Sri Lanka records dismal external performance in March owing to COVID-19 disruptions: Central Bank says

The COVID-19 pandemic and the imposition of a partial lockdown in Sri Lanka in the second half of March 2020 severely affected the external sector performance in March 2020.

“The breakdown in supply and demand chains along with the interruption of domestic production processes resulted in a notable decline in merchandise exports as well as merchandise imports. However, with a greater decline in the expenditure on imports compared to the decline in earnings from exports, the trade deficit narrowed over the same period in 2019,” the Central Bank said in releasing on Monday the import/export data for March 2020.

The deficit in the trade account narrowed in March to US$549 million, from $592 million in March 2019, as the decline in imports in value terms exceeded the decline in exports. However, on a cumulative basis, the trade deficit widened to $1,853 million during the first three months of 2020 from $1,661 million in the corresponding period of 2019.

The report said that earnings from merchandise exports declined significantly, on a year on year basis, by 42.3 per cent to $656 million in March, reversing the marginal growth recorded in February 2020.

“Disruptions to domestic production processes, disruptions to export related services due to the imposition of curfew and disruptions to both domestic and global supply and demand chains due to the outbreak of the COVID-19 pandemic were the main reasons for this sharp decline in the earnings from exports,” it said.

Accordingly, all major exports sectors; agricultural, industrial and mineral exports, recorded significant contractions in March. Major export products such as textiles and garments, tea, rubber products, gems, diamonds and jewellery, machinery and mechanical appliances, seafood and coconut mainly contributed to the decline in export earnings.

Sri Lanka’s tourism industry was severely affected from March. With the termination of all passenger flights and ships to Sri Lanka, there was a cessation of tourist arrivals from the third week of March, resulting in a substantial decline in tourist arrivals by 70.8 per cent to 71,370 from 244,328 in March 2019.

With these developments, earnings from tourism were provisionally estimated to have declined to $135 million in March 2020, in comparison to $461million in March 2019, with cumulative earnings amounting to $956 million during the first three months of 2020, a drop of 31.5 per cent from the corresponding period of 2019.

Workers’ remittances declined by 13.9 per cent in March 2020, year on year, amounting to $492 million. “There was a notable number of returnees from countries such as South Korea and Italy, prior to the closure of the airports in March. This was further exacerbated by lower crude oil prices impacting West Asian economies, where a majority of Sri Lankan migrant workers are employed. On a cumulative basis, workers’ remittances recorded a decline of 1.0 per cent to $1,600 million during the first three months of 2020, in comparison to the corresponding period of 2019.

On financial flows, the CB said a net outflow of the foreign investment amounting to $261 million was recorded from the rupee denominated government securities market in March, resulting in a cumulative net outflow of $361 million during the first three months of 2020.

Outflows of foreign investments from bond markets of most emerging and frontier economies were observed in the aftermath of the COVID-19 pandemic. However, Sri Lanka’s exposure to such outflows remains negligible, with only an insignificant share of outstanding government securities being held by non-residents.

Foreign investment in the Colombo Stock Exchange, of which only secondary market transactions were available for March 2020, recorded a net outflow of $6 million. The CSE remained closed for trading from mid-March 2020 until mid -May 2020. On a cumulative basis, the CSE recorded a net outflow of $28 million in the first three months of 2020.

Gross official reserves stood at $7.5 billion at end March 2020, equivalent to 4.6 months of imports. Total foreign assets, which consist of gross official reserves and foreign assets of the banking sector amounted to $10.7 billion at end March 2020, equivalent to 6.5 months of imports.