The trade deficit is growing at a frightening pace. Last year's trade deficit of US$ 3800 million was by far the largest trade deficit incurred by the country. There can be no doubt that this would be exceeded by a large margin this year. In the first four months of this year the trade deficit mounted to nearly twice the trade deficit suffered for the first four months of last year. The trade gap in the first four months of this year was US $ 2,045 million compared to US dollars 1,063 million during last year's first four months. This is alarming as it may pile up to a massive US$ 6000 million or more by the end of the year. This is probable if oil prices continue to increase, as it has this year.
Let us look more closely at how we sustained such a large trade deficit in the first four months, much more than the record deficit of last year. Although exports grew this year too it was by a modest amount compared to imports that grew by a much larger amount. This has been the feature of the country's trade performance that has been a concern in our trade account for the last three decades. It has been much more so in the last three years. During the four month period, January-April 2008, export earnings amounted to US dollars 2,488, while import expenditure increased to US dollars 4,533 million. This is an increase in imports by 37.4 percent compared to that of the first four months of last year.
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Export earnings for the first four months January-April 2008 grew by 11.3 percent to US dollars 2,488. This was mainly due to agricultural export earnings increasing by as much as 37 percent in the four month period, compared to that of the same period last year. This was due to the buoyant prices of tea and rubber. In fact tea export earnings increased by as much as 45.8 percent. The good news is that both tea and rubber prices are likely to continue to rise this year and boost export earnings. It is the increased expenditure on imports that causes the huge dent in the trade balance. Expenditure on imports during the first four months of 2008 amounted to US dollars 4,533 million, an increase of 37.4 percent this year compared to that of the first four months of last year. This has been the reason for the near doubling of the trade deficit.
In April 2008, earnings from exports increased by 14.7 percent to US dollars 610 million, with agricultural exports and industrial exports contributing 59 percent and 37 percent. Agricultural exports grew by 46.5 per cent in April 2008, with earnings from tea and minor agricultural products recording a significant growth. Export prices of tea increased further in April 2008 and the average export price was US dollars 4.00 a kilogram, the highest recorded up to then. Industrial exports grew by much less at 6.9 percent. Exports of most industrial exports such as garments and textiles; food, beverages and tobacco; rubber products, petroleum products and ceramic products increased. However the growth in many of these was quite modest.
Expenditure on imports in April 2008 recorded an increase of 37 percent to US dollars 1,269 million. In April 2008, import expenditure on consumer goods, mainly food items, increased significantly with an emphasis on rice and sugar. Import expenditure on intermediate goods increased by 38 percent and contributed 64 percent to the increase in import expenditure in April 2008. This was primarily due to significant price increases of crude oil and fertilizer. Imports of investment goods grew by 33.5 percent. Among the increased imports in this category were increases in imports of transport equipment, machinery and building material.
The Central Bank's release of these figures for April 2008 is revealing of what has happened this year on the export side in particular. In April 2008, earnings from exports increased by 14.7 percent, to US dollars 610 million. Agricultural exports contributed 59 percent to this growth while industrial exports contributed only 37 percent. During the first four months agricultural exports grew by 46.5 percent. Earnings from tea and minor agricultural product exports recorded a significant growth. In the case of tea the main factor accounting for the growth of earnings is the sharp rise in international tea prices owing to both, an improved demand for tea, especially from oil producing countries, and the disruption of tea production in African countries. Export prices of tea increased further and the average export price in April was the highest recorded ever of US dollars 4.00 a kilogram, over Rs 420.
The performance in industrial exports is a matter of serious concern. Industrial exports grew by only a modest 4.3 percent in the first four months of 2008. Most categories of industrial exports grew by only a small amount. This included exports of garments and textiles (the main industrial export); food, beverages and tobacco; rubber products, petroleum products and ceramic products. Total exports consequently grew by only 11.3 percent to US dollars 2,488 for the period January-April 2008, quite inadequate to finance the increased expenditure on imports.
Despite these unfavourable developments, the country's balance of payments was in surplus. The balance of payments showed a surplus of US dollars 320 million for the four month period January-April 2008. Consequently the trade deficit did not result in a dwindling of the reserves. In fact the gross official reserves increased to US dollars 3,383.8 million by end April 2008. This is sufficient to finance around 3.3 months of imports. This situation in the balance of payments should not lull us into complacency as the increasing trade deficit is of such a magnitude that the capital inflows may be inadequate to offset the increasing trade deficit. As we pointed out last week much of this surplus is through borrowing that increases the debt burden and the debt servicing costs. It is factually correct that, in as far as imports are concerned, the high expenditure has been owing to the sharp increases in international prices of oil, food, fertilizer and chemicals. This should not mask the emerging crisis in our industrial exports that are faring badly. The increasing costs of production in a high inflationary situation with a more or less constant exchange rate can do serious damage to the development of export industry. An economic crisis of serious proportions is brewing. We must recognise this in order to take remedial action. |
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