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The Central Bank envisages exports in 2024 to increase by 8.4% to $ 12.9 billion in the aftermath of a decline in 2023.
The projection of $ 12.9 billion worth of exports is indicated in the CBSL’s Annual Economic Review of 2023 released last week.
Last year exports were down by 9% to $ 11.9 billion from $ 13.1 billion in 2022.
Imports are expected to recover to $ 20 billion this year from $ 16.8 billion last year, which was down from $ 18.3 billion in 2022.
Exports in the first two months of 2024 amounted to $ 2 billion, up by 3.6% from the corresponding period of 2023. Imports grew by 18% to $ 2.89 billion.
In its commentary on the growth outlook, CBSL said external demand for domestic services, particularly through tourism, is expected to remain elevated and some renewed demand for exports may emerge if ongoing initiatives to strengthen exports materialise amid the improved growth prospects of Sri Lanka’s key trading partners in the medium term.
The merchandise trade deficit is expected to widen in 2024 due to the possible increase in import demand, reflecting the relaxation of import restrictions, improved economic activity, and increased spending capacity of the public and businesses due to easing monetary conditions, despite the expected moderate growth in export earnings in 2024.
It said even with the continued growth in import expenditure, the trade deficit is expected to reach manageable levels in the medium term, supported by the expected revival and expansion of earnings from exports.
The services account surplus is likely to increase in 2024 and beyond with the projected upswing in earnings from tourism as well as the envisaged improvement in competitiveness of other services exports.
Sri Lanka is likely to benefit from the booming tourism industry in the medium term with the gradual normalisation of the global economy and continued strategic drive to reap the full potential of this sector. However, the expected surge in tourism should also accompany alignment with international standards and sustainable tourism measures while ensuring that estimated revenue is realised fully for the country to reap the benefits. The services account surplus is also expected to strengthen over the medium term with the expected rebound in activities in transport services and high growth in the Information Technology and Business Process Outsourcing (IT/BPO) services subsector.
CBSL said during the medium term, the current account deficit is expected to be maintained at sustainable levels following the restoration of debt sustainability and the anticipated adoption of policies in favour of the tradable sector. The exchange rate will act as a stabiliser in the context of any large trade or current account imbalances.
In reviewing the performance of the external trade in 2023, the CBSL said the merchandise trade deficit for 2023 reached its lowest level since 2010, largely driven by a notable decline in import expenditure relative to the decline observed in export earnings. Export earnings dipped in 2023, with a sizeable contraction of industrial exports, driven by garment exports. Meanwhile, a significant drop in import expenditure was observed due to subdued economic activity, lower disposable income, import restrictions, and tight monetary and fiscal conditions.
Accordingly, the deficit in the trade account narrowed to $ 4,900 million compared to $ 5,185 million recorded in 2022. As a percentage of GDP, the trade deficit narrowed to 5.8% in 2023 from 6.7% in 2022. Terms of trade, i.e., the ratio of the price of exports to the price of imports, deteriorated marginally, since both export and import unit value indices deteriorated close to similar levels in 2023, compared to 2022.
Total trade, i.e., the total of export earnings and import expenditure, declined significantly by 8.5% (year-on-year) in 2023.
Export performance in 2023
The performance of merchandise exports was subdued in 2023. Earnings from exports recorded $ 11,911 million in 2023, which declined by 9.1% compared to 2022. This decline was influenced by global factors, including high cost of living and economic downturn in major export destinations and geopolitical tensions, which resulted in reduced demand for Sri Lankan exports. On the other hand, domestic factors, such as higher operating expenses and supply constraints of intermediate goods adversely impacted the overall competitiveness of exports. Further, as a percentage of GDP, export earnings in 2023 declined to 14.1% from 17.1% in 2022.
The decline in industrial exports largely contributed to the contraction in export earnings, though the decline was broad-based. The export of textiles and garments, the single largest export of Sri Lanka, registered an 18% decline in 2023 compared to 2022, thereby emerging as a key contributor to the overall decline in exports. A notable decline was observed in petroleum product exports in 2023, attributed to the lower prices of bunker and aviation fuel. Earnings from most other industrial goods also experienced subdued performance. However, gems, diamonds and jewellery, transport equipment and machinery, and mechanical appliances exports recorded a growth in 2023. Meanwhile, agricultural exports reported a marginal dip in earnings in 2023 compared to 2022. Of the agricultural exports, the increases in mainly tea, spices, and unmanufactured tobacco were offset by weaker performances in coconut, rubber, and seafood exports. The notable increase in earnings from tea exports reflected higher export prices despite a decline in export volumes. Mineral exports recorded a decline compared to 2022, led by lower titanium ores exports in 2023.
Import Performance in 2023
A notable contraction in import expenditure was observed in 2023. Expenditure on imports declined by 8.1% to $ 16,811 million in 2023 compared to 2022, driven by several factors, including restrictions on non-essential imports, subdued economic activity, and constrained spending capabilities of the public due to tight monetary and fiscal policies.
As a percentage of GDP, import expenditure declined to 19.9% in 2023 compared to 23.8% in 2022. The decline in import expenditure was a result of lower intermediate and investment goods imports, while expenditure on both food and non-food consumer goods imports increased. Expenditure on rice imports declined significantly due to lower volumes of rice imports in 2023 compared to 2022 although this decline was offset by higher expenditure on imports of most other food commodities, such as sugar, oils and fats, and milk powder.
Expenditure on non-food consumer goods increased largely due to imports of medical and pharmaceutical products, and mobile phones. In addition, most other items categorised under non-food consumer goods showed an increasing trend during the latter part of 2023 due to the relaxation of import restrictions.
Expenditure on intermediate goods declined with textiles and textile articles accounting for a significant portion of the decline, in line with the reduction of apparel exports. Expenditure on fuel imports, the largest item in the import basket, declined primarily due to lower import prices across all products: crude oil, refined petroleum (including LP gas), and coal, though import volumes of crude oil and coal recorded an increase.
Reflecting lower economic activities, expenditure on most other intermediate goods declined in 2023.
Expenditure on imports of investment goods declined with notable reductions in all three main categories of investment goods, namely machinery and equipment (mainly engineering equipment), building material (mainly iron and steel), and transport equipment, and most of their subcategories, in 2023 compared to 2022, mainly attributable to import restriction and lower levels of economic activity, especially in the construction sector.
The terms of trade, which is the ratio of export prices to import prices, deteriorated marginally in 2023. Export price and import price indices declined by 11.3% and 10.8% to 82.7 index points, and 96.6 index points, respectively, causing the terms of trade to deteriorate by 0.6% in 2023 compared to 2022. The decline in the price indices of industrial exports and mineral exports contributed to the decline in export prices, while lower prices of the importation of intermediate goods and investment goods, accounted for the decline in the overall import price index.
The volume indices for all main categories of exports deteriorated, except industrial exports, whereas the import volume indices of all main categories, except for consumer goods, showed improvement during 2023.
