Trade deficit narrows during first six months | Sunday Observer

Trade deficit narrows during first six months

7 August, 2022

The merchandise trade balance recorded a surplus in June 2022 for the first time since August 2002, reflecting the impact of historically high monthly export earnings and the continued decline in import expenditure. Earnings from tourism recorded an increase in June 2022 (year-on-year) from the low base, despite the negative sentiments associated with travel advisories and the ongoing shortage of fuel and resultant transportation difficulties. 

Workers’ remittances moderated in June 2022, compared to May 2022, reflecting an increase of grey market activity of foreign exchange transactions. Foreign investment in the government securities market recorded a marginal net inflow, while that in the Colombo Stock Exchange (CSE) recorded a marginal net outflow during June 2022. 

The Central Bank continued to provide forex liquidity to finance essential imports, exhausting the usable level of gross official reserves.

The weighted average spot exchange rate in the interbank market remained around Rs. 360 per US dollar during the month.

The balance in the merchandise trade account in June 2022 recorded a surplus of US dollars 21 million, compared to the deficit of US dollars 652 million recorded in June 2021, and for the first time since August 2002, where a trade surplus of US dollars 110 million was recorded. 

The cumulative deficit in the trade account during January-June 2022 narrowed to US dollars 3,514 million from US dollars 4,316 million recorded over the same period in 2021. 

Terms of trade, i.e., the ratio of the price of exports to the price of imports, deteriorated by 5.4 per cent in June 2022, compared to June 2021, as the increase in import prices surpassed the increase in export prices.

Earnings from merchandise exports in June 2022 increased by 23.9 per cent over the corresponding month in 2021, recording US dollars 1,248 million, which is the highest ever monthly export earnings recorded. An increase in earnings of both industrial and agricultural exports contributed to this favourable outcome, while mineral exports, which constitute a meagre share of export earnings, recorded a decline. Cumulative export earnings from January to June 2022 also increased by 14.3 per cent over the same period in the last year, amounting to US dollars 6,514 million.

Industrial exports: Earnings from the export of industrial goods increased in June 2022 by 28.4 per cent, compared to June 2021. Higher export earnings from garments contributed to a major share of this outcome. Export of garments to all major markets (the United States, the European Union, and the United Kingdom) improved. Meanwhile, most of the other industrial export categories also showed an improved performance, particularly, gems, diamonds and jewellery; petroleum products; animal fodder; and food, beverages and tobacco. Earnings from the export of petroleum products improved mainly due to the increase in average export prices of both aviation and bunker fuel exports. Meanwhile, a decline in earnings was reported in base metals and articles (mainly, aluminium, iron and steel and articles), transport equipment (mainly, bicycles), plastics and plastic articles thereof (mainly, plastic sacks and bags) and chemical products (mainly, cosmetic or toilet preparations and pharmaceutical products).

Agricultural exports: Total earnings from the exports of agricultural goods in June 2022 increased by 9.2 per cent, compared to June 2021, with a substantial share of the increase being contributed by seafood (primarily, fresh and frozen fish) and minor agricultural products (primarily, areca nuts). Export earnings from coconut kernel products, vegetables and natural rubber also increased to some extent. 

Export earnings from tea and spices declined by 6.0 per cent and 10.6 per cent (year-on-year),  due to the decline in volume exported.

Mineral exports: Earnings from mineral exports in June 2022 declined by 34.8 per cent, compared to June 2021, mainly due to a decline in export earnings from titanium ores categorised under ores, slag, and ash.

The export volume index increased notably by 23.5 per cent, while unit value index improved marginally by 0.3 per cent (year-on-year), in June 2022. Thus, the increase in export earnings could be attributed mainly to higher export volumes.