The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Foreign investment, aid and tourist earnings may flow in but trade deficit widens
The increasing inflow of foreign investment and aid flows, increasing tourist earnings and the enhancement in foreign exchange reserves may well blind us to the fact that the country's trade deficit is high and increasing.

This is also due to a concealment of the severity of the trade deficit owing to a comparison of our export performance this year with the poor performance of last year.
Presenting our exports as increasing in comparison with that of the comparative month or period of last year is deceptive. Such a comparison indicates a favourable performance as last year's trade performance was poor. It masks the fact that the trade deficit is large and increasing.

This is rather unfortunate, as it is the trade balance is a good indicator of whether our trade dependent economy is robust. The foreign aid flows and investments have contingent liabilities that result in an outflow of funds at a latter time, unlike export earnings.

They are also very much dependent on foreign perceptions of the political situation that could change dramatically and change the flow of funds. The trade balance conversely measures the fundamental health indicators of the economy.

At the end of the first seven months of this year the trade deficit had grown to US $ 823.5 million. We take satisfaction that it is about 19 per cent lower than the deficit in the same period of last year. Such contentment is based on a deception as we amassed a huge trade deficit of US$ 1.4 billion dollars last year, higher than the trade deficit of 2001.

At the current level of monthly trade deficits we are likely to have another massive trade deficit of over 1 billion US Dollars: about 1.2 to 1.3 billion US Dollars. Trade deficits have become endemic in Sri Lanka. We have not had even a modest trade surplus in the last 25 years.

This is indeed indicative of fundamental weaknesses in the economy and the structure of our trade. Although export statistics for the first seven months disclose a favourable development, it is in comparison with a poor export performance of last year. The export earnings of this year compare unfavourably with the 2000 export statistics.

In 2000 the country recorded a significant 20 per cent increase in exports. Since then the performance has been unsatisfactory, mainly due to external factors. In 2001 industrial export values dipped by 13.4 per cent to US $ 3710 million.

This decline continued into 2002, when industrial exports fell a further 2.1 per cent to US$ 3631 million. In the first seven months of this year the industrial export performance has been better than that of 2002,but is much less than our export earnings in 2000.

In the first seven months of this year (January to July 2003) exports grew by 17.6 percent, compared to the exports of the first seven months of last year. Industrial exports grew by 21 per cent, while agricultural exports declined by 1.7 per cent. The industrial export growth of 21 per cent was significant in relation to the export performance of the first seven months of last year and signifies a recovery in industrial exports. Yet as the industrial export performance of 2002 was poor, our industrial export growth was inadequate to make a significant dent on the trade deficit. In fact industrial exports declined by 2.1 per cent last year.

This was after a 13.4 per cent decline in the previous year (2001). Our industrial export earnings so far this year is much lower Although the 16 per cent growth in garment exports, the largest export item, was mostly responsible for the improved export performance, it was less than the 18 per cent growth recorded at the half-year mark. Rubber and leather goods, the second most important industrial export category, increased 13.5 per cent in the first seven months, again less than the 15 per cent growth recorded for the first six months of this year compared to the first half of last year.

Another discouraging feature is that the increase in industrial exports in July was only US $ 76 million. The value of exports for the first seven months of this year at US $ 2218 million was only 52 per cent of the export value for 2000, whereas it should have been about 58 per cent, if exports were to be around the value of 2000. Although the value of industrial exports so far (first seven months of this year) is higher than for the same seven-month period in 2002 ,it is lower than the industrial exports of 2001. And it is much lower than the industrial export value of the first seven months of 2000.

The recovery in industrial exports, particularly since about April-May this year and in June, has not been maintained in July. As a result the expectation of a good industrial export performance this year is less certain. Consequently it is likely that once again the country will have a massive trade deficit. this year.

Back to Columns