Trade deficit shrinks for third consecutive month

External Sector Performance – May 2022

The import expenditure declined, while earnings from exports increased in May 2022, year-on-year, extending the contraction in the trade deficit for the third consecutive month. Meanwhile, tourist arrivals slowed in May 2022, compared to the previous month. Workers’ remittances increased in May 2022, compared to April 2022.

Foreign investment in the government securities market and the Colombo Stock Exchange (CSE) recorded marginal net inflows during May 2022. Considering the liquidity pressures witnessed in the domestic foreign exchange market, the Central Bank imposed cash margin requirements in May 2022, while the Government introduced restrictions on open accounts and consignment payments terms, among others. These measures were expected to curtail activity in the informal foreign exchange market and narrow the gap between the official and grey market exchange rates. Meanwhile, the weighted average spot exchange rate in the interbank market remained stable around Rs. 359 per US dollar during the month, helped by the measures introduced to manage pressures in the domestic foreign exchange market, along with the market guidance.

Merchandise Trade Balance and Terms of Trade

Trade Balance: The trade deficit recorded a decline for the fifth consecutive month on month-on-month basis and for the third consecutive month on year-on-year basis in May 2022, supported mainly by the policy induced moderation of imports, along with the notable growth momentum of exports. The trade deficit narrowed to US dollars 404 million in May 2022, compared to the deficit of US dollars 716 million recorded in May 2021. On a cumulative basis, trade deficit narrowed on a year-on-year basis for the first time in May during this year. Accordingly, the trade deficit during January-May 2022 narrowed to US dollars 3,535 million, from US dollars 3,663 million recorded over the same period in 2021. The major contributory factors for this 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 notably by 18.5 per cent in May 2022, compared to May 2021, as the increase in import prices surpassed the increase in export prices.

Performance of Merchandise Exports1

Overall exports: Earnings from merchandise exports in May 2022 increased substantially by 17.5 per cent over the corresponding month in 2021, recording at US dollars 1,047 million. An increase in earnings was observed in industrial exports, while a decline was recorded in agricultural exports and mineral exports. The cumulative export earnings during January-May 2022 increased by 12.2 per cent over the same period in the last year, amounting to US dollars 5,266 million.

Industrial exports: Earnings from the export of industrial goods increased in May 2022 by 24.2 per cent, compared to May 2021. A broad-based increase in earnings among industrial goods has been recorded, with the greatest share for the overall increase mainly being contributed by garments. Export of garments to all major markets (such as the United States, the European Union, and the United Kingdom) improved. Further, gems, diamonds and jewellery and petroleum products also contributed to this increase in exports. Earnings from the export of petroleum products improved due to the increase in both average export prices and volumes of bunker fuel exports. Meanwhile, continuing the lower demand for rubber gloves as a personal protective item due to declining spread of Covid-19 worldwide, a decline in earnings was reported in rubber products. Export earnings from animal fodder and plastics and articles also declined during the month.