Decline in exports; lower global demand

External Sector Performance – November 2022

The merchandise trade deficit continued to remain low compared to a year ago, though it widened in November 2022 over the previous month. Earnings from merchandise exports declined in November 2022, mainly due to lower global demand, particularly for garment exports. Meanwhile, merchandise import expenditure also declined for the ninth consecutive month in November 2022 on year-on-year basis, despite recording an increase, compared to October 2022. Workers’ remittances continued to recover and recorded a notable increase in November 2022 over a year earlier and the previous month.

Earnings from tourism increased in November 2022 over the previous month supported by a growth of tourist arrivals over 40 per cent. Foreign investment in the government securities market recorded a marginal net inflow during November 2022, while the Colombo Stock Exchange (CSE) recorded a marginal net outflow during November 2022. The Central Bank continued to provide foreign exchange to the domestic foreign exchange market to part finance essential imports. Consequently, the build-up of gross official reserves remained constrained. Meanwhile, the weighted average spot exchange rate in the interbank market remained around Rs. 363 per US dollar during the month.

Merchandise Trade Balance
and Terms of Trade

Trade Balance: The deficit in the merchandise trade account narrowed to US dollars 450 million in November 2022, compared to the deficit of US dollars 553 million recorded in November 2021. However, the merchandise trade deficit has shown a tendency to widen on month-on-month basis since recording a surplus in June 2022. The cumulative deficit in the trade account during January-November 2022 recorded at US dollars 4,839 million, a decline from US dollars 7,054 million recorded over the same period in 2021. The major contributory factors for the decline in the cumulative trade deficit are shown in Figure 1.

Terms of Trade: Terms of trade, i.e., the ratio of the price of exports to the price of imports, deteriorated by 5.3 per cent in November 2022, compared to November 2021, as the increase in import prices surpassed the increase in export prices.

Performance of Merchandise
Exports

Overall exports: Earnings from merchandise exports declined by 17.9 per cent in November 2022, over November 2021, to US dollars 994 million, recording a slight decline for the third consecutive month, on a month-on-month basis. While declines in earnings were observed across all main categories, industrial exports mainly contributed to the contraction in earnings. However, cumulative export earnings during January-November 2022 increased by 6.0 per cent over the same period in the last year to US dollars 12,026 million, which was mainly driven by a 9.4 per cent improvement in industrial exports amidst a decline in agricultural and mineral exports.

Industrial exports: Earnings from the export of industrial goods declined in November 2022 by 15.4 per cent, compared to November 2021. This decline was due to a broad-based decline in earnings from most of the industrial products led mainly by garments and rubber products. Earnings from export of garments declined by 8.3 per cent (y-o-y) driven by lower global demand for garment exports. Accordingly, exports of garments to most of the major markets (the USA, the EU and the UK) recorded declines. The decline in earnings from rubber products was due to the lower exports of tires and household gloves. Further, a sizable decline was recorded in the exports of petroleum products (led by lower export volumes); animal fodder (mainly, wheat residues); and food, beverages, and tobacco (mainly, vegetable, fruit, and nuts preparations), although earnings from gems, diamonds, and jewellery; and machinery and mechanical appliances (mainly, electronic equipment) increased. Earnings from exports of petroleum products recorded a decline of 30.7 per cent in November 2022 (y-o-y), due to lower volumes of bunker and aviation fuel supplied despite a notable increase in average export prices.

Agricultural exports: Earnings from the export of agricultural goods declined by 25.9 per cent in November 2022 compared to November 2021, due to a broad-based decline in all subcategories of agricultural goods led by spices and coconut related products. Export earnings from spices declined due to the lower earnings from all subcategories, whereas earnings from pepper declined the most, driven by lower export volumes. Both kernel and non-kernel coconut related products contributed to the decline in earnings from coconut related products. The drop in export earnings from tea was mainly due to lower export volumes (a decline of 25.5 per cent), despite high average export prices which recorded an increase of 20.5 per cent, (y-o-y). (CBSL)