The trade deficit widened in January 2020 compared to January 2019, as earnings from exports declined while expenditure on imports increased.
The Sri Lankan rupee remained broadly stable and appreciated against the US dollar in January 2020, but depreciated sharply in March in the face of the COVID-19 pandemic following a similar trend of many emerging market currencies due to strengthening US dollar and yen. The deficit in the trade account widened in January 2020 to US dollars 730 million, from US dollars 617 million in January 2019, led by a decline in exports and an increase in imports on a year on year basis. The major contributory factors for the increase in the trade deficit are depicted in Figure 1.
Meanwhile, terms of trade, i.e., ratio of the price of exports to the price of imports, deteriorated by 3.7 per cent (year-on-year) in January 2020, as export prices declined at a faster pace than the decline in import prices.
Continuing the year-on-year declining trend observed since July 2019, earnings from merchandise exports declined by 3.2 per cent to US dollars 1,005 million in January 2020, with all major export sectors recording declines in comparison to January 2019.
Earnings from agricultural exports declined in January 2020 (year-on-year) driven by all of its sub sectors except for minor agricultural products. Earnings from tea exports declined due to the combined effect of lower export volumes and average export prices.
In addition, earnings from spices declined in January 2020, mainly due to lower export volumes of many sub categories, while export prices also declined except for nutmeg and mace. Earnings from seafood exports declined with lower demand from the USA.
Meanwhile, earnings from coconut exports declined, mainly due to lower export earnings from desiccated coconut categorised under kernel products and fibre under non kernel products. In contrast, earnings from export of minor agricultural products increased during the month, mainly led by exports of arecanuts and betel leaves.
Industrial exports decline
Earnings from industrial exports declined in January 2020 in comparison with January 2019, with low earnings from almost all sub sectors, except petroleum products, chemical products and gems, diamond and jewellery.
Earnings from food, beverages and tobacco exports declined, led by manufactured tobacco exports and miscellaneous food preparations. In addition, earnings from rubber products declined mainly driven by lower tyre exports.Earnings from textiles and garments declined marginally, as a result of lower earnings from the USA and nontraditional markets such as India, South Korea and Mexico, despite an increase recorded in exports to the EU. Further, earnings from machinery and mechanical appliances declined with lower exports in all subcategories.
Conversely, export earnings from petroleum products increased substantially, due to higher earnings from bunker and aviation fuel exports resulting from higher bunker quantities and prices as well as higher earnings from naphtha exports.
Earnings from mineral exports recorded a decline in January 2020, year-on-year, with weaker performance in all subcategories.
The export volume index in January 2020 improved by 2.9 per cent (year-on-year), while the export unit value index declined by 6.0 per cent, indicating that the decline in exports was driven entirely by lower prices when compared to January 2019.
Performance of Merchandise Imports
Expenditure on Merchandise imports increased, on a year-on-year basis, in January 2020 for the second consecutive month, by 4.8 per cent to US dollars 1,735 million, driven by higher consumer and investment goods imports.
Expenditure on consumer goods imports increased in January 2020 with the increase in expenditure on both food and beverages and nonfood consumer goods imports. Accordingly, vegetables (mainly big onions), dairy products (mainly milk powder), sugar and spices (mainly chillies) imports, categorised under food and beverages, increased. Meanwhile, under nonfood consumer goods category, expenditure on personal motor vehicle imports recorded a growth, on a year-on-year basis, for the second consecutive month in January 2020.
Meanwhile, expenditure on investment goods imports increased in January 2020 due to higher imports of machinery and equipment and transport equipment. The increase in expenditure on machinery and equipment imports was mainly driven by turbines, telecommunication devices and electrical machinery and equipment.
Vehicle imports declines
However, expenditure on personal vehicle imports declined significantly when compared with December 2019. In contrast, expenditure on beverages (mainly alcoholic beverages) and seafood (mainly canned fish) imports declined, in comparison to January 2019.
Meanwhile, expenditure on transport equipment increased with higher expenditure incurred on railway equipment such as locomotive engines and carriages, and Lorries.
However, expenditure on building material imports decreased mainly due to low expenditure on iron and steel and those articles imports such as iron bars and rods although higher outlays on the importation of the bridges and bridge sections continued to increase in January 2020.
Expenditure on imports of intermediate goods declined in January 2020, mainly due to lower expenditure on fuel, owing to lower import volumes of all subcategories namely crude oil, refined petroleum and coal, although average import prices of crude oil and refined petroleum increased, when compared with January 2019.
In addition, expenditure on base metals (mainly iron and steel), wheat and mineral products (mainly cement clinker) imports declined in January 2020. However, import expenditure on textiles and textile articles increased, led by higher expenditure on fabric and fibre imports. The import volume index increased by 7.3 per cent, while the unit value index declined by 2.3 per cent in January 2020, indicating that the increase in imports was driven entirely by higher volumes when compared to January 2019.
Tourism suffer a setback
The tourism sector suffered a setback in January 2020 following the outbreak of COVID-19 reversing the recovering trend of the tourist arrivals since the Easter Sunday attacks. Tourist arrivals in January 2020 declined by 6.5 per cent to 228,434 compared to 244,239 in January 2019.
Tourist arrivals from Russia, Poland and Ukraine increased in January 2020 (year-on-year), while arrivals from key destinations, such as Australia, France, the United Kingdom, Germany and China, declined. Earnings from tourism were provisionally estimated at US dollars 431 million in January 2020, in comparison to US dollars 460 million in January 2019.
Meanwhile, workers’ remittances recorded a growth of 6.5 per cent in January 2020, year-on-year, amounting to US dollars 581 million.
Gross official reserves stood at US dollars 7.5 billion at end January 2020, equivalent to 4.5 months of imports.
Meanwhile, total foreign assets consisting of gross official reserves and foreign assets of the banking sector amounted to US dollars 10.3 billion at end January 2020, equivalent to 6.2 months of imports.
Rupee depreciates sharply
The Sri Lankan rupee, which remained broadly stable in the month of January as well as until the first week of March, depreciated sharply with the speculative behavior in the market with the spread of COVID-19 outbreak.
Accordingly, the rupee recorded a depreciation of 4.7 per cent against the US dollar by 30 March 2020.
Reflecting cross-currency movements, the rupee depreciated against the US dollar, the euro and the Japanese yen while appreciating against the pound sterling, the Canadian dollar, the Australian dollar and the Indian rupee during the year up to 30 March 2020.
External Sector Developments amidst the COVID-19
The initial pressure created by both global and domestic market uncertainties was felt in the domestic foreign exchange market, particularly in the second half of the month of March 2020.
A notable depreciation of the Sri Lanka rupee was observed, primarily due to speculative market behaviour and foreign investment outflows from the government securities market.
The Central Bank undertook a number of emergency operational and policy measures, including some intervention in the domestic foreign exchange market, suspension of all personal motor vehicle and non-essential consumer goods imports, limiting issuance of foreign currency notes as travel allowance up to a maximum of US dollars 5,000 and suspension of purchase of Sri Lanka International Sovereign Bonds by licensed banks in Sri Lanka.
The government established a fuel price stabilisation fund to maintain stable energy prices domestically, while enabling the utilisation of benefits accruing on account of the sharp decline in international crude oil prices more productively.
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