Declining industrial export growth, sign of economic mismanagement

The trend of declining industrial export growth is ominous. It is a mark of poor macro economic policies and a warning of impending deteriorating economic conditions. It will continue to affect the country’s economy not just its export incomes. Taking comfort in the fact that other items in the trade balance is improving and is offsetting some of the adverse effects of the decline in industrial exports is a serious concern for the future of the country’s economic management. The fact that despite the large trade deficit there is a balance of payments surplus and a reasonable foreign exchange reserve is not good grounds for comfort as the reasons for these are diverse and unconnected. The reasons for the need for concern about the deteriorating industrial export performance have been articulated in this column before but the seriousness of the situation merits us to place the case again in the light of the latest trade statistics for the first half of this year.

The external trade performance continues to grow dimmer and dimmer. This is especially so with respect to industrial exports whose growth is declining. The trade balance is widening with the deficit in the first half of the year reaching a massive US$ 3064 million. The magnitude of this deficit implies that it would be a strain on the balance of payments and the country’s foreign exchange reserves. Despite these forebodings the authorities keep coming up with new fangled theories that the trade deficit does not matter. One reason for this is, in the recent past, and even the first half of this year, there has been a balance of payments surplus in spite of the large trade deficit. Several economists have shown this is not so. Yet there is a persisting consolation that there is no problem in our external trade and finances. This stance of the government’s economic advisors is misleading and incomprehensible.

The main factor accounting for the trade deficit is the large import expenditure. The expenditure on imports in the first half of 2008 was US dollars 6972 million, which was an increase of 35.6 percent over the same period last year. Both oil and other imports increased. Oil imports increased by 87 percent to a new high of US $ 1792 million for a six month period, while non-oil imports during the first half of the year amounted to US dollars 5,180 million, an increase of 23.8 percent over the corresponding period last year. Although there should have been a greater effort to reduce import expenditure one could take a position that in the light of the high international prices of essential imports there was a degree of inevitability in import expenditure.

The main focus of this analysis is on the export performance that is showing serious concerns. Exports that amounted to US dollars 654.6 million in June 2008 was a decline of 1.9 percent compared to June 2007. The export earnings for the first half of the year increased by only 9.8 percent to US dollars 3,888 million. Export earnings from several categories of industrial exports, namely, food and beverages; garments and textiles; and machinery and equipment declined. Industrial exports declined by 9.3 percent in June. The growth in industrial export earnings in the first six months was only 4.4 percent. Most disappointing was the fact that the country’s leading industrial export, textiles and garments, has slowed down significantly. In fact it declined by 8.9 percent in comparison with earnings in June last year. The growth in exports of textiles and garments was only 1.5 percent in the first half of the year compared to what it was in the first half of last year. This is an increase inadequate to cope with the massive increases in growth of imports.

Most startling is the fact that there has been an appreciable decline in garments exports to our main export markets, the United States and the European Union (EU) countries. According to the export statistics the exports of China and Vietnam are far more competitive and eating into our markets in these countries. This situation would deteriorate unless corrective actions are taken. Expecting productivity improvements in the garments in an environment of ever increasing prices is foolhardy. The stable exchange rate in this context of increasing costs of production is the main factor leading to the erosion of competitiveness in international markets.

The declining trend in industrial exports must be taken seriously. The growth in earnings from tea, coconut and minor agricultural products offset the impact of the decline in industrial export earnings to some extent. The seriousness of the situation would have been much worse were it not for the increased earnings from agricultural exports. Fortunately the commodity boom is assisting the country due to the increased prices of tea and rubber. It is no consolation that some of the losses in export earnings from industrial goods are being offset by agricultural exports. The two are unrelated in terms of the causes for their respective performances. The declining trend in industrial exports is indicative of the serious macro economic conditions that are rendering industrial exports uncompetitive in world markets. The high rate of inflation that increases the costs of production is the main factor. There are increases in costs of fuel, transport, electricity, interest costs and wage costs. The prices fetched for the industrial exports are not rising as the exchange rate is kept virtually constant in order not to raise the costs of imports. This is understandable from a social and political angle but it is bad economics and would lead to further deterioration in industrial exports. Fundamental economic laws are being flouted as if Sri Lanka has discovered new economics that can by-pass economic principles!

It has been possible to ignore the deteriorating trade balance owing to the country achieving a balance of payments surplus, despite the huge deficit. This has been made possible due to the large amount of remittances by Sri Lankans and the increase in foreign borrowing. While the remittances are a positive development, the increased borrowing from abroad at commercial terms of borrowing are a serious concern.

These borrowings and servicing costs of the debt is a burden for the future. In as much as these may give relief to the balance of payments currently, they are a burden to the balance of payments in the future. This is why there is a need to take corrective action on the trade deficit. That corrective action must be in terms of proper macro economic management.