The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Continuous trade deficits since liberalisation in 1978
When a country suffers trade deficits continuously for 25 years there must be fundamental economic reasons for it. These must be addressed by those responsible for the country's trade and balance of payments. For twenty-five years since liberalisation in 1977 the country had a persistent trade deficit. The deficits have grown rather than declined.

Last year, in spite of the economic recovery, exports declined by 2.4 per cent. Not so imports that increased by 2.2 per cent. This increase in imports was a much higher amount as the country's import value is larger. Compared to exports of US$ 4,699 million, imports cost US $ 6,105 million last year. Consequently the trade deficit increased to US$ 1,406 million compared with a deficit of US$ 1,157 in 2001.

Last year's increased trade deficit was owing to a decrease in the volume of exports, decreased export prices and increased import volumes. The decrease in overall import prices by 8 per cent was unable to compensate for the increased volume of imports by 11 per cent.

Decreased exports and increased imports resulted in the larger deficit. In the first four months of this year the deficit has continued to grow. In spite of an export growth of 12.8 per cent, the trade deficit has grown by 12.5 per cent. In the first four months the country has incurred a US$ 566 million deficit. At this rate the deficit for this year is likely to exceed last year's deficit. It may reach around US$ 1,600 to 1,700 million.

Even in 2000 when we had an export growth of 20 per cent, we suffered a huge deficit of US$ 1,798 million. The reasons for this particular year's problem were clear. Imports increased owing to a huge expenditure on military hardware and there was an exceptionally high expenditure on crude oil imports owing to both an increased demand for thermal generation and increased oil prices that year.

Each year we have had a problem of one sort or another. Either there is a decrease in exports, as did happen in 2002 or an increase in imports far higher than the export increase or exports decline while imports increase as last year. Whatever the reason the plain fact is that we have been unable to record even a modest surplus in our trade balance in any single year for the last quarter century.

One of the conventional remedies for persistent trade deficits is the devaluation of the currency. This we have done ever since liberalisation. In November 1977 we devalued the currency from around Rs 8.50 to a US dollar to Rs 16. The depreciation of the Rupee has continued to reach around Rs 97 to the Dollar and Rs 167 to the Pound Sterling today. Despite this devaluation and depreciation of the currency, trade deficits have persisted.

The fact is that given the export and import structure of the country, the depreciation of the currency hardly offers relief to the trade balance. We must seek more fundamental changes in our trade pattern and increase domestic production in many areas to achieve a greater degree of import substitution. A dollar saved is indeed a dollar earned. We also require enhancing the efficiency of our export industry, using more local inputs, diversifying into a wider range of exports in a substantial manner and diversifying into exports that have a larger domestic value addition.

This is easier said than achieved. For the attainment of these and other gains in exports, there is a need to get the economic fundamentals straightened out and there must be more effective implementation of policies. Despite the rhetoric of regaining Sri Lanka, there is no clear economic strategy that has been mapped out. Further there is a continued lack of implementation of policy, made worse by the numerous committees and ministries that have been established.

What we have suggested are broad lines of action on how the government must look at possible remedies. What is needed is a specific study with proposals that would strengthen our trade position.

We should not be lulled into complacency just because the balance of payments registered a surplus last year and is likely to generate a surplus this year too owing to increased services income and both private and official capital inflows. There is a fundamental problem indicated by the persistent trade deficits. Economic policies must address this problem.

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