Sri Lanka’s external sector strengthened further in June 2019 with a marked contraction in the trade deficit while gross official reserves were augmented with the proceeds of the issuances of two international sovereign bonds (ISBs).
In June 2019, the trade deficit narrowed to US dollars 316 million, the lowest since October 2010.
This considerable reduction was due to the decline in import expenditure by 23.1 per cent (year-on-year) and an increase of export earnings by 5.8 per cent (year-on-year).
Earnings from tourism picked up in June, gradually recovering from the impact of the Easter Sunday attacks. Earnings from tourism increased by 66.8 percent in June 2019 in comparison with May 2019. However, earnings from tourism declined on a year-on-year basis by 57.0 per cent in June2019.
Workers’ remittances at US dollars 537 million in June 2019 recorded a growth of 2.5 per cent (year-on-year). On a cumulative basis, workers’ remittances amounted to US dollars 3,270 million during the first half of 2019.
With the proceeds of the issuance of the ISB, gross official reserves increased to US dollars 8.9 billion at end June 2019, which was equivalent to 5.2months of imports.
Earnings from merchandise exports increased for the 28thconsecutive month in June 2019 and recorded an increase of 5.8per cent (year-on-year) to US dollars 1,084million, mainly supported by an increase in industrial exports.
Earnings from industrial exports increased in June2019 mainly due to the improved performance in textiles and garments, rubber products and transport equipment. Export earnings from textiles and garments increased by 11.4per cent in June2019benefiting from higher demand for garment exports from both the traditional and non-traditional markets. Export earnings from rubber products increased with better performance in tyres and surgical and other gloves while export earnings from transport equipment increased notably reflecting the supply of a naval craft to Japan. However, export earnings from petroleum products and machinery and mechanical appliances declined significantly in June2019 in comparison to June2018.
Earnings from agricultural exports decreased, on a year-on-year basis, in June2019 mainly due to the reduction in earnings from tea, rubber, spices and minor agricultural products. Export earnings from tea declined in June 2019 (year-on-year) mainly due to lower prices. However, export earnings from coconut, seafood and vegetables increased in June 2019.
Export earnings from mineral exports also declined in June2019in comparison to June 2018.
The export volume index in June 2019 increased by 6.4 per cent (year-on-year) while the export unit value index declined by 0.6 per cent, indicating that the growth in exports was entirely driven by increased volumes when compared to June 2018.
The deficit in the trade account narrowed significantly in June2019 in comparison to the corresponding month of 2018mainly due to the reduction in imports of motor vehicles and fuel. On a cumulative basis, the deficit in the trade account contracted by US dollars 2,112 million to US dollars 3,597 million during the first six months of 2019 in comparison to the corresponding period of 2018, the Central Bank said in a release.
Meanwhile, the terms of trade, which represents the relative price of imports in terms of exports, improved by 3.6per cent (year-on-year) to 114.0index points in June2019asexport prices, on average, reduced at a slower pace than the decline in import prices. However, on a cumulative basis, the terms of trade deteriorated by 1.5 per cent during the first six months of 2019 in comparison to the corresponding period of 2018, the Central bank said.
Imports
Expenditure on merchandise imports contracted for the eighth consecutive month, recording a decline of23.1per cent, on a year-on-year basis, to US dollars 1,400 million. All three major categories of imports; consumer goods, investment goods and intermediate goods contributed to the decline in June 2019. Expenditure on consumer goods imports reduced by 39.4per cent in June2019, due to lower imports of all subcategories of non-food consumer goods, particularly, personal motor vehicles. The persistent decline in import expenditure on personal motor vehicles mainly reflects the impact of the upward revision of excise duties introduced in March 2019 on the importation of hybrid and electric motor vehicles and motor cars with less than 1000ccengine capacity.
Expenditure on food and beverages imports also decreased reflecting lower outlays in almost all sub categories except seafood, cereals and milling industry products.
Imports of intermediate goods decreased by 11.1per cent in June 2019 mainly due to lower fuel imports. Both crude oil and refined petroleum products declined due to the combined impact of low import volumes and prices. Imports of textiles and textile articles, fertiliser, chemical products, food preparations and paper and paper boards also contributed to the reduction in imports. However, imports of base metals increased in June 2019.
Import expenditure on investment goods decreased in June2019, due to lower imports in all subcategories. Building material imports reduced mainly due to the decline in iron and steel and cement imports while transport equipment reduced mainly due to the decline in certain categories of vehicles such as commercial cabs, auto trishaws etc.
The import volume index decreased by 19.8per cent and the unit value index decreased by 4.0 per cent indicating that the decline in import expenditure was driven by the reduction in both volumes and prices, in comparison to June2018.
Tourist arrivals gradually recovered in June 2019 from the impact of the Easter Sunday attacks. Accordingly, tourist arrivals increased by 66.8 per cent to 63,072 in June 2019 in comparison to 37,802 in May 2019. However, tourist arrivals in June 2019 registered a year-on-year decline of 57.0per cent. The drop in tourist arrivals was mainly due to the decline in the number of tourists from key destinations such as India, China, the United Kingdom and Australia in the aftermath of the Easter Sunday attacks. The decline in arrivals from India and China accounted for 41.6per cent of the total decline in June 2019. Earnings from tourism were estimated at US dollars 118million in June2019, in comparison to US dollars 276million in June 2018. On a cumulative basis, earnings from tourism were estimated at US dollars 1,893million during the first six months of 2019compared to US dollars 2,186 million during the corresponding period of 2018.
Meanwhile, workers’ remittances grew by 2.5 per cent, year-on-year, to US dollars 537 million in June 2019. On a cumulative basis, however, workers’ remittances recorded a decline of 9.8 per cent reaching US dollars 3,270 million during the first half of 2019 in comparison to the corresponding period of 2018.
Foreign investments in the government securities market recorded a net outflow of US dollars 5 million in June2019. On a cumulative basis, net outflows in the government securities market amounted to US dollars 96million during the first half of the year.
Foreign investments in the CSE, including primary and secondary market transactions, recorded a net inflow of US dollars 10 million during the month of June 2019. On a cumulative basis, the CSE recorded a net outflow of US dollars 10 million in the first half of 2019, including primary and secondary market transactions. Further, long term loans to the government recorded a net outflow of US dollars 99million during June 2019. Along with the proceeds of the International Sovereign Bond (ISB) of US dollars 2 billion, issued in June 2019, the level of gross official reserves of the country increased to US dollars 8.9 billion by end June 2019(equivalent to 5.2 months of imports) from US dollars 6.7 billion recorded at end May 2019. Meanwhile, total foreign assets, which consist of gross official reserves and foreign assets of the banking sector, were US dollars 11.5billion as at end June 2019, which was equivalent to 6.8months of imports.
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