A massive trade deficit of US$ 5.2 billion characterized last year’s trade performance. The trade deficit expanded by 66.7 per cent to US$ 5,205 million in 2010 from US dollars 3,122 million in 2009. It was the largest trade deficit recorded in the country’s economic history. Although export earnings increased by 17.3 per cent to US$ 8,307 million, it was far below the increase in imports by US$ 13,512 million: nearly twice (32.4 per cent) that of exports. The import expenditure for 2010 was unprecedented, exceeding the previous highest by a large margin.
The growth in export earnings by only 17.3 per cent was a disappointing performance, even though the value of export earnings at US dollars 8,307 million in 2010 was according to the Central Bank, “the highest annual value so far in history”. Since expenditure on imports increased by 32.4 per cent to US$ 13,512 million, the record export earnings must be viewed in relation to the country’s much higher import expenditure that resulted in the trade deficit expanding to US$ 5,205 million in 2010.
Despite this large trade deficit, there would be a balance of payments surplus owing to worker remittances, earnings from tourism and investment inflows. This should not detract from the fundamental weaknesses in the economy that are reflected in this wide trade deficit. The export-import performance is reviewed and evaluated to reveal the strengths and weaknesses of the country’s trade structure and performance.
Agricultural exports
Agricultural export earnings grew by 20 per cent compared to industrial export earnings growth of 16 per cent. The main reason for the growth in agricultural export earnings was improved prices fetched by tea and rubber and other export crops. The average export prices of tea and rubber were high throughout the year.
In December 2010, the average export prices of tea were at a high US$ 4.56 per kg, while the average price of rubber reached US$ 4.26 per kg. Tea export earnings increased by 16 per cent. Earnings from other agricultural exports too increased due to significant improvements in export prices and volumes of such crops as cocoa, essential oils, cashew nuts and cardamoms.
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Unfortunately the capacity of the country to increase agricultural exports is limited. This is especially so in the short term. Even in the long term increasing agricultural export volumes are limited by land availability. However, productivity on tea estates is below potential as a large proportion of estate tea lands have senile tea bushes with less productive seedling tea. If export earnings from tea are to be increased, then replanting with vegetatively propagated (VP) teas is essential. Paradoxically, when tea prices are high there is little incentive for uprooting even low productive senile tea bushes. In contrast small holdings tea is significantly higher in productivity. Replanting of tea lands is an essential strategy for increasing tea export incomes.
A similar situation holds for rubber cultivation. There is a need for replanting of rubber with high yielding varieties. This is more feasible than replanting tea as under planting rubber lands are an option. The government has also identified new areas for rubber growing and a programme of expanding rubber cultivation is in progress. Increase in rubber production would not only contribute directly to export incomes, but also indirectly through higher use of natural rubber in industrial production for exports.
The increasing international prices for several other agricultural exports, such as spices, cocoa, essential oils and cashew, point to the possibility of larger extents of systematic cultivation of these crops for export. Cultivation of dry zone crops such as cashew, especially in the liberated areas of the country, could enhance export earnings. Supply inelasticity and limited systematic growing of many export crops have constrained the country’s agricultural export potential.
Industrial exports
Industrial export performance has not been very impressive in the last few years. Sri Lanka appeared to be losing her competitive advantage. This was especially so with respect to the country’s largest export–garments due to price competitiveness of other countries.
The withdrawal of the GSP plus status was another setback, as the European Union was the country’s largest export market for garments. The industrial export performance must be viewed in this context.
Industrial exports grew by only 16.4 per cent last year. Export of garments that accounted for 56.8 per cent of industrial exports increased by only 7 per cent. On the face of these statistics, industrial export growth was too little and the growth in garment exports was even less impressive. These statistics also imply that the share of garment exports in total industrial exports, though constituting the largest share, is a declining one and other industrial exports are increasing at a faster pace to continue this trend. These other industrial exports include rubber products mainly pneumatic tyres and gloves, food, beverages and tobacco products.
However this observation must be moderated by the fact that despite the GSP plus concession being withdrawn, the country has been able to make some progress in exports. The performance of industrial exports in the latter part of the year indicates a better performance in garment exports and a revival of trade with the EU countries without the concession. In the last three months of the year there was a noticeable increase in textiles and garment exports to the US and EU countries.
The Central Bank points out that in December 2010 export earnings from garments to EU and USA increased by 33.9 per cent and 31.4 per cent, respectively,. It is this improved performance that has led the government to not apply for a renewal of the GSP plus concession. There is confidence that the country’s exports could compete without such concessions. Further the growth in other industrial exports is a healthy diversification of the country’s export structure.
Implications
This analysis indicates several policy implications for improving the country’s export performance. Foremost among these is the need for the country to remain competitive. This involves keeping the costs of production at levels that would enable the country’s exports to be competitive in international markets. This means farms and firms producing for the export market must be efficient and their productivity high. Apart from the efficiency of firms, the macro economic conditions must be such that inputs for industry are available at competitive prices. In Sri Lanka’s case the high energy costs and poor development of infrastructure have added to costs.
One of the encouraging features of the country’s exports is the progressive diversification of exports. This is evident from recent increases in non-garment exports and the variety of industrial exports. It is vital that macro-economic conditions are conducive for the growth of new industries for export. Increasing of value addition in exports is another means of increasing export earnings.
The exchange rate too is an important determinant of export competitiveness. It is not the nominal exchange rate that matters but the real effective exchange rate (REER). The REER takes into consideration the relative rates of inflation and the exchange rates of competing countries. Now that the government has taken a decision to not seek export concessions, it is crucial that the country’s export competitiveness is maintained through efficiency, productivity, low costs of inputs and a competitive exchange rate.
An improved export performance can contribute immensely to the country’s economic stability and growth. Both short term possibilities and long term potential require to be explored. It is through export growth that the country’s reserves could be strengthened and foreign borrowing reduced. Sri Lanka’s import dependency must be supported by export growth.
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