There is no escape from the reality that Sri Lanka’s economic prosperity is much dependent on external economic circumstances. This is not a recent development with globalization as some contend. It is a phenomenon that developed with colonialism. The country was turned into an import-export economy with high trade dependence. The value of the country’s imports and exports as a percentage of the country’s production of goods and services (GDP) was 70 per cent at the time of independence and for many decades after that. This was more or less equally divided between imports and exports.
What is important is that we were as much dependent on imports as exports. This trade dependence continues to this day with the value of exports and imports being still around the 70 per cent mark, with a percentage point or two up or down as a ratio of GDP. What has changed however is that the nature of the dependence has changed significantly with changes in the kind of exports and imports.
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Before independence, at independence and for nearly three decades after independence, the country remained very much of an agricultural and food dependent economy. For instance, in 1950 our imports were largely food imports which constituted about 45 per cent of the import bill. This was due to the neglect of food crops and the need to depend on imports of essential foods like rice, wheat flour, sugar, subsidiary food crops, milk, fish and livestock products. On the other hand, the country’s exports too were predominantly agricultural. This apparent paradox was the result of the colonial masters neglecting food crop cultivation and focusing attention on the development of plantation or cash crops for export.
Therefore at independence, the country was a large importer of food items such as rice, wheat flour, sugar, milk products, other grains and poultry and livestock products, and exported tea, rubber, coconut products, coffee, cocoa and a variety of spices. About 95 per cent of exports were these agricultural products.
The nature of the country’s trade dependency has changed drastically. Our food imports have constituted less than 10 per cent of the import bill, though it is somewhat higher in the first quarter of this year. The important items of import are intermediate goods such as petroleum, fertilizer, other raw materials and intermediate goods for the production of industrial goods. Machinery and other capital goods are also significant imports. On an average, intermediate goods account for over 50 per cent of import expenditure and capital goods for about 20 per cent of imports.
Similarly industrial exports account for over 70 per cent of export earnings and agricultural exports about 25 per cent of exports. What is significant is that the main exports of today are highly dependent on the import of raw materials. In other words, we are an import dependent industrial export economy. It is estimated that the value addition of most industrial exports are about 30 per cent.
This statistic is often misinterpreted as an unfavourable one. In fact the reason for this high import content is due to the country’s limited raw material resource base. Sri Lankans like to fancy the country as one blessed with lots of natural resources. In fact we are not rich in resources. Garment exports have to be based on cotton imports. Other industrial exports require chemicals, iron, steel, canvas and petroleum for their production. Therefore the country will remain dependent for a wide range of imports for industrial exports. This is not necessarily a disadvantage as Singapore, Japan, and many similarly resource limited countries have demonstrated. However the capacity to export on the basis of imported raw materials is very much dependent on skills, work ethics, management skills and macroeconomic policies that are supportive of industrial export development.
This international dependency is seen in this year’s first quarter trade figures. On the export side agricultural exports accounted for only about 27 per cent of total exports, while industrial exports accounted for 72 per cent of exports even though industrial exports had declined during this period. This shows very clearly that industrial exports are much more important than the country’s agricultural exports. However these statistics have an inbuilt bias that exaggerates the importance of industrial exports as they have large import content unlike agricultural exports. Yet when allowance is made for this factor industrial exports are still much more significant for export earnings.
Agricultural exports continue to have price fluctuations dependent on international supply that is volatile mainly due to weather conditions. The other disadvantage is that often when prices increase the amount supplied cannot be increased. In fact it often happens that when tea production is high, prices are low and the converse too happens. In the case of rubber, petroleum prices have an important bearing as synthetic rubber manufacture is petroleum-based.
Here again when prices rise, it is not possible to increase the output of rubber and its exportable surplus. In the case of industrial exports international demand and the competitiveness with other exporters are important. In the last two years and currently these factors have been unfavourable and consequently industrial exports have declined. In the first three months of this year industrial exports declined by 14 per cent. This has an important bearing on export earnings.
Recent experience demonstrates that we are even more vulnerable on the import side. The country is very much dependent on imports of petroleum and intermediate imports. As much as 52 per cent of imports are intermediate goods of which petroleum is the most important. Petroleum imports in the first quarter of this year accounted for 23 per cent of total imports. The significance of petroleum imports in the trade balance is seen even more clearly by the fact that Petroleum imports absorbed as much as 43 per cent of the country’s export earnings and was more than the earnings from all agricultural exports in the first quarter of this year.
The important implication of this is that increases in oil prices bear heavily on the country’s balance of trade. In 2008 the country suffered a huge trade deficit because of high oil and essential food import expenditure. This appeased in 2009 but indications are that oil prices will result in a huge import cost this year and will be very much responsible for a large trade deficit. This is particularly so as industrial export incomes are also declining. The current vulnerability of the country’s trade is mainly due to the fluctuations in oil prices. When oil prices increase as they have done in the last 12 months, the terms of trade deteriorates and there is a huge trade deficit. This is compounded when the country’s industrial exports are also faring badly.
Fortunately the full cost of petroleum imports in the first quarter of this year has been offset by remittances from abroad. While petroleum imports cost US$ 752 million in the first quarter, remittances that increased by 14 per cent was higher at US$ 891 million. This should not detract from the undeniable fact that the economy’s trade, and therefore its economic conditions are very vulnerable to external economic developments. |
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