Trade account deficit widens YoY for fourth consecutive month

External sector performance – June 2021

The deficit in the trade account widened on a year-on-year basis for the fourth consecutive month in June 2021. Both exports and imports were significantly higher in June 2021 compared to June 2020. Considering the first half of the year, although exports recorded a healthy growth, import expenditure increased at a higher pace. Workers’ remittances recorded a year-on-year decline in June 2021, while earnings from tourism remained at minimal levels. In the financial account, both foreign investment in the government securities market and the Colombo Stock Exchange (CSE) continued to record marginal net outflows during the month. The Sri Lankan rupee remained broadly stable in June 2021.

Trade Balance and Terms of Trade

Trade Balance: The deficit in the trade account widened on a year-on-year basis to US dollars 652 million in June 2021 compared to the deficit of US dollars 161 million recorded in June 2020. The cumulative deficit in the trade account in the first half of the year also widened to US dollars 4,316 million from US dollars 3,262 million recorded in the corresponding period in 2020, and US dollars 3,597 million recorded in the corresponding period in 2019. The major contributory factors for this outcome 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 16.7 per cent in June 2021 compared to June 2020, as the increase in import prices were higher than the increase of export prices, compared to June 2020.

Performance of Merchandise Exports1

Overall exports: Earnings from merchandise exports in June 2021 recorded an increase of 12.6 per cent to US dollars 1,007 million on a year-on-year basis. Cumulative export earnings from January to June 2021 amounted to US dollars 5,699 million, compared to US dollars 4,413 million recorded in the corresponding period in 2020 and US dollars 5,999 million recorded in the corresponding period in 2019. Exports improved by 12.9 per cent in June 2021 over May 2021.

Industrial exports: Earnings from the export of industrial goods increased by 16.6 per cent in June 2021 compared to June 2020, with a broad-based increase in export earnings under most of the categories. Substantial increases were noted with respect to rubber products (tyres and gloves), petroleum products, machinery and mechanical appliances (all subcategories), textiles and garments, gems, diamonds and jewellery, and base metals and articles. Increase in earnings from petroleum products was due to the increase in unit values of bunker fuel along with some improvement in quantities supplied. Despite the ongoing pandemic related disruptions, the main export segments also recorded increased earnings on a month-on-month basis. Total earnings from industrial exports from January to June 2021 amounted to US dollars 4,408 million with a growth of 31.3 per cent from the same period in 2020.

Agricultural exports: Total earnings from the export of agricultural goods in June 2021 remained around the same values recorded in June 2020. Earnings from tea exports increased due to improvement in export volumes while the export unit value declined. Further, earnings from exports of coconut (both kernel and non-kernel products), spices (such as pepper and cloves) and unmanufactured tobacco increased. In contrast, there was a decline in export earnings from seafood, minor agricultural products (fruits, arecanuts, betel leaves, etc.) and vegetables (fresh, frozen, dried, preserved, etc.). Total earnings from agricultural exports during the first half of 2021 amounted to US dollars 1,259 million, with a growth of 21.2 per cent from the same period in 2020.

Mineral exports: Earnings from mineral exports were higher in June 2021 than in June 2020 with increases in earnings from earths and stone as well as ores, slag and ash. Total earnings from mineral exports from January to June 2021 amounted to US dollars 25 million.

1 Exports classified according to Standard International Trade Classification Revision 4 are presented in Annex I

Export indices: The export volume and unit value indices increased by 8.9 per cent and 3.4 per cent, respectively, on a year-on-year basis in June 2021. These indicate that the increase in export earnings, on a year-on-year basis, was due to the combined impact of higher export volumes and prices.

Performance of Merchandise Imports2

Overall imports: Expenditure on merchandise imports increased by 57.2 per cent to US dollars 1,659 million compared to US dollars 1,055 million recorded in June 2020. The increase in import expenditure was observed across all main categories of imports, namely, consumer goods, intermediate goods and investment goods, although expenditure on petroleum imports was low due to low import volumes during June 2021. On a cumulative basis, total import expenditure in the first half of 2021 amounted to US dollars 10,015 million, compared to US dollars 7,675 million recorded in the corresponding period in 2020 and US dollars 9,596 million recorded in the corresponding period in 2019.

Consumer goods: Expenditure on the importation of both food and beverages and non-food consumer good categories increased substantially in June 2021 compared to a year ago. Expenditure on food and beverages increased by 61.9 per cent to US dollars 165.0 million with a broad-based increase in all categories, except seafood. However, the largest contribution to the increase in total food bill was from dairy products (mainly milk powder, but also cheese and butter), and oils and fats (mainly coconut oil, but also other types of oil). Expenditure on non-food consumer goods increased by 47.6 per cent to US dollars 217.2 million, contributed mainly by medical and pharmaceuticals (mainly vaccines), home appliances (televisions, rice cookers, fans, refrigerators, etc.), mobile phones, rubber tyres and tubes, etc. Total expenditure on the importation of consumer goods in the first half of 2021 amounted to US dollars 1,912 million, which is an increase of 7.3 per cent compared to the same period in 2020.

Intermediate goods: Expenditure on importation of intermediate goods in June 2021 increased by 48.5 per cent over June 2020, despite the 40.0 per cent decline in the expenditure on fuel. Expenditure on fuel declined due to non-importation of crude oil and low import volumes of other types of petroleum, taking into consideration the availability of sufficient stocks. The expenditure on almost all other types of intermediate goods increased, except fertiliser, mineral products and unmanufactured tobacco, reflecting increased economic activity in the country as well as increased commodity prices in the world market. Total expenditure on importation of intermediate goods during the first half of 2021 amounted to US dollars 5,950 million with an increase of 42.8 per cent from the same period in 2020.

(CBSL)