The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Bleak trade prospects
In January this year when the gathering war clouds had still had little impact on trade, the country suffered a large trade deficit of US$ 150 million. This, despite the fact that exports grew by 11 per cent. The January trade deficit comes on the heels of a 1.4 billion dollar deficit in 2002. The much larger imports of consumer, intermediate and capital imports choked the export gains. The growth in export earnings in January has been hailed as an achievement. Any euphoria on that account is inappropriate. It is a hollow gain.

Three reasons make it so. First, although export earnings increased by 11 per cent compared to that of January 2002, it is a comparison with a low level of exports in January 2002. Second, although export earnings increased, we suffered a very high trade deficit owing to an even larger increase in imports. Third, it is most unlikely that the trend of increase in export earnings that began in the second half of last year would continue owing to the Iraqi war. On the contrary, it is most likely that the trade deficit this year would be even larger than the very large deficit suffered last year.

In January this year exports increased by 11 per cent to US $ 382 million. However imports increased by a larger amount; US$ 531 million or 12 per cent more than in January last year. In terms of dollars the increase in export earnings was considerably less than the increase in imports. Consequently we suffered a trade deficit of US$ 150 million in the first month of the year itself. If a monthly deficit of this magnitude continues throughout the year, then we would incur a trade deficit of about US $ 1.8 billion for the year, higher than last year's trade deficit of US$1.4 billion.

In fact if the international situation continues to be unstable, the deficit could be even larger. The growth in exports would not have been maintained in March. Tea exports in particular had a serious set back. Vegetable and fruit exports to the Middle East, though not a very significant amount of total exports, also suffered a cutback. Minor agricultural exports, most notably cloves, have also suffered. It is only a matter of time for garment exports and other manufactured exports to suffer a setback too owing to depressed demand in industrial countries, especially the US.

Import expenditure increased in January owing to higher imports of non-food consumer imports, intermediate and capital goods imports. Consumer imports increased by 7 per cent but non-food consumer items increased by as much as 34 per cent. The favourable decline in food imports by 10 per cent was more than offset by increases in other consumer goods such as cars, motor cycles and television sets. Imports of cars increased by a huge 134 per cent. Intermediate imports increased by 21 per cent owing to increased imports of raw materials, such as fertiliser and textiles and the higher costs of petroleum imports. Intermediate imports excluding petroleum increased by 19 per cent.

The prospect for deterioration in the trade balance in 2003 is most likely. From March onwards till the Iraqi war is over and much beyond that our exports are likely to suffer. This applies to our main agricultural export tea and subsidiary agricultural exports like cloves, vegetables and fruits. These exports may recover somewhat faster than the current situation permits us to expect. Where our industrial exports are concerned it is likely to take much more time for the markets of these commodities to recover.

Meanwhile our imports are likely to rise mainly owing to increases in prices of petroleum and fertiliser in particular. The nature of our imports is such that there would be only an insignificant reduction. These would be in the raw materials for industry that would be owing to the reduced demand for manufactured exports. Other import expenditure would rise owing to increases in prices.

The most significant of these would be the rise in crude oil prices that are a high proportion of the import bill. The country's trade prospects for the rest of the year are indeed bleak. A school student writing an essay on the Iraqi war concluded by saying that, "when other countries fight we have to suffer".

Back to Columns