Massive trade deficit despite export growth
A massive trade deficit of US $ 1.7 billion is forecast for this year. Although the focus has been on the export recovery and export growth this year, this growth has not been adequate to offset the increase in imports that has been by far the larger.

The trade deficit has grown to register a large deficit already. By the end of September it had risen to US$ 940 million. The Central Bank has projected a trade deficit of US $ 1.7 billion by the end of this year. This is larger than last year's deficit of US$ 1.4 billion. Although exports grew by 11 per cent this year compared to those of last year, the growth in imports was 13 per cent.

While exports are expected to grow to US$ 5.2 billion, imports are expected to rise to US$ 6.9 billion. Consequently, the deficit is expected to widen to as much as US 1.7 billion. There have been several reasons why there has not been any discussion on the emerging large trade deficit. One reason was that the country was focused on the fact that there was an improvement in exports. Month after month the announcements were on the improvement in exports.

Unfortunately this had a deceptive element. The comparisons were with respect to the rather poor export performance of last year. In 2002 exports declined by 1.4 per cent in comparison with those of 2001. Therefore this yardstick of a poor export performance was deceptive. A better comparison would have been the export earnings of 2000. This year's export earnings that are expected to rise to US$ 5192 million, is around 9 percent less than the export earnings of US$ 5522 million in 2000.

Another reason adduced to comfort ourselves is that the adverse trade balance is part of the export recovery and economic growth as the deficit has been sustained owing to increased imports of raw materials and machinery. These increased imports of intermediate goods and capital goods, it is pointed out, is evidence of the future potential of export growth.

This no doubt is correct, as the main growth in exports has been in intermediate and capital goods imports. Consumer goods imports are expected to grow by much less, while intermediate and capital goods exports are expected to increase by a larger amount. While this argument is correct, the fact is that over a long period of time we have not seen these expected returns. Trade deficits have become a recurring feature of the balance of payments.

In fact Sri Lanka has not recorded a trade surplus in the past 25 years. Even in years of good export growth there have been significant deficits. Imports that have always been a larger amount have grown by a higher proportion and by far a larger amount.

Imports are expected to register a higher growth of 13 per cent this year compared to the 11 per cent growth in exports. The third reason for the complacency lies in the fact that although the country is facing a massive trade deficit, the balance of payments is expected to record a surplus owing to the improvements in the services account, increased private remittances from abroad, investment flows and aid receipts. In fact the country has recorded balance of payments surpluses in the past three years and this year's expected balance of payments surplus would be the fourth successive one a word of caution about this year's surplus. No doubt the Central Bank projection was done prior to the uncertainties created by the political crisis.

This no doubt is having an adverse impact on investment and aid flows. So the expected balance of payments surplus of US$ 390 million may either diminish or could even turn into a deficit. While these three considerations have a degree of validity, they must not lead us into apathy regarding our trade performance. We must look to both the import side and our export performance to see whether we could reduce the trade gap.

On the import side are there ways by which we could decrease imports either because they are not essential or substitutable with local production? We are not by any stretch of imagination suggesting non-tariff barriers and an import restrictive regime. This is neither economically rational nor feasible in the current international economic order. What we must look to is the strengthening of our international competitiveness, improvements in productivity and expansion of our production base in both agriculture and industry.

The recurrent trade deficits are a measure of the inefficiencies in the economy. The other items in the balance of payments that are favourable have contingent liabilities, are fragile and subject to global conditions that make them not dependable in the long run. We must make every effort therefore to move towards a trade surplus as the balance of payments could be strengthened significantly, if we do.

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