Trade deficit widens for fifth consecutive month

External sector performance extracts – July 2021

The deficit in the trade account recorded an expansion on a year-on-year basis in July 2021. Earnings from export of goods increased during the month over a year earlier, but expenditure on imports increased at a faster pace, causing the trade deficit to widen for the fifth consecutive month in July 2021. Workers’ remittances declined in July, following the trend observed in June 2021, while earnings from tourism remained at minimal levels. Meanwhile, maintaining the country’s impeccable record of debt service payments, Sri Lanka successfully settled the matured 10-year International Sovereign Bond (ISB) of US dollars 1.0 billion in July 2021. Foreign investment in the government securities market recorded a marginal net inflow, while the Colombo Stock Exchange (CSE) continued to record net outflows during the month. The average spot exchange rate in the interbank market remained broadly stable in July 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 607 million in July 2021 compared to the deficit of US dollars 209 million recorded in July 2020. The cumulative deficit in the trade account from January to July 2021 also widened to US dollars 4,922 million from US dollars 3,471 million in the corresponding period of 2020.

Terms of Trade: Terms of trade, i.e., the ratio of the price of exports to the price of imports, deteriorated by 11.6 per cent in July 2021 compared to July 2020, as the increase in import prices surpassed the increase in export prices.

Performance of Merchandise Exports1

Overall exports: Exports performed well in July 2021 despite the ongoing pandemic. Earnings from merchandise exports in July 2021 recorded an increase of 1.7 per cent to US dollars 1,104 million compared to July 2020. Cumulative export earnings from January to July 2021 amounted to US dollars 6,803 million, compared to US dollars 5,498 million recorded in the corresponding period in 2020.

Industrial exports: Earnings from the export of industrial goods increased by 1.1 per cent in July 2021 compared to July 2020. This increase was mainly due to the increase in earnings from export of petroleum products, machinery and mechanical appliances (primarily parts of mechanical appliances and electronic equipment) and rubber products (tyres and gloves). Earnings from the export of petroleum products improved because of the increase in prices and quantities of bunker fuel supplied, as well as the prices of aviation fuel supplied. Among the sectors that recorded a decline in July 2021 over July 2020 were food, beverages and tobacco (mainly miscellaneous food preparations); textiles and garments (mainly face masks); and plastic articles. Export of garments to the EU and UK region declined in July 2021 compared to July 2020, while exports to the USA and other destinations increased.

Agricultural exports: Total earnings from the export of agricultural goods in July 2021 increased by 2.3 per cent compared to July 2020, mainly due to the increase in export earnings from seafood (such as fresh and frozen tuna, fish fillet, shrimps and prawns) and spices (cinnamon, pepper, cloves, nutmeg and mace etc). However, earnings from the export of tea declined significantly, due to a decline in both volume and prices of tea exported. Further, exports of vegetables and minor agricultural products also recorded a drop due to the decline in earnings from lentils and arecanuts, respectively.

Mineral exports: Earnings from mineral exports were lower in July 2021 than in July 2020 by 6.9 per cent due to a decline in export earnings from minerals such as granite, quartz and zirconium ores.

Export indices: The export volume index declined by 4.2 per cent, while the export unit value index increased by 6.1 per cent on a year-on-year basis in July 2021. This indicates that the increase in export earnings, on a year-on-year basis, was due to the increase in export prices that outpaced the decline in export volumes.

Performance of Merchandise Imports

Overall imports: Expenditure on merchandise imports increased by 32.2 per cent to US dollars 1,710 million compared to US dollars 1,294 million recorded in July 2020. The increase in import expenditure was observed across all main categories of imports, namely, consumer goods, intermediate goods and investment goods, despite some import controls still being in place. On a cumulative basis, total import expenditure from January to July 2021 amounted to US dollars 11,725 million, compared to US dollars 8,968 million recorded in the corresponding period in 2020. (CBSL)