Trade deficits have been endemic in the post independent history of the country. In 2009 too we incurred a substantial trade deficit though considerably less than the huge deficit of the previous year. In the sixty two year post-independent history of the country, there have been only six years when the country had a trade surplus. The last trade surplus was as distant as 1977. It was a small surplus achieved with draconian controls on imports. Nonetheless owing to capital inflows such as aid, grants, foreign investments and remittances the country has had balance of payments surpluses quite often. In 2009 the balance of payments surplus is likely to be quite substantial owing to a significant increase in inward remittances and capital inflows. In fact remittances will more than offset the trade deficit. The persistence in the trade deficit is despite significant transformation in the structure of the economy and the resultant change in the country’s trade pattern.
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In the sixty two years since independence there have been several significant changes in the economy. One of these is a distinct change in the trading pattern of the country. The significant diversification of the economy from an agricultural one to a diversified economy, where agriculture is less important is no doubt the most significant of these changes. It is this economic transformation that has resulted in the change in the trading pattern. However the country remains an export–import dependent economy, though the nature of the trade dependence has changed. This change in the trading pattern has not reduced the country’s vulnerability to external shocks that have been responsible for huge trade deficits, as was the case in 2008 when oil and food import prices rocked the economy.
The country’s trade pattern reflects the structural changes in the economy. When the economy was predominantly agricultural the export structure was predominantly of agricultural exports. At this time since food production in the country had also been neglected there was a huge dependence on agricultural imports as well. Agricultural exports dominated the export structure from the beginning of the plantation economy till the 1980s. In 1950, tea, rubber and coconut exports accounted for 94 per cent of exports. A significant diversification of exports occurred in the 1980s, and in 1989 agricultural exports had declined to about 35 per cent of total exports. By 2000 it had declined further to 18 per cent. The diversified export structure consists of 78 per cent of industrial exports, which include garments (53 per cent), rubber based products (3.5 per cent), ceramics (1.1 per cent), leather and footwear (4.4 per cent) and machinery and equipment (4.4 per cent).
However one must be cautious in interpreting these statistics as the importance of agricultural exports is downplayed as agricultural and industrial exports have different levels of import content. In the case of agricultural exports, about 70 percent of the export earnings are domestic value added, while in the case of industrial exports the import content is estimated to be as high as 60 percent in the case of most industrial exports. Nevertheless even when allowance is made for this difference, industrial exports contribute more than agricultural exports to the country’s export earnings. Another development in recent years is that there are new agricultural exports besides tea, rubber and coconut and processed agricultural exports are also increasing.
The import structure too has changed significantly. In 1951 food imports accounted for 45 per cent of total imports. Rice imports alone accounted for 15 per cent of total imports. In contrast, food imports were only 9.4 percent in 2007 and only 10.7 per cent of total imports in 2008, with rice imports being less than 1 per cent of total imports. The import structure has changed from over 50 per cent of imports being consumer items, to 59.5 per cent being intermediate goods. Consumer imports have declined to 18.2 per cent of total imports in 2008 (Central Bank 2008). One of the substantial achievements of the country has been the lesser dependence on food imports despite a nearly three-fold increase in population. The most dramatic indication of this is that we are more or less self-sufficient in rice in spite of the population increasing from about 7 million at independence to a little over 20 million today.
Despite these compositional changes in exports and imports, Sri Lanka’s trade dependence (imports and exports as a proportion of GDP) remains high. In 1950 the country’s trade dependence was 70 per cent. It is only marginally less at about 68 per cent today. Yet the character of the trade dependence has altered significantly. The trade dependence is more industrial than agricultural. Manufactured goods dominate exports. Raw materials and capital goods for industries account for a larger share of imports than food and other consumer imports.
The challenge facing the country is not that of reducing the trade dependence, but of ensuring that the country’s export earnings are increased. There is a need to diversify the export structure more than has been achieved in the past. This export diversification should be in both agricultural exports as well as manufactured goods. Two critical conditions to retain the country’s international competitiveness are to keep inflation under control and the exchange rate such that the country’s exports are competitive. |
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