An 18 percent decline in export earnings in the first half of the year is indeed a matter of serious concern to an export dependent economy such as ours.
Admittedly the global recession has been an important determinant and cause for this decline. However placing the blame entirely on external factors is only a partial explanation and is of little benefit in correcting the problem. Global conditions are beyond the control of a small economy, yet the manner in which we respond to these conditions would determine the end result.
It is now clear that in the face of the global downturn the economic policies and developments in the country were not adequately responsive to these to ensure our competitiveness in the world economy. The increasing rise in costs of production together with inadequate flexibility in exchange rate policy made the country’s responsiveness inadequate to cope with the challenge. Industrial exports in particular became less competitive in foreign markets. In contrast, many of our competitors took steps to decrease production costs especially in such areas as energy and depreciated their currencies. Thereby their exchange rates compensated to some extent increases in domestic costs and reduced prices of their products abroad. This made their products competitive while we lost our competitive edge as costs of production went up while the fairly stable currency meant higher prices abroad or losses at home. It is not that these countries did not suffer by the global downturn but they took actions to mitigate the detrimental conditions.
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The most relevant issue now is whether we would be able to regain our competitive edge. There is some evidence that our main industrial export garments is showing signs of an improved export performance. The Central Bank says that “apparel exports indicate a recovery in the second half as order books look healthy for the rest of the year.” We hope this forecast is correct and exports of garments would pick up in the remaining months of the year. An improvement in the competitiveness of garment exports would go a long way in improving export earnings.
It is to the credit of some of the country’s industrialists that they attempted to make their enterprises more productive through internal reforms and cost cutting exercises. Such improvements helped withstand international competitiveness to some extent. The quality of upmarket products too assisted in holding on to their markets. These factors helped the apparel industry to face up to the export downturn to some extent. The fact that garment exports declined by only 4 percent in the first six months of this year is perhaps owing to these measures.
In the case of our main agricultural exports there was a loss in production too. Consequently the exportable surplus declined. This was partly due to the decrease in prices from the peak levels of the boom prices in 2008. The small holder tea producers, who are the major tea producers and exporters, were not geared to act in the face of a price fall. Consequent inadequate resources resulted in a drop in their production. Even when prices rose again, export capacity had declined owing to the lower production of tea and rubber. Rubber exports have been adversely affected by the diminished demand for cars.
However the rise in oil prices in recent months is likely to raise rubber prices. There are plans to increase rubber production in the country but these have a gestation period of about seven to ten years before they could contribute significantly to production and exports.
In the first half of this year export earnings declined by as much as 18 percent in comparison with exports in the first half of last year. All major export categories recorded reduced earnings. Industrial export performance has been particularly unsatisfactory with export earnings declining by 17 percent. This does not augur well at all for the country as it was this downturn that led to significant lay-offs and increasing unemployment. However among industrial exports and garment exports, the country’s main export declined by only 4 percent and is hopefully poised to grow.
Agricultural export earnings declined by 18 percent due to both depressed prices in the early part of the year and reduced output and exports. This was so with respect to the country’s main agricultural export, tea, as well as in the case of rubber. Tea exports fell by as much as 19 percent. Tea production fell in the first half of this year. The good news is that prices have returned to the high levels of last year and there may be production gains in the second half of the year. Rubber prices are rising with an improvement in petroleum prices that have an important bearing on natural rubber prices.
The end result of these developments was that export earnings declined to US $ 3,189 million while expenditure on imports amounted to US $ 4,437 million resulting in a trade deficit of US $ 1,249 million This deficit was much lower than the trade defici in the first half of last year when it was a massive US$ 3116 million. The trade deficit in the first half of this year was 60 per cent less compared to that of the first half of 2008.
There has been scant concern for the trade deficit as private remittances from abroad offset it. This was so in the first half of this year as well. Compared to the trade deficit of US$ 1249 million in the first six months, private remittances have been US$ 1,586 million in the first half of 2009, thus resulting in a balance of payments surplus when these two items are considered. There is an expectation that there would be net inflow of capital this year. Therefore, despite the likely trade deficit, the balance of payments is likely to be in surplus. There was some anxiety that this year’s private remittances would be lower owing to the recessionary conditions and the job market in countries that absorb our labour. In fact it has turned out to be different. The remittances received in the first six months were 5 percent more than during the same period last year.
These favourable developments have tended to make us turn a blind eye to the trade deficit. This is unfortunate as the trade deficit is an endogenous economic problem. It reflects imbalances in the production consumption patterns in the country with demand for imports exceeding our capacity to finance these by export earnings. The private remittances are an exogenous factor not reflecting the working of the Sri Lankan economy. There should be every effort therefore to enhance the productive capacity and efficiency of the economy to reflect a trade surplus. Then the remittances would be a strong contributor to the country’s investment and growth rather than a means of counterbalancing the trade deficit. |
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