Sri Lanka’s trade deficit in July records notable contraction

Earnings from Sri Lankan exports increased in July 2022, while import expenditure declined for the fifth consecutive month, on a year-on-year basis. The notable decline in import expenditure in July 2022 reflected the impact of overall moderation of activity amidst forex liquidity strains in the banking system, while the policy measures to curtail non-urgent import expenditure also helped to contain import demand pressures, the Central Bank said in its latest trade figures for July 2022.

As a result, the trade deficit recorded a notable contraction in July 2022 over the year, thereby easing stresses in the domestic foreign exchange market.

Workers’ remittances increased marginally in July 2022, compared to June 2022, and remained in excess of the trade deficit, thereby supporting the forex liquidity conditions under severe balance of payments pressures.

Earnings from tourism recorded an increase in July 2022 (year-on-year) on the low base. Foreign investment in the government securities market and the Colombo Stock Exchange (CSE) recorded a marginal net inflow during July 2022.

The Central Bank continued to provide forex liquidity to finance essential imports, exhausting the usable level of gross official reserves.

Trade Balance: The balance in the merchandise trade account recorded a deficit of US$123 million in July 2022, compared to the deficit of $606 million recorded in July 2021.

The cumulative deficit in the trade account during January-July 2022 narrowed to $3,637 million from $4,922 million recorded over the same period in 2021.

Merchandise exports

Earnings from merchandise exports grew by 5.4 per cent in July 2022, over July 2021, to $1,164 million. An increase in earnings was observed in industrial exports, while a decline was recorded in agricultural and mineral exports. Cumulative export earnings, which increased by 12.9 per cent during January-July 2022, amounted to $7,678 million, compared to $6,803 million recorded in the corresponding period in 2021.

Earnings from the export of industrial goods increased in July 2022 by 12.4 per cent, compared to July 2021, contributed mainly by higher export earnings from garments; and gems, diamonds and jewellery. Export of garments to all major markets (the US, the European Union, and the UK) improved. Exports of other categories which reported an increase in earnings, mainly included machinery and mechanical appliances (mainly, mechanical appliances parts and metallic components for electric accessories), chemical products (mainly, activated carbon), transport equipment (mainly, motorcycles) and, base metals and articles (mainly, aluminium iron and steel; and articles thereof).

Agricultural exports: Total earnings from the export of agricultural goods declined by 14.5 per cent in July 2022, compared to July 2021, with a substantial share of the decline contributed by seafood and spices, while export earnings from tea increased only slightly. Earnings from seafood in July 2022 nearly halved, compared to July 2021, mainly due to the decline in volume of tunas exported. The broad-based decline in subcategories of spices resulted in the decline in earnings from spices by 26.2 per cent (y-o-y). Further, coconut related products (primarily, desiccated coconut, fibres and coconut oil), vegetables and natural rubber also contributed to the decline in export earnings.

Mineral exports: Earnings from mineral exports declined by 42.8 per cent in July 2022, compared to July 2021, mainly due to a decline in export earnings from titanium ores categorised under ores, slag, and ash.

Workers’ remittances increased to $279 million during July 2022, in comparison to $274 million in the previous month, while remaining low compared to the corresponding month in the previous year. Meanwhile, total departures for foreign employment were recorded at 22,821 during the month of July 2022. Total departures of foreign employment comprised unskilled (8,232), skilled (7,091) and domestic aid (4,479) categories. Total departures for foreign employment during January-July 2022 were recorded at 163,522, compared to 37,041 in the corresponding period of the previous year, and a total of 117,952 in 2021.

Tourist arrivals rose in July 2022 to 47,293, from 32,856 arrivals recorded in June 2022. Unfavourable conditions, such as fuel shortages, power outages, travel advisories issued by certain countries etc continued to impact tourist arrivals (though in August man adverse advisories were relaxed). The UK, India, Germany, and France remained the main source countries for tourist arrivals in July 2022. Earnings from tourism in the month of July 2022 are estimated at $85 million, in comparison to $59 million in the previous month, and $6 million in the corresponding month in the previous year.

Gross official reserves stood at $1.8 billion as at end July 2022. This included the swap facility from the People’s Bank of China, equivalent to around $1.5 billion, which is subject to conditionalities on usability. The Central Bank continued to supply forex liquidity to finance essential imports by utilising inflows to gross official reserves. Consequently, the level of usable reserves continued to remain at significantly low level by the end of July 2022.