Sri Lanka’s trade deficit narrows in May 2020

July 14, 2020

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According to the latest external trade data released by the Central Bank, country’s trade deficit narrowed in May 2020 as imports fell more than the decline in exports. The external sector showed signs of stabilisation, with the removal of most lockdown measures in the second week of May 2020. The impact of restrictions on non-essential imports was observed in May with a notable reduction in merchandise imports. Meanwhile, merchandise exports, which dropped significantly in April, rebounded more than expected during the month. The deficit in the trade account narrowed by US $ 416 million in May 2020 to US $ 407 million, from $ dollars 823 million in May 2019, as the decline in imports exceeded the decline in exports. Also, on a cumulative basis, the trade deficit narrowed by US $ 180 million to US $ 3,100 million during the first five months of 2020 from US$ 3,281 million in the corresponding period of 2019. Meanwhile, terms of trade, i.e., the ratio of the price of exports to the price of imports, improved by 20.6 per cent (year-on-year) in May 2020 with prices of exports having increased while prices of imports declining. Exports Earnings from merchandise exports rebounded in May 2020 to US dollars 587 million, with the export sector gradually resuming activities following the relaxation of lockdown measures and the recovery of both domestic and global supply and demand chains to some extent. Earnings in May 2020 were more than twice the value recorded in April 2020. However, in comparison to May 2019, earnings from merchandise exports declined significantly by 39.0 per cent. Earnings from the three major export sectors declined on a year-on-year basis, with industrial exports declining the most and agricultural and mineral exports declining at a slower pace. Major exports such as textiles and garments, rubber products, petroleum products, food, beverages and tobacco declined in May 2020, though earnings from these sectors recovered to about one half of the monthly average value reported in 2019. However, led by a higher demand for personal protective equipment (PPE) such as face masks, protective suits, surgical gloves, etc., earnings from exports of other made up articles (categorised under textiles and garments) and surgical and other gloves (categorised under rubber products) grew significantly. Meanwhile, earnings from agricultural exports declined, led by lower volumes of tea exports due to lower domestic production, despite higher average export prices for tea recorded in the international market. Earnings from coconut exports declined, led by lower volumes of coconut kernel products, though exports of non-kernel products increased. Exports of minor agricultural products improved in May 2020 mainly led by the export of arecanuts. The export volume index declined by 46.8 per cent while the unit value index improved by 14.8 per cent in May 2020, indicating that the decline in exports was driven entirely by lower volumes, compared to May 2019. Imports Expenditure on merchandise imports declined notably by 44.3 per cent, on a year-onyear basis, to US dollars 994 million in May 2020, recording a monthly expenditure of less than US dollars 1 billion for the first time since March 2010. Expenditure on all major import sectors; consumer, intermediate and investment goods, declined in May 2020. This reduction was mainly attributable to the measures taken by the government and the Central Bank since March 2020 to restrict the importation of selected goods aiming at easing the pressure on the exchange rate and international reserves from the adverse effects created by the pandemic. Driven by lower expenditure on fuel imports, the expenditure on intermediate goods declined the most, followed by investment and consumer goods. The factors that accounted for the decline in expenditure on fuel include the decline in import prices of crude oil and refined petroleum in the international market, and the reduction in import volumes due to the decline in domestic demand for fuel. The average import price of crude oil was US dollars 25.44 per barrel in May 2020, compared to US dollars 74.76 per barrel a year ago. Expenditure on imports of textile and textile articles declined significantly in May 2020, amid global supply chain disruptions as well as low demand prospects for garment exports in the period ahead. Import expenditure on other intermediate goods such as base metals, plastic and articles thereof, all sub categories of investment goods and non-food consumer goods imports declined mainly due to the measures taken by the government and the Central Bank since March 2020 to restrict imports, and the disruptions to global supply chains from the COVID-19 pandemic. Import expenditure on food and beverages also declined, although at a slower pace, led by the decline in seafood, sugar, beverages and fruits that offset the higher imports of essential goods such as vegetables (mainly lentils and red onion), spices (mainly chillies) and dairy products (mainly milk powder). Both the import volume index and the unit value index declined by 41.6 per cent and 4.8 per cent, respectively, in May 2020, indicating that the decrease in imports was a result of both lower volumes and lower prices relative to May 2019.