Trade deficit widens as worker remittances increase

External Sector Performance – March 2021 Overview

Sri Lanka’s external sector showed a mixed performance in March 2021 with a widened trade deficit on the one hand, and a healthy growth in workers’ remittances and a slight pickup in the tourism sector on the other. The deficit in the trade account widened in March 2021, for the first time since April 2020. Both exports and imports were significantly higher in March 2021, compared to March 2020 as well as February 2021. However, workers’ remittances grew steadily, and the tourism sector continued the recovery process, albeit at a very slow pace. In the financial account, both foreign investment in the government securities market and the Colombo Stock Exchange (CSE) continued to record marginal net outflows in March 2021 as well.

The Sri Lankan rupee depreciated against the US dollar during the month, partly reflecting the seasonal demand for imports. However, mainly supported by the regulatory measures that were in place till mid-March, the Central Bank absorbed foreign exchange on a net basis during the month, to strengthen the gross official reserve position. Meanwhile, in March 2021, the Central Bank entered into a bilateral currency swap arrangement with the People’s Bank of China (PBoC) for Chinese yuan 10 billion (approximately US dollars 1.5 billion) with a view to promoting bilateral trade and direct investment for economic development of the two countries, and to be used for other purposes agreed upon by both parties.

Trade Balance: The deficit in the trade account widened on a year-on-year basis in March 2021, for the first time since April 2020, to US dollars 832 million compared to the deficit of US dollars 549 million recorded in March 2020 and US dollars 572 million in February 2021. Both exports and imports were significantly higher in March 2021, compared to March 2020 and February 2021. Meanwhile, the cumulative deficit in the trade account during January – March 2021 widened to US dollars 2,059 million from US dollars 1,853 million recorded over the same period in 2020. The major contributory factors for the increase in the trade deficit as at end March 2021 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 6.3 per cent in March 2021 as the increase in import prices were higher than the increase of export prices, compared to March 2020.

Overall exports: Earnings from merchandise exports in March 2021 increased by 66.7 per cent to US dollars 1,094 million, from low earnings from merchandise export in March 2020 (US dollars 656 million) during the first wave of the COVID-19. Earnings from exports improved considerably in March 2021 compared to February 2021 also raising export earnings towards pre-pandemic export levels.

Industrial exports: Earnings from all subsectors of industrial goods exports, excluding petroleum products and leather, travel goods and footwear, improved in March 2021, year-on-year. On a month-on-month basis, earnings from Industrial exports increased, except for the subsector of leather, travel goods, and footwear. Earnings from textiles and garments, rubber products (mainly gloves and tyres), food, beverages and tobacco (mainly value added coconut products), base metals and articles, chemical products, and machinery and mechanical appliances exports recorded considerable growth rates compared to February 2021. Meanwhile, earnings from the export of petroleum products declined on a year-on-year basis due to the significant reduction in volumes of aviation fuel and bunkering fuel supplied to aircraft and ship arrivals, despite the increase in the average prices of these export products. Earnings from leather, travel goods and footwear export declined in March 2021 both on year-on-year and month-on-month bases.

Agricultural exports: Export earnings from all subsectors related to agricultural goods increased in March 2021, compared to a year ago, as well as compared with February 2021. Export earnings from tea, seafood, coconut (both kernel and non-kernel products), spices (mainly pepper), and minor agricultural products (mainly arecanuts) recorded considerable increases over February 2021.

Mineral exports: Mineral exports in March 2021 were also higher than the exports observed in March 2020 and February 2021, due to increased earnings in subsectors of earths and stone (mainly quartz) and ores, slag and ash (mainly titanium ores).

Export indices: The export volume index and the unit value index increased by 56.5 per cent and 6.5 per cent, respectively, on a year-on-year basis, in March 2021. This indicates that the increase in export earnings were due to the combined impact of higher export volumes and prices.

(CBSL)