Sri Lanka in a paradoxical situation over its trade deficit despite higher exports

by Sanath Nanayakkare

Despite Sri Lanka’s exports had increased more than imports (y-o-y), reducing the trade deficit in April 2024, the cumulative trade deficit for Jan-Apr 2024 has widened, according to the External Sector Performance report of the Central Bank of Sri Lanka.

The deficit in the merchandise trade account narrowed to US dollars 558 million in April 2024 from US dollars 583 million recorded in April 2023. However, it widened compared to March 2024 (US dollars 359 million). Meanwhile, the cumulative deficit in the trade account during January to April 2024 widened to US dollars 1,777 million from US dollars 1,479 million recorded over the same period in 2023, according to the Central Bank.

“Earnings from merchandise exports increased by 3.4 per cent to US dollars 878 million in April 2024 compared to US dollars 849 million in April 2023. There was an increase in earnings across all major categories of exports, where industrial exports increased the most, despite a decline in garments exports. The increase in industrial goods exports in April 2024 was mainly contributed by petroleum products due to the increase in volumes of bunkering and aviation fuel exports.

Earnings from exports of agricultural goods improved in April 2024 mainly driven by coconut-related products and tea (led by higher volumes), despite a decline in spice exports. Earnings from mineral exports also increased in April 2024. However, earnings from exports declined in April 2024 compared to March 2024, resulted by broad-based declines due to festive seasonal effects”, the Central Bank report stated.

“This itself reflects the paradoxical nature of the domestic economy. One would expect more exports and fewer imports on a continued basis to improve the trade deficit of a country. But it doesn’t seem to be happening in Sri Lanka. The reason for this is; Sri Lanka’s export unit value is far below the import unit value, and this needs to be addressed by shifting to export products that create more value for the country in US dollar terms rather than gloating about our export volumes that still bring us insufficient foreign currency,” a leading gem exporter based in Ratnapura told The Island Financial Review.

“Yes, the expenditure of investment goods and fuel imports may have contributed to this increase in the trade deficit. But the issue is; how long Sri Lanka would take to be an export economy with foreign currency earnings that surpasses its import bill, or at least equate the import bill for self-sustenance. So, what we need to specifically target is; breakeven foreign exchange earnings to compensate for our import bill,” he said.