Sri Lanka’s external sector showed a mixed performance in August 2017. Although export earnings increased in August 2017, higher growth in import expenditure resulted in an expansion of the trade deficit.
Despite the increase in tourist earnings in August 2017, the decline in workers’ remittances together with the expanded trade deficit dampened the performance of the external current account. However, the financial account of the Balance of Payments (BOP) was supported by the receipt of the second tranche of the foreign currency term financing facility to the government along with continued foreign inflows to the Colombo Stock Exchange (CSE) and the government securities market in August 2017.
Surpassing the US dollars 1 billion mark for the second consecutive month, earnings from exports increased in August 2017, indicating the positive impact of the restoration of the GSP+ facility. Accordingly, earnings from exports increased by 15.5 per cent (year-on-year) to US dollars 1,001 million in August 2017 mainly due to an increase in industrial exports followed by agricultural exports.
Earnings from industrial exports grew by 13.1 per cent (year-on-year) to US dollars 740 million in August 2017 owing to the increase in exports of textiles and garments. Export earnings from textiles and garments increased by 10.1 per cent (year-on-year) to US dollars 433 million with improved garment exports to the EU market.
Accordingly, earnings from garments exports to the EU market increased by 12.2 per cent (year-on-year) to US dollars 186 million in August 2017 contributing more than 68 per cent to the growth of garment exports. Meanwhile, garment exports to the USA and non-traditional markets also grew by 4.4 per cent and 4.6 per cent (year-on-year), respectively, during the month.
In addition, the export earnings from food, beverages and tobacco increased significantly by 35.8 per cent (year-on-year) to US dollars 35 million while export earnings from gems, diamonds and jewellery (23.6 per cent), machinery and mechanical appliances (14.0 per cent), and rubber products (4.1 per cent) increased during the month compared to the corresponding month of the previous year. However, export earnings from base metals and articles, printing industry products and transport equipment declined in August 2017.
Earnings from agricultural exports increased substantially by 22.8 per cent (year-on-year) to US dollars 255 million in August 2017 reflecting improved performance in almost all sub categories. Export earnings from tea increased significantly by 20.6 per cent (year-on-year) to US dollars 131 million.
Reflecting the positive impact of the removal of the ban on exports of fisheries products to the EU market and the restoration of the GSP+ facility, earnings from seafood exports increased considerably by 38.6 per cent (year-on-year) to US dollars 18 million in August 2017, with a 81.9 per cent year-on-year growth in exports to the EU market.
On a cumulative basis, earnings from exports grew by 7.6 per cent (year-on-year) to US dollars 7,413 million during the first eight months of 2017 mainly due to increased earnings received from exports of tea, petroleum products, transport equipment, spices and seafood.
The USA, the UK, India, Germany and Italy were the leading markets for merchandise exports of Sri Lanka during the first eight months of 2017, accounting for about 50 per cent of total exports.
Expenditure on imports increased by 12.6 per cent (year-on-year) to US dollars 1,857 million, recording the second highest import value so far during the year, owing to the higher expenditure incurred on intermediate goods, particularly fuel.
Expenditure on intermediate goods imports increased significantly by 23.9 per cent (year-on-year) to US dollars 1,021 million in August 2017, mainly due to the increase in expenditure on imports of fuel by 73.0 per cent (year-on-year) to US dollars 312 million.
This was largely driven by the significant increase in refined petroleum imports by 110.9 per cent to US dollars 233 million.
In addition, reflecting the impact of high crude oil prices in the international market, import expenditure on crude oil increased by 12.2 per cent despite a reduction in volume.
Accordingly, average import price of crude oil was recorded at US dollars 53.07 per barrel in August 2017 compared to US dollar 46.71 per barrel recorded in August 2016.
Meanwhile, expenditure on consumer goods imports remained broadly unchanged at US dollars 394 million in August 2017.
However, expenditure on food and beverages grew by 3.7 per cent (year-on-year) in August 2017, mainly due to higher expenditure incurred on the importation of rice.
Meanwhile, import expenditure on vegetables, dairy products and fruits increased during the month.
Import expenditure on investment goods increased by 2.1 per cent (year-on-year) to US dollars 439 million in August 2017 reflecting higher imports of machinery and equipment, and building materials.
With regard to the origin of imports, India, China, the UAE, Singapore and Japan were the main import origins during the first eight months of 2017 accounting for about 59 per cent of total imports. Tourist arrivals increased by 2.5 per cent, year-on-year, in August 2017, with 190,928 tourists arriving during the month. This provisional estimate may be revised once the Sri Lanka Tourism Development Authority releases its survey results on average stay period and average spending per day estimates for 2017.
During the first eight months of the year, foreign investments in the CSE recorded a net inflow of US dollars 328.3 million, including net inflows of US dollars 180.7 million to the secondary market and inflows of US dollars 147.6 million to the primary market.
Foreign investments in the government securities market continued to record inflows, registering a net inflow of US dollars 86.4 million in August 2017.
During the first eight months of 2017, the overall balance of the BOP is estimated to have recorded a surplus of US dollars 2,174.9 million in comparison to a surplus of US dollars 211.5 million recorded during the corresponding period of 2016.
Sri Lanka's gross official reserves as at end August 2017 amounted to US dollars 7.7 billion, equivalent to 4.5 months of imports, while total foreign assets amounted to US dollars 9.8 billion, equivalent to 5.7 months of imports.
The Sri Lankan rupee recorded a modest depreciation of 2.6 per cent against the US dollar during the period from end 2016 to 16 October 2017.
Furthermore, reflecting cross currency movements, the rupee also depreciated against the euro by 13.0 per cent, the pound sterling by 9.9 per cent, the Japanese yen by 6.2 per cent, the Canadian dollar by 9.7 per cent, the Australian dollar by 10.4 per cent and the Indian rupee by 7.2 per cent during this period.