 24.6% was recorded on a year-on-year basis. In June 2020, expenditure on merchandise imports stood at $ 1,055 million. Expenditure on all major import sectors declined on a year-on-year basis in June 2020, with intermediate and investment goods imports declining the most.
This broad-based decline is attributable to the measures taken by the Government and the Central Bank since March 2020 to restrict the importation of selected goods to mitigate the adverse effects created by the COVID-19 pandemic and also to the steep decline in expenditure on fuel imports.
Expenditure on intermediate goods contributed the most to the decline in import expenditure. Import of fuel in June 2020 declined significantly compared to June 2019 as a result of the decline in expenditure on refined and crude oil. This decline in expenditure stemmed from both the reduction in volumes imported and the lower prices of fuel in the international market. The average import price of crude oil declined to $ 38.35 per barrel in June 2020, compared to $ 67.29 a year ago.
Expenditure on imports of textile and textile articles declined significantly in June 2020 led by lower imports of fabric and yarn. However, import expenditure on fertiliser (mainly urea), mineral products (mainly cement clinker), unmanufactured tobacco and agricultural inputs (mainly animal fodder) increased during the month compared to June 2019.
Expenditure on investment goods declined notably with the decline of all sub categories of investment goods in June 2020. Accordingly, expenditure on machinery and equipment (mainly medical and laboratory equipment), building material (mainly articles of iron and steel) and transport equipment (mainly commercial vehicles such as tankers and bowsers) declined in June 2020, compared with June 2019. However, expenditure on machinery and equipment parts and cement increased during the period under review.
Although expenditure on food and beverages increased, expenditure on consumer goods declined, due to the decline in expenditure on non-food consumer goods imports. Expenditure on motor vehicle imports declined considerably by 80.9% while import of home appliances declined led by refrigerators and televisions during the month mainly due to the import restriction measures taken by the government and the Central Bank since March 2020.
However, expenditure on medical and pharmaceuticals and telecommunication devices (mainly mobile phones) imports increased in June 2020. Meanwhile, import expenditure on food and beverages increased, led by import of seafood (mainly dry fish), dairy products (mainly milk powder), vegetables (mainly lentils), fats and oils (mainly coconut oil), and spices (mainly chillies and coriander seeds).
Both the import volume index and the unit value index declined by 13.2% and 13.1%, respectively, in June 2020, indicating that the decrease in imports was driven both by lower volumes and lower prices when compared to June 2019.
Gross official reserves stood at $ 6.7 billion at end June 2020, equivalent to 4.5 months of imports. Total foreign assets, which consist of gross official reserves and foreign assets of the banking sector, amounted to $ 9.5 billion at end June 2020, equivalent to 6.3 months of imports.
The Sri Lankan Rupee, which continued to appreciate since mid-April 2020, maintained the momentum during June 2020 and recorded a marginal appreciation of 0.03% during the month. With a sharp appreciation since beginning of May 2020, the overall depreciation of the rupee against the US dollar thus far during the year up to 14 August 2020 is limited to 0.6%.
The Central Bank continued to intervene in the domestic foreign exchange market with a view to building up reserves. Meanwhile, reflecting cross-currency movements, the rupee depreciated against the euro, the pound sterling, the Japanese yen and the Australian dollar, while appreciating against the Indian rupee during the year up to 14 August 2020.
